Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, or Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Annual Report on Form 10-K of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and
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effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorizations of management and directors; and
(3) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework provided in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by Ernst and Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
Changes in Internal Control
As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded no changes during the quarter ended December 31, 2022 materially affected, or were reasonably likely to materially affect, our internal controls over financial reporting.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Ironwood Pharmaceuticals, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Ironwood Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Ironwood Pharmaceuticals, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income and comprehensive income, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 16, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 16, 2023
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Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have adopted a code of business conduct and ethics applicable to our directors, officers, employees, consultants and all their immediate family or other household members. A copy of that code is available on our corporate website at http://www.ironwoodpharma.com. Any amendments to the code of business conduct and ethics, and any waivers thereto involving any of our directors or executive officers, will be also available on our corporate website. A printed copy of these documents will be made available upon request. The content on our website is not incorporated by reference into this Annual Report on Form 10-K.
The other information required by this item is incorporated by reference from our proxy statement for our 2023 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from our proxy statement for our 2023 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of our management required by this item is incorporated by reference from our proxy statement for our 2023 Annual Meeting of Stockholders.
The table below sets forth information with regard to securities authorized for issuance under our equity compensation plans as of December 31, 2022. As of December 31, 2022, we had three active equity compensation plans, each of which was approved by our stockholders:
● Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan;
● 2019 Equity Incentive Plan; and
● Amended and Restated 2010 Employee Stock Purchase Plan.
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)
Weighted-average exercise price of outstanding options, warrants, and rights (2)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
12,390,288
$ 12.34
7,366,153
Equity compensation plans not approved by security holders
—
—
—
Total
12,390,288
$ 12.34
7,366,153
(1)
Amount includes the number of shares subject to issuance upon exercise of 6,931,372 outstanding stock options and vesting of 5,458,916 restricted stock units.
(2)
Amount includes all outstanding stock options but does not include restricted stock units, which do not have an exercise price.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from our proxy statement for our 2023 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from our proxy statement for our 2023 Annual Meeting of Stockholders.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
1.
List of documents filed as part of this report
1.
Consolidated Financial Statements listed under Part II, Item 8 and included herein by reference.
2.
Consolidated Financial Statement Schedules
No schedules are submitted because they are not applicable, not required or because the information is included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements.
3.
Exhibits
Incorporated by reference herein
Number
Description
Form
Date
2.1
Separation Agreement, dated as of March 30, 2019, by and between Ironwood Pharmaceuticals, Inc. and Cyclerion Therapeutics, Inc.
Current Report on Form 8-K (File No. 001-34620)
April 4, 2019
3.1
Eleventh Amended and Restated Certificate of Incorporation
Annual Report on Form 10-K (File No. 001-34620)
March 30, 2010
3.2
Certificate of Retirement
Registration Statement on Form 8-A/A (File No. 001-34620)
January 3, 2019
3.3
Certificate of Amendment
Current Report on Form 8-K (File No. 001-34620)
May 31, 2019
3.4
Fifth Amended and Restated Bylaws
Annual Report on Form 10-K (File No. 001-34620)
March 30, 2010
4.1
Specimen Class A Common Stock certificate
Registration Statement on Form S-1, as amended (File No. 333-163275)
January 20, 2010
4.3
Indenture, dated as of August 12, 2019, by and between Ironwood Pharmaceuticals, Inc. and U.S. Bank National Association (including the form of the 0.75% Convertible Senior Note due 2024)
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
4.3.1
Form of 0.75% Convertible Senior Note due 2024
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
4.4
Indenture, dated as of August 12, 2019, by and between Ironwood Pharmaceuticals, Inc. and U.S. Bank National Association (including the form of the 1.50% Convertible Senior Note due 2026)
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
4.4.1
Form of 1.50% Convertible Senior Note due 2026
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
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4.5
Description of Securities of Ironwood Pharmaceuticals, Inc.
Annual Report on Form 10-K (File No. 001-34620)
February 17, 2021
10.1#
Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan
Registration Statement on Form S-8, as amended (File No. 333-184396)
October 12, 2012
10.1.1#
Form of Stock Option Agreement under the Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan
Quarterly Report on Form 10-Q (File No. 001-34620)
November 6, 2018
10.1.2#
Form of Restricted Stock Unit Agreement under the Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan
Quarterly Report on Form 10-Q (File No. 001-34620)
November 6, 2018
10.2#
2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File No. 001-34620)
July 30, 2019
10.2.1#
Form of Non-statutory Stock Option Agreement under the 2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File No. 001-34620)
July 30, 2019
10.2.2#
Form of Restricted Stock Unit Agreement under the 2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File No. 001-34620)
July 30, 2019
10.2.3#
Form of Restricted Stock Agreement under the 2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File No. 001-34620)
July 30, 2019
10.2.4#
Form of Performance-Based Restricted Stock Unit Award Agreement under the 2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File No. 001-34620)
May 6, 2020
10.3#
Amended and Restated 2010 Employee Stock Purchase Plan
Annual Report on Form 10-K (File No. 001-34620)
February 13, 2020
10.4#
Change of Control Severance Benefit Plan, as amended and restated
Quarterly Report on Form 10-Q (File No. 001-34620)
April 29, 2014
10.5#
Form of Executive Severance Agreement
Annual Report on Form 10-K (File No. 001-34620)
February 25, 2019
10.6#
Form of Executive Severance Agreement
Current Report on Form 8-K (File No. 001-34620)
December 1, 2021
10.7#
Second Amended and Restated Executive Severance Agreement, June 22, 2021 between Ironwood Pharmaceuticals, Inc. and Thomas McCourt
Current Report on Form 8-K/A (File No. 001-34620)
June 24, 2021
10.8#*
Amended and Restated Non-employee Director Compensation Policy, effective January 1, 2023
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10.9#
Form of Indemnification Agreement with Directors and Officers
Registration Statement on Form S-1, as amended (File No. 333-163275)
December 23, 2009
10.11+
Collaboration Agreement, dated as of September 12, 2007, as amended on November 3, 2009, by and between Forest Laboratories, Inc. and Ironwood Pharmaceuticals, Inc.
Registration Statement on Form S-1, as amended (File No. 333-163275)
February 2, 2010
10.11.1
Amendment No. 2 to the Collaboration Agreement, dated as of January 8, 2013, by and between Forest Laboratories, Inc. and Ironwood Pharmaceuticals, Inc .
Annual Report on Form 10-K (File No. 001-34620)
February 21, 2013
10.12+
Commercial Agreement, dated as of January 31, 2017, by and among Allergan USA, Inc., Forest Laboratories, LLC and Ironwood Pharmaceuticals, Inc.
Quarterly Report on Form 10-Q (File No. 001-34620)
May 8, 2017
10.13+
License Agreement, dated as of April 30, 2009, by and between Allergan Pharmaceuticals International Ltd. (formerly with Almirall, S.A.) and Ironwood Pharmaceuticals, Inc.
Registration Statement on Form S-1, as amended (File No. 333-163275)
February 2, 2010
10.13.1+
Amendment No. 1 to License Agreement, dated as of June 11, 2013, by and between Allergan Pharmaceuticals International Ltd. (formerly with Almirall, S.A.) and Ironwood Pharmaceuticals, Inc .
Quarterly Report on Form 10-Q (File No. 001-34620)
August 8, 2013
10.13.2+
Amendment to the License Agreement, dated as of October 26, 2015, by and between Allergan Pharmaceuticals International Ltd. and Ironwood Pharmaceuticals, Inc.
Annual Report on Form 10-K (File No. 001-34620)
February 19, 2016
10.13.3+
Amendment to the License Agreement dated as of January 31, 2017, by and between Allergan Pharmaceuticals International Ltd., and Ironwood Pharmaceuticals, Inc .
Quarterly Report on Form 10-Q (File No. 001-34620)
May 8, 2017
10.14+
Novation Agreement, dated as of October 26, 2015, by and among Almirall, S.A., Allergan Pharmaceuticals International Ltd. and Ironwood Pharmaceuticals, Inc .
Annual Report on Form 10-K (File No. 001-34620)
February 19, 2016
10.15++
Amended and Restated License Agreement, dated as of August 1, 2019, by and between Ironwood Pharmaceuticals, Inc. and Astellas Pharma Inc .
Current Report on Form 8-K (File No. 001-34620
August 1, 2019
10.15.1+
Amendment to the Amended and Restated License Agreement, dated as of January 8, 2021, by and between Ironwood Pharmaceuticals, Inc. and Astellas Pharma Inc.
Annual Report on Form 10-K (File No. 001-34620)
February 17, 2021
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10.16++
Amended and Restated License and Collaboration Agreement, dated as of September 16, 2019, by and between AstraZeneca AB and Ironwood Pharmaceuticals, Inc.
Current Report on Form 8-K (File No. 001-34620)
September 18, 2019
10.17+
Commercial Supply Agreement, dated as of June 23, 2010, by and among PolyPeptide Laboratories, Inc. and Polypeptide Laboratories (SWEDEN) AB, Forest Laboratories, Inc. and Ironwood Pharmaceuticals, Inc .
Quarterly Report on Form 10-Q (File No. 001-34620)
August 10, 2010
10.18+
Commercial Supply Agreement, dated as of March 28, 2011, by and among Corden Pharma Colorado, Inc. (f/k/a Roche Colorado Corporation), Ironwood Pharmaceuticals, Inc. and Forest Laboratories, Inc .
Quarterly Report on Form 10-Q (File No. 001-34620)
May 13, 2011
10.18.1+
Amendment No. 3 to Commercial Supply Agreement, dated as of November 26, 2013, by and between Corden Pharma Colorado, Inc. (f/k/a Roche Colorado Corporation), Ironwood Pharmaceuticals, Inc. and Forest Laboratories, Inc.
Annual Report on Form 10-K (File No. 001-34620)
February 7, 2014
10.19
Lease Agreement for facilities at 100 Summer Street, Boston, Massachusetts, dated as of June 11, 2019, by and between Ironwood Pharmaceuticals, Inc. and MA-100 Summer Street Owner, L.L.C.
Current Report on Form 8-K (File No. 001-34620)
June 13, 2019
10.20
Tax Matters Agreement, dated as of March 30, 2019, by and between Ironwood Pharmaceuticals, Inc. and Cyclerion Therapeutics, Inc.
Current Report on Form 8-K (File No. 001-34620)
April 4, 2019
10.21
Employee Matters Agreement, dated as of March 30, 2019, by and between Ironwood Pharmaceuticals, Inc. and Cyclerion Therapeutics, Inc.
Current Report on Form 8-K (File No. 001-34620)
April 4, 2019
10.24
Base Warrants Confirmation, dated as of June 10, 2015, between Ironwood Pharmaceuticals, Inc. and JPMorgan Chase Bank, National Association, London Branch
Quarterly Report on Form 10-Q (File No. 001-34620)
August 7, 2015
10.25
Base Warrants Confirmation, dated as of June 10, 2015, between Ironwood Pharmaceuticals, Inc. and Credit Suisse Capital LLC, through its agent Credit Suisse Securities (USA) LLC
Quarterly Report on Form 10-Q (File No. 001-34620)
August 7, 2015
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10.28
Additional Warrants Confirmation, dated as of June 22, 2015, between Ironwood Pharmaceuticals, Inc. and JPMorgan Chase Bank, National Association, London Branch
Quarterly Report on Form 10-Q (File No. 001-34620)
August 7, 2015
10.29
Additional Warrants Confirmation, dated as of June 22, 2015, between Ironwood Pharmaceuticals, Inc. and Credit Suisse Capital LLC, through its agent Credit Suisse Securities (USA) LLC
Quarterly Report on Form 10-Q (File No. 001-34620)
August 7, 2015
10.30
Base Call Option Transaction Confirmation for the 2024 Notes, dated as of August 7, 2019, between Ironwood Pharmaceuticals, Inc. and JPMorgan Chase Bank, National Association
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
10.31
Base Call Option Transaction Confirmation for the 2026 Notes, dated as of August 7, 2019, between Ironwood Pharmaceuticals, Inc. and JPMorgan Chase Bank, National Association
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
10.32
Base Call Option Transaction Confirmation for the 2024 Notes, dated as of August 7, 2019, between Ironwood Pharmaceuticals, Inc. and Credit Suisse Capital LLC
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
10.33
Base Call Option Transaction Confirmation, for the 2026 Notes, dated as of August 7, 2019, between Ironwood Pharmaceuticals, Inc. and Credit Suisse Capital LLC
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
10.34
Additional Call Option Transaction Confirmation for the 2024 Notes, dated as of August 12, 2019, between Ironwood Pharmaceuticals, Inc. and JPMorgan Chase Bank, National Association
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
10.35
Additional Call Option Transaction Confirmation for the 2026 Notes, dated as of August 12, 2019, between Ironwood Pharmaceuticals, Inc. and JPMorgan Chase Bank, National Association
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
10.36
Additional Call Option Transaction Confirmation for the 2024 Notes, dated as of August 12, 2019, between Ironwood Pharmaceuticals, Inc. and Credit Suisse Capital LLC
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
10.37
Additional Call Option Transaction Confirmation for the 2026 Notes, dated as of August 12, 2019, between Ironwood Pharmaceuticals, Inc. and Credit Suisse Capital LLC
Current Report on Form 8-K (File No. 001-34620)
August 13, 2019
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10.38
Call Spread Unwind Agreement, dated as of August 7, 2019, between Ironwood Pharmaceuticals, Inc. and JPMorgan Chase Bank, National Association
Annual Report on Form 10-K (File No. 001-34620)
February 13, 2020
10.39
Call Spread Unwind Agreement, dated as of August 7, 2019, between Ironwood Pharmaceuticals, Inc. and Credit Suisse Capital LLC
Annual Report on Form 10-K (File No. 001-34620)
February 13, 2020
21.1
Subsidiaries of Ironwood Pharmaceuticals, Inc.
Annual Report on Form 10-K (File No. 001-34620)
February 13, 2020
23.1*
Consent of Independent Registered Public Accounting Firm
31.1*
Certification of Chief Executive Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act
31.2*
Certification of Chief Financial Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act
32.1‡
Certification of Chief Executive Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350
32.2‡
Certification of Chief Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350
101.INS*
XBRL Instance Document – The Instance Document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Database
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
104*
The cover page from this Annual Report on Form 10-K, formatted in Inline XBRL
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*
Filed herewith.
‡
Furnished herewith.
+
Confidential treatment granted under 17 C.F.R. §§200.80(b)(4) and 230.406. The confidential portions of this exhibit have been omitted and are remeasured accordingly. The confidential portions have been provided separately to the SEC pursuant to the confidential treatment request.
#
Management contract or compensatory plan, contract, or arrangement.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts, on the 16 th day of February 2023.
Ironwood Pharmaceuticals, Inc.
