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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-16 · 149 added, 138 removed, 279 unchanged (51% of the section changed)

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As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.

Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020 is included in Part II, Item 7 – "Management's Discussion and Analysis of Financial Condition and Results of Operations"

in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission on February 18, 2022.

We are a gastrointestinal, or GI, healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for GI patients.

Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2022 compared to the fiscal year ended December 31, 2021 is included in Part II, Item 7 – "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 16, 2023.

We are a GI healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for GI patients.

We are focused on the development and commercialization of innovative GI product opportunities in areas of significant unmet need, leveraging our demonstrated expertise and capabilities in GI diseases.

LINZESS ® (linaclotide), our commercial product, is the first product approved by the United States Food and Drug Administration, or U.S.

FDA, in a class of GI medicines called guanylate cyclase type C agonists, or GC-C agonists, and is indicated for adult men and women suffering from irritable bowel syndrome with constipation, or IBS-C, or chronic idiopathic constipation, or CIC.

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

LINZESS ® (linaclotide), our commercial product, is the first product approved by the U.S.

FDA, in a class of GI medicines called GC-C agonists, and is indicated for adult men and women suffering from IBS-C, or CIC, and for pediatric patients ages 6-17 years-old suffering from FC.

LINZESS is available to adult men and women suffering from IBS-C or CIC in the U.S., Mexico, and Saudi Arabia, to adult men and women suffering from IBS-C or chronic constipation in Japan, IBS-C in China and for pediatric patients ages 6-17 with FC in the U.S.

Linaclotide is available under the trademarked name CONSTELLA ® to adult men and women suffering from IBS-C or CIC in Canada, and to adult men and women suffering from IBS-C in certain European countries.

We have strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world, including with AbbVie Inc.

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

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

We have strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world, including with AbbVie in the U.S.

and all countries worldwide other than China (including Hong Kong and Macau) and Japan, AstraZeneca in China (including Hong Kong and Macau) and Astellas in Japan.

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

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

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

In June 2023, we completed a tender offer to purchase outstanding ordinary shares of VectivBio.

In December 2023, we completed a squeeze-out merger to acquire all remaining shares.

The VectivBio Acquisition was partially funded with $400.0 million of borrowings under a new revolving credit facility, or the Revolving Credit Facility, as further described in Note 10, Debt , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Through the acquisition, the Company is advancing apraglutide, a next-generation, synthetic peptide analog of GLP-2, for rare gastrointestinal diseases, including SBS-IF, as well as several earlier stage assets.

In November 2021, we entered into the COUR Collaboration Agreement, with COUR, that grants us an option to acquire an exclusive license to research, develop, manufacture and commercialize, in the U.S., products containing CNP-104, a tolerizing immune modifying nanoparticle, for the treatment of PBC.

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

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

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

For the years ended December 31, 2022, 2021 and 2020, we recorded net income of $175.1 million, $528.4 million, and $106.2 million, respectively.

As of December 31, 2022, we had an accumulated deficit of $696.4 million.

For the year ended December 31, 2023, we recorded net loss of approximately $1.0 billion, which included a charge of approximately $1.1 billion related to acquired in-process research and development, or IPR&D, in connection with the VectivBio Acquisition.

For the years ended 2022 and 2021, we recorded net income of $175.1 million and $528.4 million, respectively.

As of December 31, 2023, we had an

accumulated deficit of approximately $1.7 billion.

We are unable to predict the extent of any future losses or guarantee that our company will be able to maintain positive cash flows.

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● We recognized $442.7 million in total revenues during the year ended December 31 2023, compared to $410.6 million during the year ended December 31, 2022.

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

The increase was primarily driven by an in crease of $31.7 million in collaborative arrangements revenue related to sales of LINZESS in the U.S.

● We recognized $ 430.5 million in collaborative arrangements revenue related to sales of LINZESS in the U.S.

during the year ended December 31, 2023, compared to $398.8 million during the year ended December 31, 2022.

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

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

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

The increase was primarily driven by increased prescription demand, partially offset by inventory channel fluctuations.

● We generated a loss from operations of $ 945.4 million during the year ended December 31, 2023 compared to income from operations of $250.3 million during the year ended December 31, 2022.

The decrease was primarily attributable to approximately $1.1 billion in IPR&D expense related to the VectivBio Acquisition.