By:
/s/ Thomas Mccourt
Thomas McCourt
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Thomas McCourt
Chief Executive Officer and Director (Principal Executive Officer)
February 16, 2023
Thomas McCourt
/s/ Sravan k. Emany
Senior Vice President, Chief Financial Officer (Principal Financial Officer)
February 16, 2023
Sravan K. Emany
/s/ Ronald Silver
Vice President, Corporate Controller (Principal Accounting Officer)
February 16, 2023
Ronald Silver
/s/ Julie H. McHugh
Chair of the Board
February 16, 2023
Julie H. McHugh
/s/ Mark Currie
Director
February 16, 2023
Mark Currie
Director
Alexander Denner
/s/ Andrew Dreyfus
Director
February 16, 2023
Andrew Dreyfus
/s/ Jon Duane
Director
February 16, 2023
Jon Duane
/s/ Marla Kessler
Director
February 16, 2023
Marla Kessler
/s/ Catherine Moukheibir
Director
February 16, 2023
Catherine Moukheibir
/s/ Jay P. Shepard
Director
February 16, 2023
Jay P. Shepard
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Index to Consolidated Financial Statements of
Ironwood Pharmaceuticals, Inc.
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2022 and 2021
F-4
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020
F-5
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2022, 2021, and 2020
F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020
F-7
Notes to Consolidated Financial Statements
F-8
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Ironwood Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ironwood Pharmaceuticals, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income and comprehensive income, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for convertible senior notes in 2022 due to the adoption of ASU 2020-06.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Collaboration Agreement for North America with AbbVie Inc.
Description of the Matter
Revenue recognized from the Collaboration Agreement for North America with AbbVie Inc. (together with its affiliates, or “AbbVie”) was $398.8 million for the sale of LINZESS in the U.S. for the year ended December 31, 2022. As discussed in Note 4 to the consolidated financial statements, the Company generates the majority of its revenue from a collaboration arrangement with AbbVie related to linaclotide (LINZESS). The Company records its share of the net profits or net losses from the sale of LINZESS in the U.S., less commercial expenses, and presents the
F-2
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settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable.
Auditing revenue recognition under the AbbVie collaboration was especially challenging and required significant auditor judgment because the Company relies on AbbVie for timely and accurate information regarding net profits realized from the sale of LINZESS in the U.S. Management uses the information received from AbbVie, which includes net revenues from sales of LINZESS in the U.S. and related costs, to record its collaboration revenue. Certain of such information provided by AbbVie are determined by AbbVie by using estimates and judgments, which could be adjusted based on actual results in the future.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s internal controls over its collaboration revenue process, including controls over the Company’s evaluation of the completeness and accuracy of information related to net sales of LINZESS provided from AbbVie.
Our audit procedures included, among others, inspecting reported information provided by AbbVie to the Company related to the net profits realized from the sale of LINZESS in the U.S. We analyzed the gross sales and certain adjustments to arrive at net sales, cost of goods sold, and related costs contributing to Ironwood’s share of net profits and compared current period results to historical trends . We also tested settlement payments received by the Company throughout the year. In addition, we confirmed directly with AbbVie the collaborative arrangement revenue for the year ended December 31, 2022 related to the sale of LINZESS in the U.S. as well as the amounts due to the Company as of December 31, 2022.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1998.
Boston, Massachusetts
February 16, 2023
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Ironwood Pharmaceuticals, Inc.
Consolidated Balance Sheet s
(In thousands, except share and per share amounts)
December 31,
December 31,
2022
2021
ASSETS
Current assets:
Cash and cash equivalents
$
656,203
$
620,129
Accounts receivable, net
115,458
114,042
Prepaid expenses and other current assets
7,715
8,689
Restricted cash
1,250
1,250
Convertible note hedges
—
1,115
Total current assets
780,626
745,225
Restricted cash, net of current portion
485
485
Accounts receivable, net of current portion
14,589
23,998
Property and equipment, net
6,288
7,575
Operating lease right-of-use assets
14,023
15,350
Deferred tax assets
283,661
333,294
Other assets
847
1,000
Total assets
$
1,100,519
$
1,126,927
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
483
$
935
Accrued research and development costs
5,258
15,896
Accrued expenses and other current liabilities
16,700
23,566
Current portion of operating lease liabilities
3,065
3,127
Current portion of convertible senior notes
—
116,858
Note hedge warrants
19
1,316
Total current liabilities
25,525
161,698
Operating lease obligations, net of current portion
16,599
18,484
Convertible senior notes, net of current portion
396,251
337,333
Other liabilities
9,766
3,501
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $ 0.001 par value, 75,000,000 shares authorized, no shares issued and outstanding
—
—
Class A Common Stock, $ 0.001 par value, 500,000,000 shares authorized and 154,026,949 shares issued and outstanding at December 31, 2022 and 500,000,000 shares authorized and 162,036,461 shares issued and outstanding at December 31, 2021
154
162
Additional paid-in capital
1,348,600
1,543,357
Accumulated deficit
( 696,376 )
( 937,608 )
Total stockholders’ equity
652,378
605,911
Total liabilities and stockholders’ equity
$
1,100,519
$
1,126,927
The accompanying notes are an integral part of these consolidated financial statements.
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Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share amounts)
Years Ended December 31,
2022
2021
2020
Revenues:
Collaborative arrangements revenue
$
410,596
$
412,784
$
381,545
Sale of active pharmaceutical ingredient
—
969
7,978
Total revenues
410,596
413,753
389,523
Operating expenses:
Cost of revenues
—
—
3,136
Research and development
44,265
70,405
88,062
Selling, general and administrative
115,994
111,133
140,003
Restructuring expenses
—
( 44 )
15,382
Total operating expenses
160,259
181,494
246,583
Income from operations
250,337
232,259
142,940
Other (expense) income:
Interest expense
( 7,598 )
( 31,150 )
( 29,478 )
Interest and investment income
9,501
726
1,504
Gain (loss) on derivatives
182
( 1,178 )
( 6,129 )
Other income
—
—
24
Other (expense) income, net
2,085
( 31,602 )
( 34,079 )
Income before income taxes
252,422
200,657
108,861
Income tax (expense) benefit
( 77,357 )
327,791
( 2,685 )
Net income and comprehensive income
$
175,065
$
528,448
$
106,176
Net income per share—basic
$
1.13
$
3.26
$
0.67
Net income per share—diluted
$
0.96
$
3.21
$
0.66
Weighted average shares used in computing net income per share—basic:
154,366
162,245
159,427
Weighted average shares used in computing net income per share—diluted:
186,312
164,418
160,655
The accompanying notes are an integral part of these consolidated financial statements.
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Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equit y (Deficit)
(In thousands, except share amounts)
Class A
Additional
Total
Common Stock
paid-in
Accumulated
stockholders’
Shares
Amount
capital
deficit
equity (deficit)
Balance at December 31, 2019
157,535,962
$
158
$
1,478,823
$
( 1,572,232 )
$
( 93,251 )
Issuance of common stock related to share-based awards and employee stock purchase plan
3,080,713
3
18,537
—
18,540
Share-based compensation expense related to share-based awards and employee stock purchase plan
—
—
31,175
—
31,175
Net income
—
—
—
106,176
106,176
Balance at December 31, 2020
160,616,675
$
161
$
1,528,535
$
( 1,466,056 )
$
62,640
Issuance of common stock related to share-based awards and employee stock purchase plan
3,776,786
3
19,678
—
19,681
Share-based compensation expense related to share-based awards and employee stock purchase plan
—
—
22,281
—
22,281
Repurchases of common stock
( 2,357,000 )
( 2 )
( 27,137 )
—
( 27,139 )
Net income
—
—
—
528,448
528,448
Balance at December 31, 2021
162,036,461
$
162
$
1,543,357
$
( 937,608 )
$
605,911
Cumulative effect adjustment upon adoption of ASU 2020-06, net of tax
—
—
( 110,217 )
66,167
( 44,050 )
Issuance of common stock related to share-based awards and employee stock purchase plan
2,756,841
3
11,787
—
11,790
Share-based compensation expense related to share-based awards and employee stock purchase plan
—
—
27,048
—
27,048
Repurchases of common stock
( 10,766,353 )
( 11 )
( 123,375 )
—
( 123,386 )
Net income
—
—
—
175,065
175,065
Balance at December 31, 2022
154,026,949
$
154
$
1,348,600
$
( 696,376 )
$
652,378
The accompanying notes are an integral part of these consolidated financial statements.
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Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Cash Flow s
(In thousands)
Year Ended December 31,
2022
2021
2020
Cash flows from operating activities:
Net income
$
175,065
$
528,448
$
106,176
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,418
1,523
3,564
Loss on disposal of property and equipment
2
93
470
Share-based compensation expense
27,048
22,281
31,175
Change in fair value of note hedge warrants
( 1,297 )
( 10,772 )
( 12,172 )
Change in fair value of convertible note hedges
1,115
11,950
18,301
Non-cash interest expense
1,853
23,935
22,263
Deferred income taxes (including benefit from valuation allowance release)
65,739
( 333,294 )
—
Changes in assets and liabilities:
Accounts receivable and related party accounts receivable, net
7,993
7,712
4,091
Prepaid expenses and other current assets
3,224
601
1,515
Inventory, net
—
—
648
Operating lease right-of-use assets
1,327
1,226
1,167
Other assets
153
( 57 )
( 153 )
Accounts payable, related party accounts payable, and accrued expenses
( 8,116 )
( 2,644 )
( 7,523 )
Accrued research and development costs
( 10,638 )
13,998
( 1,058 )
Operating lease liabilities
( 1,947 )
( 1,835 )
218
Deferred revenue
—
—
( 875 )
Other liabilities
10,824
( 1,270 )
1,029
Net cash provided by operating activities
273,763
261,895
168,836
Cash flows from investing activities:
Purchases of property and equipment
( 136 )
( 265 )
( 1,842 )
Net cash used in investing activities
( 136 )
( 265 )
( 1,842 )
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan
9,540
19,581
18,546
Payment on 2022 Convertible Notes
( 120,699 )
—
—
Repurchases of common stock
( 126,394 )
( 24,131 )
—
Net cash provided by (used in) financing activities
( 237,553 )
( 4,550 )
18,546
Net increase in cash, cash equivalents and restricted cash
36,074
257,080
185,540
Cash, cash equivalents and restricted cash, beginning of period
621,864
364,784
179,244
Cash, cash equivalents and restricted cash, end of period
$
657,938
$
621,864
$
364,784
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets
Cash and cash equivalents
$
656,203
$
620,129
$
362,564
Restricted cash
1,735
1,735
2,220
Total cash, cash equivalents, and restricted cash
$
657,938
$
621,864
$
364,784
Supplemental cash flow disclosure:
Cash paid for interest
$
5,745
$
7,216
$
7,216
Cash paid for income taxes
$
4,615
$
3,452
$
1,848
Non-cash investing and financing activities
Stock repurchases payable in accrued expenses
$
—
$
3,009
$
—
Stock option exercise proceeds receivable in other current assets
$
2,351
$
101
$
—
The accompanying notes are an integral part of these consolidated financial statements.
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Ironwood Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
1. Nature of Business
Ironwood Pharmaceuticals, Inc. (the “Company”) is a gastrointestinal (“GI”) healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for GI patients. The Company is focused on the development and commercialization of innovative GI product opportunities in areas of significant unmet need, leveraging its demonstrated expertise and capabilities in GI diseases.
LINZESS ® (linaclotide), the Company’s commercial product, is the first product approved by the United States Food and Drug Administration (the “U.S. FDA”) in a class of GI medicines called guanylate cyclase type C agonists (“GC-C agonists”) and is indicated for adult men and women suffering from irritable bowel syndrome with constipation (“IBS-C”) or chronic idiopathic constipation (“CIC”). LINZESS is available to adult men and women suffering from IBS-C or CIC in the United States (the “U.S.”) and Mexico and to adult men and women suffering from IBS-C in Japan and China. Linaclotide is available under the trademarked name CONSTELLA ® to adult men and women suffering from IBS-C or CIC in Canada, and to adult men and women suffering from IBS-C in certain European countries.
The Company has strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world. The Company and its partner, AbbVie Inc. (together with its affiliates, “AbbVie”), began commercializing LINZESS in the U.S. in December 2012. Under the Company’s collaboration for North America with AbbVie, total net sales of LINZESS in the U.S., as recorded by AbbVie, are reduced by commercial costs incurred by each party, and the resulting amount is shared equally between the Company and AbbVie. Additionally, development costs are shared equally between the Company and AbbVie. The Company and AbbVie are exploring 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.
Outside of the U.S., the Company earns royalties as a percentage of net sales of products containing linaclotide as an active ingredient by the Company’s collaboration partners. AbbVie has an exclusive license from the Company to develop and commercialize linaclotide in all countries other than China (including Hong Kong and Macau), Japan and the countries and territories of North America (“the AbbVie License Territory”). In addition, AbbVie has exclusive rights to commercialize linaclotide in Canada as CONSTELLA and in Mexico as LINZESS. Astellas Pharma Inc. (“Astellas”), the Company’s partner in Japan, has an exclusive license to develop, manufacture, and commercialize linaclotide in Japan. AstraZeneca AB (together with its affiliates) (“AstraZeneca”), the Company’s partner in China, has the exclusive right to develop, manufacture, and commercialize products containing linaclotide in China (including Hong Kong and Macau) (the “AstraZeneca License Territory”).
The Company has a collaboration and license option agreement (the “COUR Collaboration Agreement”) with COUR Pharmaceutical Development Company, Inc. (“COUR”), a biotechnology company developing novel immune-modifying nanoparticles to treat autoimmune diseases. The COUR Collaboration Agreement grants the Company an option to acquire an exclusive license to research, develop, manufacture and commercialize, in the U.S., products containing CNP-104, a potential treatment for primary biliary cholangitis, a rare autoimmune disease targeting the liver.
These and other agreements are more fully described in Note 4, Collaboration, License, and Other Agreements, to these consolidated financial statements.
The Company is also advancing IW-3300, a GC-C agonist, for the potential treatment of visceral pain conditions, including interstitial cystitis / bladder pain syndrome (“IC/BPS”) and endometriosis.
The Company was incorporated in Delaware on January 5, 1998 as Microbia, Inc. On April 7, 2008, the Company changed its name to Ironwood Pharmaceuticals, Inc. To date, the Company has dedicated a majority of its activities to the research, development and commercialization of linaclotide, as well as to the research and development of its other product candidates.
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2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Ironwood and its wholly-owned subsidiaries, as of December 31, 2022, Ironwood Pharmaceuticals Securities Corporation and Ironwood Pharmaceuticals GmbH. All intercompany transactions and balances are eliminated in consolidation.
Segment Information
Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company currently operates in one reportable business segment – human therapeutics.
Reclassifications
Certain prior period financial statement items have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the amounts of revenues and expenses during the reported periods. On an ongoing basis, the Company’s management evaluates its estimates, judgments and methodologies. Significant estimates and assumptions in the consolidated financial statements include those related to revenue recognition; accounts receivable; useful lives of long-lived assets, impairment of long-lived assets, including goodwill; valuation procedures for right-of-use assets and operating lease liabilities; valuation procedures for the issuance and repurchase of convertible notes; balance sheet classification of convertible notes; fair value of derivatives; income taxes, including the valuation allowance for deferred tax assets; research and development expenses; contingencies and share-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments with a remaining maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds, repurchase agreements, commercial paper, and corporate bonds. The carrying amount of cash equivalents approximates fair value. The amount of cash equivalents included in cash and cash equivalents was $ 650.2 million and $ 595.2 million at December 31, 2022 and 2021, respectively.
Restricted Cash
The Company is contingently liable under unused letters of credit with a bank, related to the Company’s facility lease and vehicle lease agreements, in the amount of $ 1.7 million as of December 31, 2022 and 2021. The Company records as restricted cash the collateral used to secure these letters of credit. The amount of restricted cash in current assets and non-current assets was $ 1.3 million and $ 0.5 million, respectively, at December 31, 2022 and 2021.
Concentrations of Suppliers
The Company relies on its collaboration partners and their suppliers to manufacture linaclotide API, linaclotide finished drug product, and finished goods.
If any of the Company’s collaboration partners and their suppliers were to limit or terminate production or otherwise fail to meet the quality or delivery requirements needed to satisfy the supply commitments, the process of
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locating and qualifying alternate sources could require up to several months, during which time production could be delayed. Such delays could have a material adverse effect on the Company’s business, financial position and results of operations.
Accounts Receivable
The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for credit losses when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. The Company’s receivables relate primarily to amounts reimbursed under its collaboration, license, and other agreements. The Company believes that credit risks associated with these partners are not significant. The Company reviews the need for an allowance for credit losses for its receivables based on various factors including payment history and historical bad debt experience. The Company had no allowance for credit losses as of December 31, 2022 or 2021.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, restricted cash, and accounts receivable. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and the Company believes that such funds are subject to minimal credit risk. The Company has adopted an investment policy which limits the amounts the Company may invest in certain types of investments, and requires all investments held by the Company to be at least A- rated, thereby reducing credit risk exposure.
Accounts receivable primarily consist of amounts due under the linaclotide collaboration agreement with AbbVie for North America (Note 4). The Company does not obtain collateral for its accounts receivable. The Company previously reflected amounts due from Allergan plc (“Allergan”), net of amounts payable to Allergan, prior to its acquisition by AbbVie as related party accounts receivable, net. Following the acquisition of Allergan by AbbVie, the Company determined that AbbVie is not a related party to the Company (Note 15).
The percentages of revenue recognized from significant collaborative partners of the Company in the years ended December 31, 2022, 2021 and 2020 as well as the account receivable balances, net of any payables due, at December 31, 2022 and 2021 are included in the following table:
Accounts
Receivable
Revenue
December 31,
Year Ended December 31,
2022
2021
2022
2021
2020
Collaborative Partner:
AbbVie (North America and Europe)
80
%
81
%
98
%
98
%
96
%
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at cost, and are depreciated when placed into service using the straight-line method based on their estimated useful lives as follows:
Estimated Useful Life
Asset Description
(In Years)
Laboratory equipment
5
Computer and office equipment
3
Furniture and fixtures
7
Software
3
Included in property and equipment are certain costs of software obtained for internal use. Costs incurred during the preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs related to software obtained for internal use are expensed as incurred.
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Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term.
Costs for capital assets not yet placed into service have been capitalized as construction in process, and will be depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred.
Impairment of Long-Lived Assets
The Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist, which warrant adjustments to carrying values or estimated useful lives. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value.
Income Taxes
The Company provides for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.
The Company accounts for uncertain tax positions recognized in the consolidated financial statements in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 740, Income Taxes , by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company evaluates uncertain tax positions on a quarterly basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any changes to these estimates, based on the actual results obtained and/or a change in assumptions, could impact the Company’s income tax provision in future periods. Interest and penalty charges, if any, related to unrecognized tax benefits are classified as income tax expense in the Company’s consolidated statements of income.
Financing Costs
Financing costs include costs directly attributable to the Company’s offerings of its equity securities and its debt financings. Costs attributable to equity offerings are charged as a reduction to stockholders’ equity against the proceeds of the offering once the offering is completed. Costs attributable to debt financings are deferred and amortized to interest expense over the term of the debt using the effective interest method. In accordance with ASC Topic 835, Interest , the Company presents debt issuance costs on the balance sheet as a direct deduction from the associated debt liability.
Leases
The Company’s lease portfolio for the year ended December 31, 2022 included: an office lease for its headquarters location, vehicle leases for its salesforce representatives, and leases for computer and office equipment. The Company determines if an arrangement is a lease at the inception of the contract and determines the classification of its leases at lease commencement. The asset component of the Company’s operating leases is recorded as operating lease right-of-use assets, and the liability component is recorded as current portion of operating lease liabilities and operating lease liabilities, net of current portion in the Company’s consolidated balance sheets. As of December 31, 2022, the Company 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 commencement date. The lease term used to measure the right-of-use asset and operating lease liability may include options to extend the lease when it is reasonably certain that the Company will exercise the option. The Company accounts for lease components and non-lease components together as a single lease component for
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the asset class of right-of-use real estate assets. The Company uses an incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments, if an implicit rate of return is not readily determinable. Operating lease right-of-use assets are adjusted for prepaid rent, initial direct costs, and lease incentives.
Right-of-use assets and operating lease liabilities are remeasured upon reassessment events and modifications to leases using the present value of remaining lease payments and estimated incremental borrowing rate at the time of remeasurement, as applicable.
Operating lease cost is recognized on a straight-line basis over the lease term, and includes amounts related to short-term leases. The Company has elected to not recognize lease terms with a term of twelve months or less on its balance sheet for all classes of underlying asset types. The Company recognizes 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 the Company.
Derivative Assets and Liabilities
In June 2015, the Company issued 2.25 % Convertible Senior Notes due June 15, 2022 (the “2022 Convertible Notes”), and in August 2019, the Company issued 0.75 % Convertible Senior Notes due 2024 (the “2024 Convertible Notes”), and 1.50 % Convertible Senior Notes due 2026 (the “2026 Convertible Notes”, and together with the 2022 Convertible Notes and the 2024 Convertible Notes, the “Convertible Senior Notes”). I n connection with the issuance of the 2022 Convertible Notes, the Company entered into convertible note hedge transactions (the “Convertible Note Hedges”) and separate note hedge warrant transactions (the “Note Hedge Warrants”), with certain financial institutions (Note 9). In connection with the partial repurchase of the 2022 Convertible Notes in August 2019, the Company terminated its Convertible Note Hedges and Note Hedge Warrants proportionately. The Convertible Note Hedges terminated unexercised upon expiry in June 2022. These instruments are derivative financial instruments under ASC Topic 815, Derivatives and Hedging (“ASC 815”).
These derivatives are recorded as assets or liabilities at fair value each reporting date 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 include the price per share of the Company’s Class A Common Stock, expected terms of the derivative instruments, strike prices of the derivative instruments, risk-free interest rates, and expected volatility of the Company’s Class A Common Stock. Changes to these inputs could materially affect the valuation of the derivative instruments.
In August 2019, in connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, the Company entered into the Capped Calls. The Capped Calls cover the same number of shares of Class A Common Stock that initially underlie the 2024 Convertible Notes and the 2026 Convertible Notes (subject to anti-dilution and certain other adjustments). These instruments meet the conditions outlined in ASC 815 to be classified in stockholders’ equity (deficit) and are not subsequently remeasured as long as the conditions for equity classification continue to be met.
Share Repurchases
The Company accounts for repurchases of its Class A Common Stock on the trade date by recording the excess of the repurchase price over the par value entirely to additional paid-in capital. All repurchased shares are retired or constructively retired. Issued and outstanding shares are reduced by shares repurchased.
Revenue Recognition
The Company’s revenues are generated primarily through collaborative arrangements and license agreements related to the research and development and commercialization of linaclotide. The terms of the collaborative research and development, license, co-promotion 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 the Company’s clinical sales specialists.
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Non-refundable payments to the Company under these agreements may include (i) up-front license fees, (ii) payments for research and development activities, (iii) payments for the manufacture of finished drug product, API, or development materials, (iv) payments based upon the achievement of certain milestones, (v) payments for sales detailing, promotional support services and medical education initiatives, and (vi) royalties on product sales. The Company receives its share of the net profits or bears its share of the net losses from the sale of linaclotide in the U.S. through its collaboration agreement with AbbVie for North America. The Company has adopted a policy to recognize revenue net of tax withholdings, as applicable.
Collaboration, License, and Other Commercial Agreements
Upon licensing intellectual property to a customer, the Company determines if the license is distinct from the other performance obligations identified in the arrangement. The Company recognizes revenues from the transaction price, including non-refundable, up-front fees allocated to the license when the license is transferred to the customer if the license has distinct benefit to the customer. For licenses that are combined with other promises, the Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. For performance obligations that are satisfied over time, the Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
The Company’s license and collaboration agreements include milestone payments, such as development and other milestones. The Company evaluates whether the milestones are considered probable of being reached and estimates 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. Milestone payments that are not within the control of the Company, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. The Company re-evaluates the probability of achievement of such milestones and any related constraint at each reporting period, and any adjustments are recorded on a cumulative catch-up basis.
Agreements that include the supply of API or drug product for either clinical development or commercial supply at the customer’s discretion are generally considered as options. The Company assesses if these options provide a material right to its partner, and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer exercises these options, any additional payments are recorded as revenue when the customer obtains control of the goods, which is typically upon shipment for sales of API and finished drug product.
For agreements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue when the related sales occur.
Net Profit or Net Loss Sharing
In accordance with ASC Topic 808, Collaborative Arrangements (“ASC 808”), the Company considers the nature and contractual terms of the arrangement and the nature of the Company’s business operations to determine the classification of payments under the Company’s collaboration agreements. While ASC 808 provides guidance on classification, the standard is silent on matters of separation, initial measurement, and recognition. Therefore, the Company applies the separation, initial measurement, and recognition principles of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), as applicable.
The Company’s collaborative arrangements revenues generated from sales of LINZESS in the U.S. are considered akin to sales-based royalties. In accordance with the sales-based royalty exception, the Company recognizes its share of the pre-tax commercial net profit or net loss generated from the sales of LINZESS in the U.S. in the period the product sales are earned, as reported by AbbVie, and related cost of goods sold and selling, general and administrative expenses as incurred by the Company and AbbVie. These amounts are partially determined based on amounts provided by AbbVie and involve the use of estimates and judgments, such as product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and contractual rebates, wholesaler fees,
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product returns, and co-payment assistance costs, which could be adjusted based on actual results in the future. The Company is highly dependent on AbbVie for timely and accurate information regarding net revenues from sales of LINZESS in the U.S. in accordance with both ASC 808 and ASC 606, and the related costs, in order to accurately report its results of operations. If the Company does not receive timely and accurate information or incorrectly estimates activity levels associated with the collaboration at a given point in time, the Company could be required to record adjustments in future periods.
In accordance with ASC 606-10-55, Principal Agent Considerations , the Company records revenue transactions as net product revenue in its consolidated statements of income if it is deemed the principal in the transaction, which includes being the primary obligor, retaining inventory risk, and control over pricing. Given that the Company is not the primary obligor and does not have the inventory risks in the collaboration agreement with AbbVie for North America, it records its share of the net profits or net losses from the sales of LINZESS in the U.S. on a net basis and presents the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable. The Company and AbbVie settle the cost sharing quarterly such that the Company’s 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 year ended December 31, 2020 the Company produced linaclotide API, finished drug product, finished goods, and/or development materials for certain of its partners. As of December 31, 2020, the Company was no longer responsible for the supply of linaclotide API, finished drug product, finished goods or development materials to its partners, though the Company may provide development materials to certain of its partners on a periodic basis. Sales of such development materials have been and are expected to continue to be immaterial.
The Company recognizes 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 passed all quality testing required for acceptance by the partner.
Other
The Company’s deferred revenue balance consists of advance billings and payments received from customers in excess of revenue recognized.
Cost of Revenues
Cost of revenues includes cost related to the sales of linaclotide API, finished drug product, and finished goods and are generally recognized upon shipment to certain of the Company’s partners outside of the U.S. The Company’s cost of revenues for linaclotide consists of the internal and external costs of producing such API, finished drug product, and finished goods.
Research and Development Costs
The Company generally expenses research and development costs to operations as incurred. The Company capitalizes nonrefundable advance payments made by the Company for research and development activities and defers expense recognition until the related goods are received or the related services are performed.
Research and development expenses are comprised of costs incurred in performing research and development activities, including salary, benefits, share-based compensation, and other employee-related expenses; laboratory supplies and other direct expenses; facilities expenses; overhead expenses; third-party contractual costs relating to nonclinical studies and clinical trial activities and related contract manufacturing expenses, development of manufacturing processes and regulatory registration of third-party manufacturing facilities; licensing fees for the Company’s product candidates; and other outside expenses.
The Company has certain collaboration agreements pursuant to which it shares or has shared research and development expenses related to linaclotide. The Company records expenses incurred under such linaclotide collaboration arrangements as research and development expense. Under the Company’s collaboration agreement with
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AbbVie for North America, the Company is reimbursed for certain research and development expenses and nets these reimbursements against its research and development expenses as incurred.
Research and development expense includes up-front payment, non-contingent payment, and milestone payment obligations under the COUR Collaboration Agreement (Note 4). Expense is recognized when the obligation is determined to be probable.
Restructuring Expenses
Restructuring expenses are comprised primarily of costs associated with exit and disposal activities in accordance with ASC Topic 420, Exit or Disposal Cost Obligations , and include one-time termination benefits and contract-related costs. Such costs are based on estimates of fair value in the period liabilities are incurred. The Company evaluates and adjusts these costs for changes in circumstances as additional information becomes available.
Selling, General and Administrative Expenses
The Company expenses selling, general and administrative costs to operations as incurred. Selling, general and administrative expenses consist primarily of compensation, benefits and other employee-related expenses for personnel in the Company’s administrative, finance, legal, information technology, business development, commercial, sales, marketing, communications and human resources functions. Other costs include the legal costs of pursuing patent protection of the Company’s intellectual property, general and administrative related facility costs, insurance costs and professional fees for accounting, tax, consulting, legal and other services.
The Company includes 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 presents the net payment to or from AbbVie as collaboration expense or collaborative arrangements revenue, respectively.
Share-Based Compensation Expense
The Company grants awards under its share-based compensation programs, including stock awards, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) (including both time-based and performance-based RSUs), stock options, and shares issued under the Company’s employee stock purchase plan (“ESPP”). 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. The Company estimates forfeitures over the requisite service period using historical forfeiture activity and records share-based compensation expense only for those awards that are expected to vest.
The Company estimates the fair value of stock options using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility and expected term, among others. The fair value of stock awards, RSAs, and RSUs is based on the market value of the Company’s Class A Common Stock on the date of grant, with the exception of performance-based RSUs with market conditions, which are measured using the Monte Carlo simulation method on the date of grant (Note 12). Discounted stock purchases under the Company’s ESPP are valued on the first date of the offering period using the Black-Scholes option-pricing model to compute the fair value of the lookback provision plus the purchase discount.
For awards that vest based on service conditions and market conditions, the Company uses a straight-line method to recognize compensation expense over the respective service period. For awards that contain performance conditions, the Company determines the appropriate amount to expense at each reporting date based on the anticipated achievement of performance targets, which requires judgement, including forecasting the achievement of future specified targets. At the date performance conditions are determined to be probable of achievement, the Company records a cumulative expense catch-up, with remaining expense amortized over the remaining service period. Throughout the performance period, the Company re-assesses the estimated performance and updates the number of performance-based awards that it believes will ultimately vest. Discounted stock purchases under the Company’s 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
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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. As a result, if revisions are made to the Company’s underlying assumptions and estimates, the Company’s share-based compensation expense could vary significantly from period to period.
Patent Costs
The Company incurred and recorded as operating expense legal and other fees related to patents of $ 1.3 million, $ 1.7 million, and $ 2.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. These costs were charged to selling, general and administrative expenses as incurred.
Net Income Per Share
Basic net income per common share is computed by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution beyond common shares for basic net income per share that could occur if securities or other contracts to issue common shares were exercised, converted into common shares, or resulted in the issuance of common shares that would have shared in the Company’s earnings.
Subsequent Events
The Company considers events or transactions that have occurred after the balance sheet date of December 31, 2022, but prior to the filing of the financial statements with the Securities and Exchange Commission (“SEC”) to provide additional evidence relative to certain estimates or to identify matters that require additional recognition or disclosure. Subsequent events have been evaluated through the filing of the financial statements accompanying this Annual Report on Form 10-K.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Except as set forth below, the Company did not adopt any new accounting pronouncements during the year ended December 31, 2022 that had a material effect on its consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The amendments in ASU 2020-06 simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Under ASU 2020-06, embedded conversion features are no longer separately reported in equity and convertible debt instruments are now accounted for as a single liability measured at amortized cost, as long as no other features require bifurcation and recognition as derivatives. These changes will reduce reported interest expense and increase reported net income for entities with convertible instruments that were bifurcated between liabilities and equity under previously existing guidance. Additionally, temporary differences between the book and tax bases resulting from the bifurcation of the embedded conversion feature under previously existing guidance have been eliminated and deferred tax assets and liabilities arising from such temporary differences will no longer be reported. The new guidance also requires the if-converted method to be used in diluted earnings per share computations for all convertible instruments and revised the if-converted method to preclude the addback of interest expense to the numerator if the principal portions of the convertible instruments are required to be settled in cash. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Upon adoption, entities may apply the new standard on a modified retrospective or full retrospective basis.
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The Company adopted ASU 2020-06 on January 1, 2022 using the modified retrospective approach, which resulted in a cumulative-effect adjustment recorded on the date of adoption as follows (in thousands):
December 31, 2021
Effect of the Adoption
January 1, 2022
Consolidated Balance Sheet
As Reported
of ASU 2020-06
As Adjusted
Deferred tax assets
$
333,294
$
16,855
$
350,149
Current portion of convertible senior notes
116,858
3,581
120,439
Long-term portion of convertible senior notes
337,333
57,324
394,657
Additional paid-in-capital
1,543,357
( 110,217 )
1,433,140
Retained earnings
( 937,608 )
66,167
( 871,441 )
Interest expense recognized in subsequent periods is reduced as a result of accounting for convertible debt instruments as a single liability measured at amortized cost, with a decrease of $ 22.1 million of non-cash interest expense during the year ended December 31, 2022 compared to the year ended December 31, 2021 related to convertible debt instruments outstanding on the adoption date.
The adoption of ASU 2020-06 does not impact the Company’s liquidity or cash flows.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). The guidance in ASU 2021-04 clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. The Company adopted ASU 2021-04 as of January 1, 2022 . The adoption of ASU 2021-04 did not have a material impact on the Company’s financial position and results of operations.
Other recent accounting pronouncements issued, but not yet effective, are not expected to be applicable to the Company or have a material effect on the consolidated financial statements upon future adoption.
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3. Net Income Per Share
The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):
Year Ended December 31,
2022
2021
2020
Numerator:
Net income
$
175,065
$
528,448
$
106,176
Add back interest expense, net of tax benefit, on assumed conversion of 2024 Convertible Notes
1,781
—
—
Add back interest expense, net of tax benefit, on assumed conversion of 2026 Convertible Notes
2,668
—
—
Numerator used in computing net income per share — diluted
$
179,514
$
528,448
$
106,176
Denominator:
Weighted average number of common shares outstanding used in computing net income per share — basic
154,366
162,245
159,427
Effect of dilutive securities:
Stock options
306
488
367
Time-based restricted stock units
1,375
1,422
766
Performance-based restricted stock units
282
146
1
Restricted stock
115
117
94
2024 Convertible Notes assumed conversion
14,934
—
—
2026 Convertible Notes assumed conversion
14,934
—
—
Dilutive potential common shares
Weighted average number of common shares outstanding used in computing net income per share — diluted
186,312
164,418
160,655
Net income per share — basic
$
1.13
$
3.26
$
0.67
Net income per share — diluted
$
0.96
$
3.21
$
0.66
The outstanding securities have been excluded from the computation of diluted weighted average shares outstanding, as applicable, as their effect would be anti-dilutive (in thousands):
Year Ended December 31,
2022
2021
2020
Stock options
6,152
7,701
11,746
Restricted stock awards
—
—
2
Time-based restricted stock units
10
102
209
Performance-based restricted stock units
1,182
121
93
Note Hedge Warrants
8,318
8,318
8,318
2022 Convertible Notes
—
8,318
8,318
2024 Convertible Notes
—
14,934
14,934
2026 Convertible Notes
—
14,934
14,934
Total
15,662
54,428
58,554
Prior to the adoption of ASU 2020-06, the potentially dilutive impact of the Convertible Senior Notes (Note 9) was determined using the treasury stock method. Under this method, no numerator or denominator adjustments arose from the principal and interest components of the Convertible Senior Notes because the Company had the intent and ability to settle the Convertible Senior Notes’ principal and interest in cash. Instead, the Company was required to increase the diluted net income per share denominator by the variable number of shares that would be issued upon conversion if it settled the conversion spread obligation with shares. For diluted net income per share purposes, the conversion spread obligation was calculated based on whether the average market price of the Company’s Class A Common Stock during the reporting period was in excess of the conversion price of the Convertible Senior Notes. There was no calculated spread added to the denominator for the years ended December 31, 2021 or 2020.
Following the adoption of ASU 2020-06 on January 1, 2022, the dilutive impact of the Convertible Senior Notes is determined using the if-converted method. Under the if-converted method, the Convertible Senior Notes are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later). Interest
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charges are deducted from the numerator, unless the principal amount of the convertible instruments is required to be paid in cash.
There was no dilutive impact of the 2022 Convertible Notes for the year ended December 31, 2022 because the Company had elected prior to the beginning of the period to settle the conversion of 2022 Convertible Notes, if any, with a combination settlement of a cash payment equal to the principal value of converted notes and shares of Class A Common Stock equal to the conversion value in excess of the principal value, if any. Accordingly, interest expense was not removed from the numerator and there was no calculated spread added to the denominator because the average market price of the Company’s Class A common stock during the portion of each period in which the 2022 Convertible Notes were outstanding was not in excess of the conversion price.
4. Collaboration, License, and Other Agreements
For the year ended December 31, 2022, the Company had linaclotide collaboration agreements with AbbVie for North America and AstraZeneca for China (including Hong Kong and Macau), as well as linaclotide license agreements with Astellas for Japan and with AbbVie for the AbbVie License Territory. The Company also had an agreement with Alnylam Pharmaceuticals, Inc (“Alnylam”) to perform disease awareness activities for acute hepatic porphyria (“AHP”) and sales detailing activities for GIVLAARI ® (givosiran). The following table provides amounts included in the Company’s consolidated statements of income as collaborative arrangements revenue and sale of API primarily attributable to transactions from these arrangements (in thousands):
Year Ended December 31,
Collaborative Arrangements Revenue
2022
2021
2020
Linaclotide Collaboration and License Agreements:
AbbVie (North America)
$
401,498
$
403,085
$
370,902
AbbVie (Europe and other)
2,444
2,558
2,196
AstraZeneca (China, including Hong Kong and Macau)
635
743
682
Astellas (Japan)
2,001
2,232
2,128
Other Agreements:
Alnylam (GIVLAARI)
2,194
2,411
4,302
Other
1,824
1,755
1,335
Total collaborative arrangements revenue
$
410,596
$
412,784
$
381,545
Sale of API
Linaclotide Agreements:
Astellas (Japan)
$
—
$
149
$
2,017
AstraZeneca (China, including Hong Kong and Macau)
—
597
5,540
Other
—
223
421
Total sale of API
$
—
$
969
$
7,978
Accounts receivable, net, included $ 130.0 million and $ 138.0 primarily related to collaborative arrangements revenue and sale of API, collectively, as of December 31, 2022 and 2021, respectively. Accounts receivable, net, included $ 104.4 million and $ 112.2 million due from the Company’s partner, AbbVie, net of $ 4.0 million and $ 5.0 million of accounts payable at December 31, 2022 and 2021, respectively.
The Company routinely assesses the creditworthiness of its license and collaboration partners. The Company has not experienced any material losses related to receivables from its license or collaboration partners during the years ended December 31, 2022, 2021, or 2020.
Linaclotide Agreements
Collaboration Agreement for North America with AbbVie
In September 2007, the Company entered into a collaboration agreement with AbbVie to develop and commercialize linaclotide for the treatment of IBS-C, CIC, and other GI conditions in North America. Under the terms of this collaboration agreement, the Company received an upfront licensing fee, equity investment, and development and regulatory milestones, and shares equally with AbbVie all development costs as well as net profits or losses from the
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development and sale of linaclotide in the U.S. In addition, the Company receives royalties in the mid-teens percent based on net sales in Canada and Mexico. AbbVie is solely responsible for the further development, regulatory approval and commercialization of linaclotide in those countries and funding any costs.
During the years ended December 31, 2022, 2021 and 2020, the Company incurred $ 8.0 million, $ 8.2 million, and $ 20.1 million in total research and development expenses under the linaclotide collaboration for North America. As a result of the research and development cost-sharing provisions of the linaclotide collaboration for North America, the Company incurred $ 8.9 million, $ 11.5 million, and $ 5.6 million in incremental research and development costs during the years ended December 31, 2022, 2021, and 2020, respectively, to reflect the obligations of each party under the collaboration to bear 50 % of the development costs incurred.
The Company and AbbVie began commercializing LINZESS in the U.S. in December 2012. The Company receives 50 % of the net profits and bears 50 % of the net losses from the commercial sale of LINZESS in the U.S. Net profits or net losses consist of net sales of LINZESS to third-party customers and sublicense income in the U.S. less the cost of goods sold as well as selling, general and administrative expenses. LINZESS net sales are calculated and recorded by AbbVie and may include gross sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions.
The Company evaluated its collaboration arrangement for North America with AbbVie and concluded that all development-period performance obligations had been satisfied as of September 2012. The Company has determined that there are three remaining commercial-period performance obligations, which include the sales detailing of LINZESS, participation in the joint commercialization committee, and approved additional trials. The consideration remaining includes cost reimbursements in the U.S. and net profit and loss sharing payments based on net sales in the U.S. Additionally, the Company receives royalties in the mid-teens percent based on net sales in Canada and Mexico. Royalties and net profit and loss sharing payments will be recorded as collaborative arrangements revenue or expense in the period earned, as these payments relate predominately to the license granted to AbbVie. The Company records royalty revenue in the period earned based on royalty reports from its partner, if available, or based on the projected sales and historical trends. The cost reimbursements received from AbbVie during the commercialization period will be recognized as earned in accordance with the right-to-invoice practical expedient, as the Company’s right to consideration corresponds directly with the value of the services transferred during the commercialization period.
Under the Company’s collaboration agreement with AbbVie for North America, LINZESS net sales are calculated and recorded by AbbVie and include gross sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions, as noted above. These amounts include the use of estimates and judgments, which could be adjusted based on actual results in the future. The Company records its share of the net profits or net losses from the sales of LINZESS in the U.S. less commercial expenses on a net basis, and presents the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable. This treatment is in accordance with the Company’s revenue recognition policy, given that the Company is not the primary obligor and does not have the inventory risks in the collaboration agreement with AbbVie for North America. The Company relies on AbbVie to provide accurate and complete information related to net sales of LINZESS in accordance with U.S. generally accepted accounting principles in order to calculate its settlement payments to and from AbbVie and record collaboration expense or collaborative arrangements revenue, as applicable.
The Company recognized collaborative arrangements revenue from the AbbVie collaboration agreement for North America during the years ended December 31, 2022, 2021, and 2020 as follows (in thousands):
Year Ended December 31,
2022
2021
2020
Collaborative arrangements revenue related to sales of LINZESS in the U.S.
$
398,767
$
400,371
$
368,603
Royalty revenue
2,731
2,714
2,299
Total collaborative arrangements revenue
$
401,498
$
403,085
$
370,902
The Company incurred $ 34.3 million, $ 30.3 million, and $ 39.9 million in total selling, general and administrative costs related to the sale of LINZESS in the U.S. in accordance with the cost-sharing arrangement with AbbVie for the years ended December 31, 2022, 2021, and 2020, respectively.
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In May 2014, CONSTELLA ® became commercially available in Canada and, in June 2014, LINZESS became commercially available in Mexico. The Company records royalties on sales of CONSTELLA in Canada and LINZESS in Mexico in the period earned. The Company recognized $ 2.7 million, $ 2.7 million, and $ 2.3 million of combined royalty revenues from Canada and Mexico during the years ended December 31, 2022, 2021, and 2020, respectively.
License Agreement with AbbVie (All countries other than the countries and territories of North America, China (including Hong Kong and Macau), and Japan)
The Company has a license agreement with AbbVie to develop, manufacture and commercialize linaclotide in (i) Europe, and (ii) all countries other than China (including Hong Kong and Macau), Japan, and the countries and territories of North America, or collectively the “Expanded Territory,” for the treatment of IBS-C, CIC and other GI conditions.
Under the license agreement, as amended, AbbVie is obligated to pay the Company, (i) royalties based on sales volume in Europe in the upper-teens percent, and (ii) on a country-by-country and product-by-product basis in the Expanded Territory, a royalty as a percentage of net sales of products containing linaclotide as an active ingredient in the upper-single digits for five years following the first commercial sale of a linaclotide product in a country, and in the low-double digits thereafter. The royalty rate for products in Europe and the Expanded Territory will decrease, on a country-by-country basis, to the lower-single digits, or cease entirely, following the occurrence of certain events. The license agreement also contains certain sales-based milestones and commercial launch milestones, which could total up to $ 42.5 million.
The Company recognized $ 2.4 million, $ 2.6 million and $ 2.2 million of royalty revenue from the Amended European License Agreement during the years ended December 31, 2022, 2021, and 2020, respectively.
License Agreement for Japan with Astellas
The Company has a license agreement with Astellas to develop, manufacture, and commercialize linaclotide for the treatment of IBS-C, CIC and other GI conditions in Japan.
Under the license agreement, as amended, Astellas is required to pay royalties to the Company at rates beginning in the mid-single digit percent and escalating to low-double-digit percent, based on aggregate annual net sales in Japan of products containing linaclotide as an active ingredient. These royalty payments are subject to reduction following the expiration of certain licensed patents and the occurrence of generic competition in Japan.
During the year ended December 31, 2022, the Company recognized $ 2.0 million in collaborative arrangements revenue related to royalties.
During the year ended December 31, 2021, the Company recognized $ 2.2 million in collaborative arrangements revenue related to royalties, and $ 0.2 million from the sale of API to Astellas under the Amended Astellas License Agreement.
During the year ended December 31, 2020, the Company recognized $ 2.1 million in collaborative arrangements revenue related to royalties, an insignificant amount of collaborative arrangements revenue related to adverse event reporting services, and $ 2.0 million from the sale of API to Astellas under the Amended Astellas License Agreement.
Collaboration Agreement for China (including Hong Kong and Macau) with AstraZeneca
The Company has a collaboration agreement with AstraZeneca under which AstraZeneca has the exclusive right to develop, manufacture and commercialize products containing linaclotide in the AstraZeneca License Territory.
Under the collaboration agreement, AstraZeneca is required to pay tiered royalties to the Company at rates beginning in the mid-single-digit percent and increasing up to twenty percent based on the aggregate annual net sales of products containing linaclotide in the AstraZeneca License Territory.
During the year ended December 31, 2022, the Company recognized $ 0.6 million in collaborative arrangements revenue related to the Amended AstraZeneca Agreement related to royalties.
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During the year ended December 31, 2021, the Company recognized $ 0.7 million in collaborative arrangements revenue related to the Amended AstraZeneca Agreement, of which $ 0.5 million related to royalties and $ 0.2 million related to services provided under a transition services agreement, and recognized $ 0.6 million in sales of API relating to the supply of development material.
During the year ended December 31, 2020, the Company recognized $ 0.7 million in collaborative
arrangements revenue related to the Amended AstraZeneca License, of which $ 0.6 million related to services provided under a transition services agreement and $ 0.1 million related to royalties, and recognized $ 5.5 million of sales of API relating to the supply of linaclotide finished drug product and finished goods under a commercial supply agreement.
The Company is entitled to receive non-contingent payments totaling $ 35.0 million in three installments through 2024, of which $ 25.0 million remained outstanding at December 31, 2022. In addition, AstraZeneca may be required to make milestone payments totaling up to $ 90.0 million contingent on the achievement of certain sales targets. The significant financing component of the transaction was $ 2.6 million and is recognized as interest income through 2024 using the effective interest method. At December 31, 2022, the current portion and non-current portion of the non-contingent receivable due from AstraZeneca was $ 10.0 million and $ 14.6 million, respectively. At December 31, 2021, the non-contingent receivable due from AstraZeneca was $ 24.0 million and was classified as non-current.
Other Collaboration and License Agreements
Collaboration and License Option Agreement with Cour
In November 2021, the Company entered into the COUR Collaboration Agreement, pursuant to which the Company has been granted an option (the “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 (“CNP-104”) for the treatment of primary biliary cholangitis. COUR has initiated a clinical study to evaluate the safety, tolerability, and 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.
Pursuant to the terms of the COUR Collaboration Agreement, the Company made an upfront, non-refundable payment of $ 6.0 million to COUR during the year ended December 31, 2021, and agreed to pay $ 13.5 million in non-contingent payments and milestone payments in connection with certain development activities and regulatory milestones. After reviewing the data from the clinical study for CNP-104, if the Company exercises the Option, the Company will pay COUR $ 35.0 million in exchange for the license. Upon commercialization, COUR will be eligible to receive commercial milestone payments of up to $ 440.0 million over the term of the agreement and 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.
During the year ended December 31, 2021, the Company recognized research and development expense totaling $ 19.5 million related to the up-front payment, non-contingent payment, and milestone payments for which payment is probable to occur. At December 31, 2022 and 2021, payment obligations of $ 3.8 million and $ 13.5 million, respectively, were included in accrued research and development costs related to the COUR Collaboration Agreement.
Other Agreements
Disease Education and Promotional Agreement with Alnylam
In August 2019, the Company and Alnylam entered into a disease education and promotional agreement (the “Alnylam Agreement”) for Alnylam’s GIVLAARI for the treatment of AHP. The Alnylam Agreement, as amended, was terminated in June 2021 with an effective termination date of September 30, 2021. Under the terms of the Alnylam Agreement, the Company’s sales force performed disease awareness activities and sales detailing activities for GIVLAARI. The Company remained eligible to receive royalties based on a percentage of net sales of GIVLAARI that are directly attributable to the Company’s promotional efforts through September 30, 2022, which was one year following the termination of the agreement.
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During the years ended December 31, 2022, 2021 and 2020, the Company recognized $ 2.2 million, $ 2.4 million and $ 0.8 million, respectively, in collaborative arrangements revenue related to royalties. During the year ended December 31, 2020, the Company recognized $ 3.5 million in collaborative arrangements revenue related to the service fees.
5. Fair Value of Financial Instruments
The tables below present information about the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2022 and 2021 and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices for similar instruments in active markets, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the Company to develop its own assumptions for the asset or liability.
The Company’s investment portfolio may include fixed income securities that do not always trade on a daily basis. As a result, the pricing services used by the Company apply other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. In addition, model processes are used to assess interest rate impact and develop prepayment scenarios. These models take into consideration relevant credit information, perceived market movements, sector news and economic events. The inputs into these models may include benchmark yields, reported trades, broker-dealer quotes, issuer spreads and other relevant data. The Company validates the prices provided by its third party pricing services by obtaining market values from other pricing sources and analyzing pricing data in certain instances. The Company periodically invests in certain reverse repurchase agreements, which are collateralized by Government Securities and Obligations for an amount not less than 102 % of their principal amount. The Company does not record an asset or liability for the collateral as the Company is not permitted to sell or re-pledge the collateral. The collateral has at least the prevailing credit rating of U.S. Government Treasuries and Agencies. The Company utilizes a third party custodian to manage the exchange of funds and ensure the collateral received is maintained at 102 % of the reverse repurchase agreements principal amount on a daily basis.
The following tables present the assets and liabilities the Company has measured at fair value on a recurring basis (in thousands):
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Significant Other
Significant
Active Markets for
Observable
Unobservable
December 31,
Identical Assets
Inputs
Inputs
2022
(Level 1)
(Level 2)
(Level 3)
Assets:
Cash and cash equivalents:
Money market funds
$
250,313
$
250,313
$
—
$
—
Repurchase agreements
261,075
—
261,075
—
Commercial paper
138,809
—
138,809
—
Restricted cash:
Money market funds
1,735
1,735
—
—
Total assets measured at fair value
$
651,932
$
252,048
$
399,884
$
—
Liabilities:
Note hedge warrants
$
19
$
—
$
—
$
19
Total liabilities measured at fair value
$
19
$
—
$
—
$
19
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Fair Value Measurements at Reporting Date Using
Quoted Prices in
Significant Other
Significant
Active Markets for
Observable
Unobservable
December 31,
Identical Assets
Inputs
Inputs
2021
(Level 1)
(Level 2)
(Level 3)
Assets:
Cash and cash equivalents:
Money market funds
$
595,233
$
595,233
$
—
$
—
Restricted cash:
Money market funds
1,735
1,735
—
—
Convertible note hedges
1,115
—
—
1,115
Total assets measured at fair value
$
598,083
$
596,968
$
—
$
1,115
Liabilities:
Note hedge warrants
$
1,316
$
—
$
—
$
1,316
Total liabilities measured at fair value
$
1,316
$
—
$
—
$
1,316
Cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued research and development costs, accrued expenses and other current liabilities and current portion of operating lease obligations at December 31, 2022 and 2021 are carried at amounts that approximate fair value due to their short-term maturities.
Convertible Note Hedges and Note Hedge Warrants with Respect to 2022 Convertible Notes
The Company’s Convertible Note Hedges and the Note Hedge Warrants are recorded as derivative assets and liabilities, respectively, and are classified as Level 3 measurements under the fair value hierarchy. These derivatives are not actively traded and are valued using the Black-Scholes option-pricing model, which requires the use of subjective assumptions.
The following inputs were used in the fair market valuation of the Convertible Note Hedges as of December 31, 2021 and the Note Hedge Warrants as of December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Note Hedge
Convertible
Note Hedge
Warrants
Note Hedges
Warrants
Risk-free interest rate (1)
4.5
%
0.2
%
0.4
%
Expected term
0.3
0.5
1.0
Stock price (2)
$
12.39
$
11.66
$
11.66
Strike price (3)
$
18.82
$
14.51
$
18.82
Common stock volatility (4)
27.1
%
27.0
%
32.2
%
Dividend yield (5)
—
%
—
%
—
%
(1) Based on U.S. Treasury yield curve, with terms commensurate with the expected terms of the Convertible Note Hedges and the Note Hedge Warrants.
(2) The closing price of the Company’s Class A Common Stock on the last trading days of the years ended December 31, 2022 and 2021, respectively.
(3) As per the respective agreements for the Convertible Note Hedges and Note Hedge Warrants.
(4) Expected volatility based on historical volatility of the Company’s Class A Common Stock.
(5) The Company has not paid and does not anticipate paying cash dividends on its shares of common stock in the foreseeable future; therefore, the expected dividend yield is assumed to be zero .
The Convertible Note Hedges and the Note Hedge Warrants are recorded at fair value at each reporting date and changes in fair value are recorded in other (expense) income, net within the Company's consolidated statements of income.
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The following table reflects the change in the Company's Level 3 Convertible Note Hedges and Note Hedge Warrants from December 31, 2020 through December 31, 2022 (in thousands):
Convertible
Note Hedge
Note Hedges
Warrants
Balance at December 31, 2020
$
13,065
$
( 12,088 )
Change in fair value, recorded as a component of gain (loss) on derivatives
( 11,950 )
10,772
Balance at December 31, 2021
$
1,115
$
( 1,316 )
Change in fair value, recorded as a component of gain (loss) on derivatives
( 1,115 )
1,297
Balance at December 31, 2022
$
—
$
( 19 )
Convertible Senior Notes
In June 2015, the Company issued $ 335.7 million aggregate principal amount of its 2022 Convertible Notes. In August 2019, the Company issued $ 200.0 million aggregate principal amount of its 2024 Convertible Notes and $ 200.0 million aggregate principal amount of its 2026 Convertible Notes, and used a portion of the proceeds from such issuances to repurchase $ 215.0 million aggregate principal amount of its 2022 Convertible Notes. In June 2022, the Company repaid the $ 120.7 million remaining aggregate principal amount of its 2022 Convertible Notes. Prior to the adoption of ASU 2020-06, the Company separately accounted for the liability and equity components of each of the 2022 Convertible Notes, 2024 Convertible Notes, and 2026 Convertible Notes by allocating the proceeds between the liability component and equity component (Note 9). Following the adoption of ASU 2020-06 on January 1, 2022, the equity component was eliminated and each of the 2022 Convertible Notes, 2024 Convertible Notes, and 2026 Convertible Notes are measured as a single liability. The fair value of the respective convertible senior notes, which differs from their carrying value, is influenced by interest rates, the price of the Company’s Class A Common Stock and the volatility thereof, and the prices for the respective convertible senior notes observed in market trading, which are Level 2 inputs.
The estimated fair value of the 2022 Convertible Notes was $ 125.2 million as of December 31, 2021. The estimated fair value of the 2024 Convertible Notes was $ 215.9 million and $ 221.9 million as of December 31, 2022 and 2021, respectively. The estimated fair value of the 2026 Convertible Notes was $ 219.0 million and $ 227.2 million as of December 31, 2022 and 2021, respectively.
Capped Calls with Respect to 2024 Convertible Notes and 2026 Convertible Notes
In connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, the Company entered into the Capped Calls with certain financial institutions. The Capped Calls cover 29,867,480 shares of Class A Common Stock (subject to anti-dilution and certain other adjustments), which is the same number of shares of Class A Common Stock that initially underlie the 2024 Convertible Notes and the 2026 Convertible Notes. The Capped Calls have an initial strike price of approximately $ 13.39 per share, which corresponds to the initial conversion price of the 2024 Convertible Notes and the 2026 Convertible Notes, and have a cap price of approximately $ 17.05 per share (Note 9). The strike price and cap price are subject to anti-dilution adjustments generally similar to those applicable to the 2024 Convertible Notes and the 2026 Convertible Notes. These instruments meet the conditions outlined in ASC 815 to be classified in stockholders’ equity (deficit) and are not subsequently remeasured as long as the conditions for equity classification continue to be met (Note 9).
6. Leases
The Company’s lease portfolio for the year ended December 31, 2022 includes: an office lease for its current headquarters location, vehicle leases for its salesforce representatives, and leases for computer and office equipment.
The Company’s office lease and vehicle lease require letters of credit to secure the Company’s obligations under the lease agreements totaling $ 1.7 million and are collateralized by money market accounts recorded as restricted cash on the Company’s consolidated balance sheets as of December 31, 2022 and 2021.
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Lease cost is recognized on a straight-line basis over the lease term. The components of lease cost for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):
Year Ended December 31,
2022
2021
2020
Operating lease cost
$
2,509
$
2,520
$
2,530
Short-term lease cost
1,070
960
1,420
Total lease cost
$
3,579
$
3,480
$
3,950
Supplemental information related to leases for the periods reported is as follows:
Year Ended December 31,
2022
2021
2020
Cash paid for amounts included in the measurement of lease liabilities (in thousands)
$
3,114
$
3,128
$
1,146
Weighted-average remaining lease term of operating leases (in years)
7.3
8.3
9.3
Weighted-average discount rate of operating leases
5.8
%
5.8
%
5.8
%
Summer Street Lease
In June 2019, the Company entered into a non-cancelable operating lease (the “Summer Street Lease”) for approximately 39,000 square feet of office space on the 23 rd floor of 100 Summer Street, Boston, Massachusetts, which began serving as the Company’s headquarters in October 2019. The Summer Street Lease terminates on June 11, 2030 and includes a 2 % annual rent escalation, free rent periods, a tenant improvement allowance, and an option to extend the term of the lease for an additional five years at a market base rental rate. The extension option is not included in the lease term used for the measurement of the lease, as it is not reasonably certain to be exercised. The lease expense, inclusive of the escalating rent payments and lease incentives, is recognized on a straight-line basis over the lease term.
At lease commencement, the Company recorded a right-of-use asset and a lease liability using an incremental borrowing rate of 5.8 %. At December 31, 2022, the balances of the right-of-use asset and operating lease liability were $ 14.0 million and $ 19.7 million, respectively. At December 31, 2021, the balances of the right-of-use asset and operating lease liability were $ 15.3 million and $ 21.5 million, respectively.
Lease costs related to the Summer Street Lease recorded during each of the years ended December 31, 2022, 2021 and 2020 were $ 2.5 million.
Future minimum lease payments under the Summer Street Lease as of December 31, 2022 are as follows (in thousands):
2023
$
3,066
2024
3,126
2025
3,189
2026
3,252
2027
3,317
2028 and thereafter
8,285
Total future minimum lease payments
24,235
Less: present value adjustment
( 4,571 )
Operating lease liabilities
19,664
Less: current portion of operating lease liabilities
( 3,065 )
Operating lease liabilities, net of current portion
$
16,599
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7. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
December 31,
2022
2021
Software
$
5,414
$
5,667
Leasehold improvements
7,407
7,407
Laboratory equipment
1,327
1,327
Furniture and fixtures
1,542
1,517
Computer and office equipment
1,362
1,285
17,052
17,203
Less accumulated depreciation and amortization
( 10,764 )
( 9,628 )
$
6,288
$
7,575
Depreciation expense of property and equipment was $ 1.4 million, $ 1.5 million and $ 2.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.
During the year ended December 31, 2020, the Company recorded $ 1.2 million, in restructuring expenses in its consolidated statement of income related to the impairment of certain fixed assets as a result of its decision to discontinue IW-3718 development.
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
December 31,
2022
2021
Accrued compensation and benefits
$
12,268
$
16,653
Restructuring liabilities
—
462
Stock repurchase
—
3,009
Other
4,432
3,442
Total accrued expenses and other current liabilities
$
16,700
$
23,566
As of December 31, 2022 and 2021, other accrued expenses of $ 4.4 million and $ 3.4 million were comprised primarily of $ 3.6 million and $ 2.7 million of uninvoiced vendor liabilities, respectively.
9. Notes Payable
2.25 % Convertible Senior Notes due 2022
In June 2015, the Company issued $ 335.7 million aggregate principal amount of the 2022 Convertible Notes. The Company received net proceeds of $ 324.0 million from the sale of the 2022 Convertible Notes, after deducting fees and expenses of $ 11.7 million. The Company used $ 21.1 million of the net proceeds from the sale of the 2022 Convertible Notes to pay the net cost of the Convertible Note Hedges (after such cost was partially offset by the proceeds to the Company from the sale of the Note Hedge Warrants), as described below.
In connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes in August 2019, the Company repurchased $ 215.0 million aggregate principal amount of the 2022 Convertible Notes. Such portion of the 2022 Convertible Notes were repurchased at a premium totaling $ 227.3 million.
In June 2022, the Company repaid the remaining $ 120.7 million aggregate principal amount of the 2022 Convertible Notes upon maturity.
The 2022 Convertible Notes were governed by an indenture (the “2022 Indenture”) between the Company and U.S. Bank National Association, as trustee (the “Trustee”). The 2022 Convertible Notes were senior unsecured obligations and bore cash interest at the annual rate of 2.25 %, payable on June 15 and December 15 of each year. The
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2022 Convertible Notes matured on June 15, 2022. No conversions were exercised by holders of the 2022 Convertible Notes.
Upon issuance, the Company separately accounted for the liability and equity components of the 2022 Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option, or equity component, due to the Company's ability to settle the 2022 Convertible Notes in cash, its Class A Common Stock, or a combination of cash and Class A Common Stock at the option of the Company. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The equity component of the 2022 Convertible Notes was recognized as a debt discount and represents the difference between the gross proceeds from the issuance of the 2022 Convertible Notes and the fair value of the liability component of the 2022 Convertible Notes on the date of issuance. The debt discount was amortized to interest expense using the effective interest method over seven years, or the expected life of the 2022 Convertible Notes. The equity component was not remeasured as long as it continued to meet the conditions for equity classification.
Upon the adoption of ASU 2020-06 on January 1, 2022, the equity component is no longer bifurcated from the liability component and each debt instrument is accounted for as a single liability measured at amortized cost. Accordingly, the unamortized debt discount as of the adoption date in the amount of $ 3.5 million was derecognized, resulting in an increase to the current portion of convertible senior notes and a decrease to stockholders’ equity. Additionally, there is no longer non-cash interest expense associated with the amortization of the original issue discount. During the years ended December 31, 2021 and 2020, the Company recognized $ 7.2 million and $ 6.6 million in non-cash interest expense, respectively, related to the debt discount.
0.75 % Convertible Senior Notes due 2024 and 1.50 % Convertible Senior Notes due 2026
In August 2019, the Company issued $ 200.0 million aggregate principal amount of the 2024 Convertible Notes and $ 200.0 million aggregate principal amount of the 2026 Convertible Notes. The Company received net proceeds of $ 391.0 million from the sale of the 2024 Convertible Notes and 2026 Convertible Notes, after deducting fees and expenses of $ 9.0 million. The Company used $ 25.2 million of the net proceeds from the sale of the 2024 Convertible Notes and 2026 Convertible Notes to pay the cost of the Capped Calls, as described below. For purposes of this section, “Notes” refer to the 2024 Convertible Notes and the 2026 Convertible Notes, collectively.
The 2024 Convertible Notes and 2026 Convertible Notes were issued by the Company on August 12, 2019, pursuant to separate Indentures, each dated as of such date (each an “Indenture” and together the “Indentures”), between the Company and the Trustee. 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. 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. The Company will settle conversions of the 2024 Convertible Notes and 2026 Convertible Notes through payment or delivery, as the case may be, of cash, shares of the Company’s Class A Common Stock or a combination of cash and shares of Class A Common Stock, at the Company’s option (subject to, and in accordance with, the settlement provisions of the applicable Indenture). The initial conversion rate for each of the 2024 Convertible Notes and the 2026 Convertible Notes is 74.6687 shares of Class A Common Stock (subject to adjustment as provided for in the applicable Indenture) per $ 1,000 principal amount of the 2024 Convertible Notes and 2026 Convertible Notes, which is equal to an initial conversion price of approximately $ 13.39 per share.
Holders of the 2024 Convertible Notes and 2026 Convertible Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding December 15, 2023, with respect to the 2024 Convertible Notes, and December 15, 2025, with respect to the 2026 Convertible Notes, in multiples of $ 1,000 principal amount, only under the following circumstances:
● during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price of Class A Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the Notes on each applicable trading day;
● during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in each Indenture) per $ 1,000 principal amount of Notes
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for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of Class A Common Stock and the conversion rate for the Notes on each such trading day; or
● upon the occurrence of specified corporate events described in each Indenture.
On or after December 15, 2023, with respect to the 2024 Convertible Notes, and December 15, 2025, with respect to the 2026 Convertible Notes, until the close of business on the second scheduled trading day immediately preceding the applicable maturity date, the holders of the Notes may convert their Notes, in multiples of $ 1,000 principal amount, regardless of the foregoing conditions.
Upon the occurrence of fundamental changes, as described in the Indentures, prior to the maturity date of the respective Notes, holders of such Notes may require the Company to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. If a make-whole fundamental change, as described in the Indentures, occurs and a holder elects to convert its Notes in connection with such make-whole fundamental change, such holder may be entitled to an increase in the conversion rate as described in the Indentures.
The Indentures do not contain any financial covenants or restrict the Company’s ability to repurchase the Company’s securities, pay dividends or make restricted payments in the event of a transaction that substantially increases the Company’s level of indebtedness. The Indentures provide for customary events of default. In the case of an event of default with respect to a series of Notes arising from specified events of bankruptcy or insolvency, all outstanding Notes of such series will become due and payable immediately without further action or notice. If any other event of default with respect to a series of Notes under the relevant Indenture occurs or is continuing, the Trustee or holders of at least 25 % in aggregate principal amount of the then outstanding Notes of such series may declare the principal amount of such Notes to be immediately due and payable.
Upon issuance, the Company separately accounted for the liability and equity components of the 2024 Convertible Notes and the 2026 Convertible Notes by allocating the proceeds between the liability components and the embedded conversion options, or equity components, due to the Company’s ability to settle the 2024 Convertible Notes and the 2026 Convertible Notes in cash, its Class A Common Stock, or a combination of cash and Class A Common Stock at the option of the Company. The carrying amount of the respective liability components were calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The respective equity components of the 2024 Convertible Notes and the 2026 Convertible Notes were recognized as a debt discount and represent the difference between the gross proceeds from the issuance of the 2024 Convertible Notes and 2026 Convertible Notes and the fair value of the liability of the 2024 Convertible Notes and 2026 Convertible Notes on their respective dates of issuance. The debt discount was amortized to interest expense using the effective interest method over approximately five and seven years , or the expected life of the 2024 Convertible Notes and the 2026 Convertible Notes, respectively. The respective equity components were not remeasured as long as they continued to meet the conditions for equity classification.
Upon the adoption of ASU 2020-06 on January 1, 2022, the equity component is no longer bifurcated from the liability component and each debt instrument is accounted for as a single liability measured at amortized cost. Accordingly, the unamortized debt discount as of the adoption date in the amount of $ 22.3 million and $ 35.8 million for the 2024 Convertible Notes and 2026 Convertible Notes, respectively, was derecognized, resulting in an increase to the non-current portion of convertible senior notes and a decrease to stockholders’ equity. Additionally, there is no longer non-cash interest expense associated with the amortization of the original issue discount. During the years ended December 31, 2021 and 2020, the Company recognized $ 8.2 million and $ 7.8 million in non-cash interest expense, respectively, related to the debt discount for the 2024 Convertible Notes and $ 6.8 million and $ 6.4 million in non-cash interest expense, respectively, related to the debt discount for the 2026 Convertible Notes.
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The Company’s outstanding balances for the convertible senior notes as of December 31, 2022 and 2021 consisted of the following (in thousands):
December 31,
2022
2021
Liability component:
Principal:
2022 Convertible Notes
$
—
$
120,699
2024 Convertible Notes
200,000
200,000
2026 Convertible Notes
200,000
200,000
Less: unamortized debt discount
—
( 61,641 )
Less: unamortized debt issuance costs
( 3,749 )
( 4,867 )
Net carrying amount
$
396,251
$
454,191
Equity component:
2022 Convertible Notes
—
19,807
2024 Convertible Notes
—
41,152
2026 Convertible Notes
—
51,350
Total equity component
$
—
$
112,309
In connection with the issuance of the 2022 Convertible Notes, the Company incurred $ 11.7 million of debt issuance costs, which primarily consisted of initial purchasers’ discounts and legal and other professional fees. The Company allocated these costs to the liability and equity components based on the allocation of the proceeds. The portion of these costs allocated to the equity components totaling $ 4.0 million were recorded as a reduction to additional paid-in capital upon issuance. The portion of these costs allocated to the liability components totaling $ 7.7 million were recorded as a reduction in the carrying value of the debt on the consolidated balance sheet and are amortized to interest expense using the effective interest method over the expected life of the 2022 Convertible Notes. In connection with the partial repurchase of the 2022 Convertible Notes, the Company recorded a loss on extinguishment of debt of $ 23.4 million, of which $ 2.8 million related to the initial debt issuance costs, during the year ended December 31, 2019. Upon the adoption of ASU 2020-06, the costs originally allocated to the equity component are reflected within the current portion of convertible senior notes and recorded as interest expense over the life of the 2022 Convertible Notes.
The Company determined the expected life of the 2022 Convertible Notes was equal to their seven-year term. From the date of the partial repurchase of the 2022 Convertible Notes in August 2019 through maturity in June 2022, the effective annual interest rate on the 2022 Convertible Notes was 2.7 %. The effective annual interest rate is computed using the contractual interest and the amortization of debt issuance costs. Prior to the adoption of ASU 2020-06, the effective annual interest rate calculation also included the amortization of the original issue discount.
In connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, the Company incurred $ 9.0 million of debt issuance costs, which primarily consisted of initial purchaser’s discounts and legal and other professional fees. The Company allocated these costs to the liability and equity components based on the allocation of the proceeds. The portion of these costs allocated to the equity components totaling $ 2.1 million were recorded as a reduction to additional paid-in capital. The portion of these costs allocated to the liability components totaling $ 6.9 million were recorded as a reduction in the carrying value of the debt on the consolidated balance sheet and are amortized to interest expense using the effective interest method over the expected lives of the 2024 Convertible Notes and the 2026 Convertible Notes. Upon the adoption of ASU 2020-06 on January 1, 2022, the costs originally allocated to the equity component are reflected within the current portion of convertible senior notes and recorded as interest expense over the life of the 2024 Convertible Notes and the 2026 Convertible Notes.
The Company determined the expected life of the 2024 Convertible Notes and the 2026 Convertible Notes was equal to their approximately five and seven-year terms, respectively. The effective annual interest rates of the 2024 Convertible Notes and the 2026 Convertible Notes for the period from the date of issuance through December 31, 2022 was 1.2 % and 1.9 % , respectively. The effective annual interest rate is computed using the contractual interest and the amortization of debt issuance costs. Prior to the adoption of ASU 2020-06, the effective annual interest rate calculation also included the amortization of the original issue discount.
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The following table sets forth total interest expense recognized related to convertible senior notes during the years ended December 31, 2022, 2021, and 2020 (in thousands):
Year Ended December 31,
2022
2021
2020
Contractual interest expense
$
5,745
$
7,216
$
7,216
Amortization of debt issuance costs
1,853
1,678
1,462
Amortization of debt discount
—
22,256
20,800
Total interest expense
$
7,598
$
31,150
$
29,478
Future minimum payments under the convertible senior notes as of December 31, 2022, are as follows (in thousands):
2023
$
4,500
2024
203,750
2025
3,000
2026
201,500
Total future minimum payments under the convertible senior notes
412,750
Less: amounts representing interest
( 12,750 )
Less: unamortized debt issuance costs
( 3,749 )
Convertible senior notes balance
$
396,251
Convertible Note Hedge and Note Hedge Warrant Transactions with Respect to 2022 Convertible Notes
To minimize the impact of potential dilution to the Company's Class A common stockholders upon conversion of the 2022 Convertible Notes, the Company entered into the Convertible Note Hedges. The Convertible Note Hedges had an exercise price of $ 14.51 per share and covered 23,135,435 shares. If the 2022 Convertible Notes had been converted and the price of the Company’s Class A Common Stock was above the exercise price of the Convertible Note Hedges, the counterparties were obligated to deliver shares of the Company’s Class A Common Stock and/or cash with an aggregate value approximately equal to the difference between the price of the Company’s Class A Common Stock at the conversion date and the exercise price, multiplied by the number of shares of the Company’s Class A Common Stock related to the Convertible Note Hedge being exercised.
Concurrently with entering into the Convertible Note Hedges, the Company sold Note Hedge Warrants to the Convertible Note Hedge counterparties to acquire shares of the Company’s Class A Common Stock. An aggregate of 23,135,435 shares underlie the Note Hedge Warrants and each warrant has a strike price of $ 18.82 per share, subject to customary anti-dilution adjustments. The Note Hedge Warrants are exercisable over the 150 trading day period beginning on September 15, 2022. The Note Hedge Warrants could have a dilutive effect on the Class A Common Stock to the extent that the market price per share of the Company’s Class A Common Stock exceeds the applicable strike price of such warrants.
The Convertible Note Hedges and the Note Hedge Warrants are separate transactions entered into by the Company and are not part of the terms of the 2022 Convertible Notes. Holders of the Convertible Note Hedges and the Note Hedge Warrants do not have any rights with respect to the 2022 Convertible Notes. The Company paid $ 91.9 million for the Convertible Note Hedges and received $ 70.8 million for the Note Hedge Warrants, resulting in a net cost to the Company of $ 21.1 million.
In August 2019, concurrently with the repurchase of $ 215.0 million aggregate principal amount of the 2022 Convertible Notes, the Company terminated the respective portion of the Convertible Note Hedges and Note Hedge Warrants. The Company received $ 3.2 million of termination payments from the counterparties of the Convertible Note Hedges and Note Hedge Warrants.
In June 2022, the Convertible Note Hedges terminated unexercised upon expiry. The Note Hedge Warrants remain outstanding as of December 31, 2022.
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The Convertible Note Hedges and Note Hedge Warrants are accounted for as derivative assets and liabilities, respectively, in accordance with ASC 815, and are remeasured to fair value at each reporting date (Note 5).
As of December 31, 2022, the Note Hedge Warrants were classified as current liabilities on the Company’s consolidated balance sheet. As of December 31, 2021, the Convertible Note Hedges and Note Hedge Warrants were classified as current assets and current liabilities, respectively, on the Company’s consolidated balance sheet.
Capped Calls with Respect to 2024 Convertible Notes and 2026 Convertible Notes
To minimize the impact of potential dilution to the Company’s Class A common stockholders upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes, the Company entered into separate Capped Calls in connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes. The Company paid the counterparties $ 25.2 million to enter into the Capped Calls.
The Capped Calls have an initial strike price of approximately $ 13.39 per share, which corresponds to the initial conversion price of the 2024 Convertible Notes and the 2026 Convertible Notes and is subject to anti-dilution adjustments generally similar to those applicable to the 2024 Convertible Notes and the 2026 Convertible Notes. The Capped Calls have a cap price of approximately $ 17.05 per share, subject to certain adjustments. The Capped Calls cover 29,867,480 shares of Class A Common Stock (subject to anti-dilution and certain other adjustments), which is the same number of shares of Class A Common Stock that initially underlie the 2024 Convertible Notes and the 2026 Convertible Notes.
The Capped Calls are expected generally to reduce the potential dilution to the Class A Common Stock upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes in the event that the market price per share of Class A Common Stock is greater than the strike price of the Capped Calls as adjusted pursuant to the anti-dilution adjustments. If, however, the market price per share of Class A Common Stock exceeds the cap price of the Capped Calls, there would nevertheless be dilution upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes to the extent that such market price exceeds the cap price of the Capped Calls.
The Capped Calls are separate transactions entered into by and between the Company and the Capped Calls counterparties and are not part of the terms of the 2024 Convertible Notes or the 2026 Convertible Notes. Holders of the 2024 Convertible Notes and the 2026 Convertible Notes do not have any rights with respect to the Capped Calls. The Company recorded a reduction to additional paid-in capital of $ 25.0 million during the year ended December 31, 2019 related to the premium payments for the Capped Calls. Additionally, the Company recorded a $ 0.2 million reduction to equity related to transaction costs incurred in connection with the Capped Calls during the year ended December 31, 2019. These instruments meet the conditions outlined in ASC 815 to be classified in stockholders’ equity and are not subsequently remeasured as long as the conditions for equity classification continue to be met.
10. Commitments and Contingencies
Commitments with AbbVie
The Company and AbbVie are jointly obligated to make minimum purchases of linaclotide API for the territories covered by the Company’s collaboration with AbbVie for North America. Currently, AbbVie fulfills all such minimum purchase commitments.
Under the collaboration agreement with AbbVie for North America, the Company shares all development and commercialization costs related to linaclotide in the U.S. with AbbVie. The actual amounts that the Company pays to AbbVie or that AbbVie pays to the Company will depend on numerous factors outside of the Company’s control, including the success of certain clinical development efforts with respect to linaclotide, the content and timing of decisions made by the regulators, the reimbursement and competitive landscape around linaclotide and the Company’s other product candidates, and other factors.
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Other Funding Commitments
As of December 31, 2022, the Company has ongoing studies in various pre-clinical and clinical trial stages. The Company’s most significant clinical trial expenditures are to contract research organizations. These contracts are generally cancellable, with notice, at the Company’s option and do not have any significant cancellation penalties.
Guarantees
As permitted under Delaware law, the Company indemnifies its directors and certain of its officers for certain events or occurrences while such director or officer is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make is unlimited; however, the Company has directors’ and officers’ insurance coverage that is intended to limit its exposure and enable it to recover a portion of any future amounts paid.
The Company enters into certain agreements with other parties in the ordinary course of business that contain indemnification provisions. These typically include agreements with business partners, contractors, landlords, clinical sites and customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities. These indemnification provisions generally survive termination of the underlying agreements. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. However, to date the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of these obligations is minimal. Accordingly, the Company did not have any liabilities recorded for these obligations as of December 31, 2022 and 2021.
Litigation
From time to time, the Company is involved in various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these ongoing legal matters, individually and in aggregate, will have a material adverse effect on the Company’s consolidated financial statements.
In January 2020, the Company and AbbVie entered into settlement agreements with Sandoz Inc. and Teva Pharmaceuticals, USA, Inc., (“Teva”), resolving patent litigation brought in response to the last outstanding abbreviated new drug applications seeking approval to market generic versions of LINZESS prior to the expiration of the Company’s and AbbVie’s applicable patents.
In May 2021, the Company and AbbVie entered into a settlement agreement with Teva, under which the Company and AbbVie will grant Teva a license to market a generic version of 72 mcg LINZESS beginning March 31, 2029 (subject to FDA approval), unless certain limited circumstances, customary for settlement agreements of this nature, occur. With this settlement agreement, the Company and AbbVie have settled with the filers of all known ANDAs to date seeking approval to market generic versions of LINZESS.
11. Stockholders’ Equity
Preferred Stock
The Company’s preferred stock may be issued from time to time in one or more series, with each such series to consist of such number of shares and to have such terms as adopted by the board of directors. Authority is given to the board of directors to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitation or restrictions thereof, including without limitation, dividend rights, conversion rights, redemption privileges and liquidation preferences.
Common Stock
The Company has one class of common stock (“Class A Common Stock”). Class A Common Stock is entitled to one vote per share. The Company has reserved, out of its authorized but unissued shares of Class A Common Stock,
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sufficient shares to effect the conversion of the convertible senior notes and the Note Hedge Warrants pursuant to the terms thereof (Note 9).
The Company’s stockholders are entitled to dividends if and when declared by the board of directors.
Share Repurchase Program
In May 2021, the Company’s Board of Directors authorized a program to repurchase up to $ 150.0 million of the
Company’s Class A Common Stock. The Company completed the share repurchase program in May 2022 and retired the repurchased shares.
During the year ended December 31, 2022, the Company repurchased 10.8 million shares of Class A Common Stock at an aggregate purchase price of $ 123.4 million. For the overall program, under which repurchases commenced in December 2021, the Company repurchased 13.1 million shares of Class A Common Stock at an average price per share of $ 11.47 .
12. Employee Stock Benefit Plans
The Company has several share-based compensation plans under which stock options, RSAs, RSUs, and other share-based awards are available for grant to employees, officers, directors and consultants of the Company.
The following table summarizes share-based compensation expense by award type (in thousands):
Year Ended December 31,
2022
2021
2020
Stock options
$
1,471
$
3,154
$
7,680
Time-based restricted stock units
17,643
14,539
18,624
Performance-based restricted stock units
5,008
1,295
2,190
Restricted stock awards
2,439
2,684
1,886
Employee stock purchase plan
412
419
722
Stock awards
75
190
73
Total share-based compensation expense
$
27,048
$
22,281
$
31,175
The following table summarizes the share-based compensation expense reflected in the consolidated statements of income (in thousands):
Year Ended December 31,
2022
2021
2020
Share-based compensation expense:
Research and development
$
4,936
$
4,849
$
5,569
Selling, general and administrative
22,112
17,323
23,825
Restructuring expenses
—
109
1,781
Total share-based compensation expense included in operating expenses
27,048
22,281
31,175
Income tax benefit
1,644
—
—
Total share-based compensation expense, net of tax
$
28,692
$
22,281
$
31,175
Restructuring expenses include modifications to share-based awards held by employees impacted by various workforce reductions (Note 16).
Stock Benefit Plans
As of December 31, 2022, the Company has the following active stock benefit plans pursuant to which awards are currently outstanding: the 2019 Equity Incentive Plan (the “2019 Equity Plan”), the Amended and Restated 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) and the Amended and Restated 2010 Employee, Director, and Consultant Equity Incentive Plan (the “2010 Equity Plan”). At December 31, 2022, there were 11,790,625 shares available for future grant under the 2019 Equity Plan and the 2010 Purchase Plan.
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2019 Equity Plan
During 2019, the Company’s stockholders approved the 2019 Equity Plan under which stock options, RSAs, RSUs, and other stock-based awards may be granted to employees, officers, directors, or consultants of the Company. Under the 2019 Equity Plan, 10,000,000 shares of Class A Common Stock were initially reserved for issuance. Awards that are returned to the 2010 Equity Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for issuance under the 2019 Equity Plan. Awards that expire, cancel, terminate, or are repurchased under the 2019 Equity Plan will no longer be available for future grant. As of December 31, 2022, 7,366,153 shares were available for future grant under the 2019 Equity Plan.
2010 Purchase Plan
During 2010, the Company’s stockholders approved the 2010 Purchase Plan, which gives eligible employees the right to purchase shares of common stock at the lower of 85 % of the fair market value on the first or last day of an offering period. Each offering period is six months . There were 400,000 shares of common stock initially reserved for issuance pursuant to the 2010 Purchase Plan. The number of shares available for future grant under the 2010 Purchase Plan may be increased on the first day of each fiscal year by an amount equal to the lesser of: (i) 1,000,000 shares, (ii) 1 % of the Class A shares of common stock outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of shares as is determined by the board of directors. As of December 31, 2022, there were 4,424,472 shares available for future grant under the 2010 Purchase Plan.
2010 Equity Plan
The 2010 Equity Plan provided for the granting of stock options, RSAs, RSUs, and other share-based awards to employees, officers, directors, consultants, or advisors of the Company. At December 31, 2022, there were no shares available for future grant under the 2010 Equity Plan.
Restricted Stock Awards
RSAs are granted to non-employee members of the board of directors under restricted stock agreements in accordance with the terms of the 2019 Equity Plan and the Company’s non-employee director compensation policy, effective May 2019. Annual restricted stock grants to each non-employee member of the board of directors vest in full on the date immediately preceding the next annual meeting of stockholders, provided the individual continues to serve on the Company’s board of directors through each vest date. Initial restricted stock grants to new non-employee members of the board of directors vest annually over a three-year period from the date of grant provided the individual continues to serve on the Company’s board of directors through each vest date.
A summary of restricted stock activity for the year ended December 31, 2022 is presented below:
Weighted-
Average
Number of
Grant Date
Shares
Fair Value
Unvested as of December 31, 2021
263,260
$
11.61
Granted
172,568
11.22
Vested
( 246,710 )
11.64
Forfeited
—
—
Unvested as of December 31, 2022
189,118
$
11.22
The weighted-average grant date fair value per share of RSAs granted during the years ended December 31, 2022, 2021, and 2020 was $ 11.22 , $ 11.67 , and $ 10.16 , respectively. The total fair value of RSAs that vested during the years ended December 31, 2022, 2021, and 2020 was $ 2.8 million, $ 2.5 million, and $ 1.9 million, respectively.
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Restricted Stock Units
RSUs granted under the Company’s equity plans represent the right to receive one share of the Company’s Class A Common Stock pursuant to the terms of the applicable award agreement. Shares of the Company’s Class A Common Stock are delivered to the employee upon vesting, subject to payment of applicable withholding taxes.
Time-based RSUs
Time-based RSUs generally vest over a two -to- four-year period on the approximate anniversary of the date of grant until fully vested, provided the individual remains in continuous service with the Company through each vesting date. The fair value of all time-based RSUs is based on the market value of the Company's Class A Common Stock on the date of grant. Compensation expense, including the effect of estimated forfeitures, is recognized over the applicable service period.
A summary of time-based RSU activity for the year ended December 31, 2022 is as follows:
Weighted-
Average
Number
Grant Date
of RSUs
Fair Value
Outstanding as of December 31, 2021
3,864,108
$
10.89
Granted
2,265,661
11.08
Vested and released
( 1,327,573 )
11.15
Forfeited
( 512,051 )
10.95
Outstanding as of December 31, 2022
4,290,145
$
10.91
Amounts relating to time-based RSUs granted prior to the Separation of the Company’s soluble guanylate cycle business, and certain other assets and liabilities, into Cyclerion Therapeutics, Inc. (the “Separation) have not been adjusted to reflect the effect of the Separation on the Company’s stock price. For additional information related to the Separation, refer to Note 15, Related Parties , to these consolidated financial statements.
The weighted-average grant date fair value per share of time-based RSUs granted during the years ended December 31, 2022, 2021, and 2020 was $ 11.08 , $ 10.40 , and $ 11.59 , respectively. The total fair value of time-based RSUs that vested during the years ended December 31, 2022, 2021, and 2020 was $ 14.8 million, $ 17.8 million, and $ 11.1 million, respectively.
Performance-based RSUs
Performance-based RSUs (“PSUs”) were granted to certain executives. PSUs vest upon the achievement of specified performance criteria over a two to three-year performance period, generally subject to the executive remaining in continuous service with the Company through the applicable vesting dates. The performance criteria applicable to the PSUs granted in 2020 were (i) gaining the U.S. FDA’s acceptance of one or more additional New Drug Applications through internal development or acquisition of development-stage or commercial-stage programs (“Pipeline PSUs”), (ii) achieving certain profitability metrics (“Profitability PSUs”) and (iii) realizing relative total shareholder return goals (the “Relative TSR PSUs”). PSUs granted in 2022 and 2021 consisted entirely of Relative TSR PSUs.
The fair value of Pipeline PSUs and Profitability PSUs is based on the market value of the Company's Class A Common Stock on the date of grant. The Relative TSR PSUs are valued using the Monte Carlo simulation method on the date of grant. The weighted average assumptions used to estimate the fair value of Relative TSR PSUs were as follows for the years ended December 31, 2022, 2021, and 2020:
Year Ended December 31,
2022
2021
2020
Fair value of common stock
$
11.13
$
11.39
$
11.78
Expected volatility
41.7
%
47.9
%
53.3
%
Expected term (in years)
2.8
2.6
2.8
Risk-free interest rate
1.6
%
0.3
%
1.0
%
Expected dividend yield
—
%
—
%
—
%
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A summary of PSU activity for the year ended December 31, 2022 is as follows:
Weighted-
Average
Number
Grant Date
of PSUs
Fair Value
Outstanding as of December 31, 2021
833,286
$
14.06
Granted (1)
598,814
14.30
Vested and released
( 151,859 )
11.68
Forfeited
( 111,470 )
11.65
Outstanding as of December 31, 2022
1,168,771
$
14.72
(1) Includes an adjustment of 70,759 PSUs related to PSUs granted in prior years which vested during the year ended December 31, 2022 in excess of the target number of PSUs.
The weighted-average grant date fair value per share of PSUs granted during the years ended December 31, 2022, 2021, and 2020 was $ 14.30 , $ 14.65 , and $ 12.48 , respectively. The total fair value of PSUs that vested during the year ended December 31, 2022 was $ 1.7 million. No PSUs vested during the years ended December 31, 2021 and 2020.
Stock Options
Stock options granted under the Company’s equity plans represent the right to purchase one share of the Company’s Class A Common Stock pursuant to the terms of the applicable award agreement. Shares of the Company's Class A Common Stock are delivered to the employee upon exercise, subject to payment of applicable withholding taxes.
As of April 2020, the Company no longer grants stock options. Stock options previously granted under the Company’s equity plans generally have a ten-year term and vest over a period of four years , provided the individual continues to serve at the Company through the vesting dates. Options granted under all equity plans are exercisable at a price per share not less than the fair market value of the underlying common stock on the date of grant. The estimated fair value of options, including the effect of estimated forfeitures, is recognized over the requisite service period, which is typically the vesting period of each option.
The weighted average assumptions used to estimate the fair value of the stock options using the Black-Scholes option-pricing model were as follows for the year ended December 31, 2020:
Year Ended December 31, 2020
Expected volatility
46.6
%
Expected term (in years)
6.1
Risk-free interest rate
1.5
%
Expected dividend yield
—
%
Expected volatility is based on the historical volatility of the Company’s Class A Common Stock. The Company estimates the expected term using historical data. The risk-free interest rate used for each grant is based on a zero-coupon U.S. Treasury instrument with a remaining term similar to the expected term of the share-based award. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock in the foreseeable future; therefore, the expected dividend yield is assumed to be zero .
The weighted-average grant date fair value per share of options granted during the year ended December 31, 2020 was $ 5.89 .
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The following table summarizes stock option activity under the Company’s share-based compensation plans:
Weighted-
Weighted-
Number of
Average
Average
Aggregate
Stock
Exercise
Contractual
Intrinsic
Options
Price (1)
Life
Value
(in years)
(in thousands)
Outstanding at December 31, 2021
9,372,794
$
12.30
3.51
$
4,528
Granted
—
—
—
—
Exercised
( 951,355 )
10.88
—
—
Cancelled
( 1,490,067 )
13.04
—
—
Outstanding at December 31, 2022
6,931,372
12.34
3.32
5,786
Vested or expected to vest at December 31, 2022
6,929,248
12.34
3.32
5,782
Exercisable at December 31, 2022
6,877,104
12.35
3.30
5,709
(1) Amounts relating to stock options granted prior to the Separation have not been adjusted to reflect the effect of the Separation on the Company’s stock price.
The total intrinsic value of options exercised during the years ended December 31, 2022, 2021, and 2020 was $ 0.9 million, $ 2.7 million, and $ 3.5 million, respectively. The intrinsic value was calculated as the difference between the fair value of the Company’s Class A Common Stock at the date of exercise and the exercise price of the option issued.
The following table sets forth the Company's unrecognized share-based compensation expense, net of estimated forfeitures, as of December 31, 2022, by type of award and the weighted-average period over which that expense is expected to be recognized:
Unrecognized
Weighted-Average
Expense, Net
Remaining
of Estimated
Recognition
Forfeitures
Period
(in thousands)
(in years)
Type of award:
Stock options with time-based vesting
$
183
0.54
Restricted stock awards
968
0.45
Time-based restricted stock units
24,436
2.41
Performance-based restricted stock units
6,387
1.49
The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures.
13. Income Taxes
The components of the provision for (benefit from) income taxes during the years ended December 31, 2022, 2021, and 2020 consisted of the following (in thousands):
Year Ended December 31,
2022
2021
2020
Current taxes:
Federal
$
—
$
—
$
—
State
11,618
5,503
2,685
Total current taxes
11,618
5,503
2,685
Deferred taxes:
Federal
52,191
( 251,367 )
—
State
13,548
( 81,927 )
—
Total deferred taxes
65,739
( 333,294 )
—
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Income tax expense (benefit)
$
77,357
$
( 327,791 )
$
2,685
During the year ended December 31, 2022, the Company 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. Due to the Company’s ability to utilize its net operating losses to offset federal taxable income and taxable income in many states, the majority of the Company’s tax provision is a non-cash tax expense until the Company’s net operating losses have been fully utilized. During the year ended December 31, 2021, the Company recorded income tax benefit of $ 327.8 million, which primarily pertains to the income tax benefit of $ 333.3 million related to the release of the valuation allowance on the majority of the Company’s tax attributes and other deferred tax assets, partially offset by $ 5.5 million of state income taxes in certain states in which the Company is unable to utilize net operating losses to fully offset taxable income. During the year ended December 31, 2020, the Company recorded $ 2.7 million in income tax expense related to state income taxes in certain states which had temporarily disallowed or only partially allow the use of net operating losses to offset taxable income. The Company did not record a provision for federal income taxes for the period ended December 31, 2020, as it offset taxable income with federal net operating losses and recorded a full valuation allowance against net deferred tax assets. The Company has not recorded a foreign tax provision as it has had cumulative net operating losses outside of the United States since inception.
On March 27, 2020. the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted and signed into law. The Company benefitted from certain provisions of the CARES Act, specifically, the increase in allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income, which allowed the Company to take additional interest deductions for the period ended December 31, 2020. Additionally, the Company was able to claim 100% bonus depreciation on leasehold improvements incurred in the period ended December 31, 2020 and 2019.
A reconciliation of income taxes computed using the U.S. federal statutory rate of 21 % to that reflected in the consolidated statements of income are as follows (in thousands):
Year Ended December 31,
2022
2021
2020
Income tax expense using U.S. federal statutory rate
$
53,009
$
42,138
$
22,861
Permanent differences
( 290 )
426
325
State income taxes, net of federal benefit
16,160
12,554
7,565
Executive compensation - Section 162(m)
2,654
695
1,718
Excess tax benefits
3,613
6,270
5,132
Fair market valuation of Note Hedge Warrants and Convertible Note Hedges
( 50 )
325
1,680
Tax credits
( 252 )
( 9 )
( 3,149 )
Expiring net operating losses and tax credits
1,087
491
1,991
Effect of change in state tax rate on deferred tax assets and deferred tax liabilities
2,581
123
( 208 )
Change in the valuation allowance
( 1,155 )
( 390,804 )
( 35,230 )
Income tax expense (benefit)
$
77,357
$
( 327,791 )
$
2,685
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to be in effect for the years in which differences are expected to reverse. Deferred tax assets and liabilities were determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse.
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December 31,
2022
2021
Deferred tax assets:
Net operating loss carryforwards
$
88,769
$
165,022
Tax credit carryforwards
59,290
60,125
Capitalized research and development
12,683
4,981
Share-based compensation
13,666
16,857
Basis difference on collaboration agreement for North America with AbbVie
95,460
78,194
Accruals and reserves
5,935
5,003
Basis difference on Convertible Notes
2,845
8,166
Intangible assets
5,299
5,396
Operating lease liability
5,337
5,971
Other
1,242
3,997
Total deferred tax assets
290,526
353,712
Deferred tax liabilities:
Basis difference on Convertible Notes
—
( 11,960 )
Operating lease right-of-use assets
( 3,810 )
( 4,248 )
Total deferred tax liabilities
( 3,810 )
( 16,208 )
Net deferred tax asset
286,716
337,504
Valuation allowance
( 3,055 )
( 4,210 )
Net deferred tax asset
$
283,661
$
333,294
On a periodic basis, the Company reassesses the valuation allowance on its deferred income tax assets weighing positive and negative evidence to assess the recoverability of the deferred tax assets. During the year ended December 31, 2021, the Company 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, management determined it was more likely than not that the Company will realize the majority of its deferred tax assets and during the year ended December 31, 2021, released the majority of its valuation allowance for the deferred tax assets that are expected to be utilized in future years. As of December 31, 2022, the Company maintained a valuation allowance of $ 3.1 million on deferred tax assets not expected to be realized, related primarily to certain tax credits that are expected to expire prior to utilization.
The valuation allowance decreased by $ 1.2 million during the year ended December 31, 2022 primarily for certain tax credits that expired unused during 2022.
The valuation allowance decreased by $ 390.8 million during the year ended December 31, 2021 primarily due to the Company’s release of the majority of its valuation allowance, as described above, as well as the use of net operating losses to offset taxable income.
The valuation allowance decreased $ 35.2 million during the year ended December 31, 2020 primarily due to the Company’s offsetting taxable income with previously disallowed interest expense and net operating losses, partially offset by an increase in deferred tax asset for the basis difference of the collaboration agreement for North America with AbbVie.
Subject to the limitations described below, at December 31, 2022, the Company had federal net operating loss carryforwards of $ 689.4 million, of which $ 559.8 million is subject to expiration between 2033 and 2038 and $ 129.6 million may be carried forward indefinitely. As of December 31, 2022, the Company had state net operating loss carryforwards of $ 509.5 million to offset future state taxable income, which is subject to expiration between 2032 and 2039. The Company also had tax credit carryforwards of $ 63.9 million as of December 31, 2022 to offset future federal and state income taxes, which is subject to expiration at various times through 2040.
Utilization of net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986 (“IRC Section 382”) and with Section 383 of the Internal Revenue Code of 1986, as well as similar state provisions. These ownership changes may limit the amount of net
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operating loss carryforwards and research and development credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change, as defined by IRC Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.
The following table summarizes the changes in the Company’s unrecognized income tax benefits for the years ended December 31, 2022, 2021, and 2020 (in thousands):
December 31,
2022
2021
2020
Balance at the beginning of the period
$
84,606
$
68,087
$
53,099
Increases based on tax positions related to the current period
101,225
83,206
66,687
Decreases for tax positions in prior periods
( 83,206 )
( 66,687 )
( 51,699 )
Balance at the end of the period
$
102,625
$
84,606
$
68,087
The Company had gross unrecognized tax benefits of $ 102.6 million, $ 84.6 million, and $ 68.1 million as of December 31, 2022, 2021 and 2020 , respectively . Of the $ 102.6 million of total unrecognized tax benefits at December 31, 2022, $ 1.4 million would, if recognized, affect the Company’s effective tax rate, and the remaining amount would not affect the Company’s effective tax rate, as it relates to a temporary timing difference. Reserves for uncertain tax positions of $ 9.2 million and $ 2.9 million are recorded in other liabilities on the Company’s consolidated balance sheets as of December 31, 2022 and 2021, respectively.
The Company will recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2022 and 2021, an insignificant amount of penalties have been accrued.
The statute of limitations for assessment by the Internal Revenue Service (“IRS”) and state tax authorities is open for tax years ended December 31, 2019 through the present, although net operating losses generated from years prior to 2019 could be subject to examination and adjustments to the extent utilized in future years. There are currently no federal or state income tax audits in progress.
14. Defined Contribution Plan
The Ironwood Pharmaceuticals, Inc. 401(k) Savings Plan is a defined contribution plan in the form of a qualified 401(k) plan in which substantially all employees are eligible to participate upon employment. Subject to certain IRS limits, eligible employees may elect to contribute from 1 % to 100 % of their compensation. Company contributions to the plan are at the sole discretion of the Company. During the years ended December 31, 2022 and 2021, the Company provided a matching contribution equal to the greater of: (a) 100 % of employee contributions on the first 3 % of eligible compensation and 50 % of employee contributions on the next 3 % of eligible compensation; or (b) 75 % of the first $ 10,000 of employee contributions. During the year ended December 31, 2020, the Company provided a matching contribution of 75 % of the employee’s contributions, up to $ 6,000 annually. During the years ended December 31, 2022, 2021, and 2020, the Company recorded $ 2.2 million, $ 2.2 million, and $ 1.8 million of expense related to its 401(k) company match, respectively.
15. Related Party Transactions
The Company previously reflected amounts due from and due to Allergan prior to its acquisition by AbbVie in May 2020 as related party receivables and payables, as appropriate. Following the acquisition of Allergan by AbbVie, the Company determined that AbbVie is not a related party to the Company.
On April 1, 2019, the Company completed the Separation of its soluble guanylate cyclase business, and certain other assets and liabilities, into Cyclerion. The Separation was effected by means of a distribution of all of the outstanding shares of common stock, with no par value, of Cyclerion through a dividend of Cyclerion’s common stock, to the Company’s stockholders of record as of the close of business on March 19, 2019. Prior to the Separation on April 1, 2019, Cyclerion was a wholly owned subsidiary of the Company. In connection with the Separation, the Company executed certain contracts with Cyclerion, whose President and Chief Scientific Officer at the time of the Separation became a member of the Company’s Board of Directors in April 2019. Pursuant to a development agreement with Cyclerion, Cyclerion provided the Company with certain research and development services with respect to certain of
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the Company’s products and product candidates. Services received were paid at a mutually agreed upon rate and development activities were governed by a joint steering committee comprised of representatives from both Cyclerion and the Company. The Company recorded $ 2.3 million in research and development expenses under the development agreement during the year ended December 31, 2020. As of December 31, 2020, the Company determined that Cyclerion was no longer considered a related party.
16. Workforce Reductions and Restructuring
In September 2020, the Company announced that one of its two identical Phase III trials evaluating IW-3718 in refractory GERD did not meet certain criteria, including the study’s primary endpoint of achieving a statistically significant improvement in heartburn severity. Based on these findings, the Company discontinued development of IW-3718. In connection with this decision, the Company reduced its workforce by approximately 100 full-time employees. This workforce reduction affected both field-based and home-office employees, including the relevant general and administrative support functions. The Company substantially completed the reduction in its workforce in the year ended December 31, 2020. The Company incurred $ 15.5 million for the year ended December 31, 2020, in restructuring expenses, primarily for severance, benefits and related costs related to this reduction in its workforce. Restructuring expenses during the year ended December 31, 2020 also included $ 1.2 million related to the impairment of certain fixed assets as a result of the Company’s decision to discontinue IW-3718 development. The Company incurred no restructuring expenses and an insignificant amount of restructuring expenses during the years ended December 31, 2022 and 2021, respectively.
The following table summarizes the accrued liabilities activity recorded in connection with the reduction in workforce in September 2020 and related restructuring activities during the year ended December 31, 2022 (in thousands):
Amounts
Amounts
Accrued at
Accrued at
December 31, 2021
Charges
Amount Paid
Adjustments
December 31, 2022
Employee severance, benefits and related costs
$
462
$
—
$
( 462 )
$
—
$
—
The following table summarizes the accrued liabilities activity recorded in connection with the reductions in workforce and related restructuring activities during the year ended December 31, 2021 (in thousands):
Amounts
Amounts
Accrued at
Accrued at
December 31, 2020
Charges
Amount Paid
Adjustments
December 31, 2021
Employee severance, benefits and related costs
$
10,902
$
1,025
$
( 10,611 )
$
( 854 )
$
462
Contract related costs
5
48
( 53 )
—
—
Total
$
10,907
$
1,073
$
( 10,664 )
$
( 854 )
$
462
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17. Selected Quarterly Financial Data (Unaudited)
The following table contains quarterly financial information for the years ended December 31, 2022 and 2021. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
First
Second
Third
Fourth
Total
Quarter
Quarter
Quarter
Quarter
Year
(in thousands, except per share data)
2022
Total revenues
$
97,529
$
97,231
$
108,637
$
107,199
$
410,596
Total cost and expenses
39,683
41,576
40,164
38,836
160,259
Other expense, net
( 1,381 )
( 1,870 )
1,434
3,902
2,085
Net income and comprehensive income
38,801
37,080
50,317
48,867
175,065
Net income per share—basic (1)
0.25
0.24
0.33
0.32
1.13
Net income per share—diluted (1)
0.21
0.21
0.28
0.27
0.96
(1) Quarterly basic and diluted net income per share do not add to full fiscal year total due to rounding.
First
Second
Third
Fourth
Total
Quarter
Quarter
Quarter
Quarter
Year
(in thousands, except per share data)
2021
Total revenues
$
88,845
$
104,031
$
103,747
$
117,130
$
413,753
Total cost and expenses
43,447
38,933
38,576
60,538
181,494
Other expense, net
( 5,040 )
( 10,726 )
( 5,499 )
( 10,337 )
( 31,602 )
Net income and comprehensive income
39,926
391,303
55,845
41,374
528,448
Net income per share—basic
0.25
2.42
0.34
0.25
3.26
Net income per share—diluted
0.25
2.39
0.34
0.25
3.21
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.