● We generated $ 183.4 million in cash from operations during the year ended December 31, 2023, ending the year with $ 92.2 million in cash and cash equivalents.

● We completed our $150 million stock repurchase program.

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

Financial Operations Overview

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

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

for the treatment of IBS-C or CIC in adults and for FC in pediatric patients ages 6-17 years-old.

Linaclotide is also available to adult men and women suffering from IBS-C or CIC in certain countries of the world, including China, Japan, and in a number of E.U.

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

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

FDA approved our sNDA to include a more comprehensive description of the effects of LINZESS in its approved label.

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

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

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

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

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

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

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

In February 2023, the U.S.

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

There are currently no U.S.

FDA approved prescription pediatric therapies for functional constipation.

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

In June 2023, the U.S.

FDA approved LINZESS as a once-daily treatment for pediatric patients ages 6-17 years-old with FC, making LINZESS the first and only FDA-approved prescription therapy for FC in this patient population.

The safety and effectiveness of LINZESS in patients with FC less than 6 years of age or in patients with IBS-C less than 18 years of age have not been established.

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

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

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

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

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

Apraglutide .

Refer to Acquired In-Process Research and Development .

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

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FDA granted Fast Track Designation to CNP-104.

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

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

COUR is currently conducting a clinical study to evaluate the safety, tolerability, pharmacodynamic effects and efficacy of CNP-104 in PBC patients, with topline data expected in the third quarter of 2024.

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

We successfully completed Phase I studies to evaluate the safety and tolerability of IW-3300 in healthy volunteers and are continuing the Phase II proof of concept study in IC/BPS.

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

Early research and development .

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Linaclotide (1)

Apraglutide (2)

Early research and development

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

(2) Includes $11.3 million of share-based compensation expense and $3.5 million of employer payroll tax expense recognized in the second quarter of 2023 immediately after the closing of the VectivBio Acquisition in connection with the vesting acceleration and settlement of outstanding stock options and restricted stock units.

(3) Includes $6.0 million up-front payment recognized in the second quarter of 2023 in connection with the amendment to the COUR Collaboration Agreement.

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

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We will continue to invest in our GI-focused product candidates as we advance them through pre-clinical and clinical trials, in addition to funding research and development activities under our external collaboration and license agreements.

Acquired In-Process Research and Development.

Asset acquisition costs, license fees and development milestone payments related to acquired and in-licensed products and technology are expensed as acquired in-process research and development at the point that they have no established alternative future use.

Through the VectivBio Acquisition, we are advancing apraglutide, a next-generation, long-acting synthetic peptide analog of GLP-2, as a differentiated therapeutic for a wide range of rare diseases, including SBS-IF and aGvHD.

Apraglutide for SBS-IF .

We are conducting a Phase III clinical trial, STARS, to assess the safety and efficacy of apraglutide in adult patients with SBS-IF, and expect to report topline results in March 2024.

In October 2023, we presented positive final data from the STARS Nutrition Phase II study of apraglutide in patients with SBS-IF and colon-in-continuity during United European Gastroenterology (UEG) Week.

We are also conducting open label extension studies to further evaluate the efficacy, safety and tolerability of apraglutide in SBS-IF and to support potential submissions of marketing applications for apraglutide in the U.S., European Union, or E.U., and Japan.

In October 2023, we presented positive final data from the STARS Nutrition Phase II study during United European Gastroenterology (UEG) Week.

This multicenter, open-label study of nine patients was designed to evaluate the safety, pharmacokinetics, and efficacy of apraglutide on intestinal absorption in adult patients who have SBS-IF and colon-in-continuity.

Apraglutide for aGvHD :

We are conducting a Phase II exploratory study, STARGAZE, to evaluate apraglutide in patients with steroid-refractory gastrointestinal aGvHD and expect data in the first quarter of 2024.

Selling, General and Administrative Expense.

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Other costs include legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs, insurance costs and professional fees for accounting, tax, consulting, legal and other services.

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

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

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

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Restructuring Expenses.

Restructuring expenses pertain to workforce reduction and restructuring initiatives and are more fully described in Note 16, Workforce Reduction and Restructuring , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Interest Expense.

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

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

Restructuring expenses pertain to a workforce reduction in April 2023 and restructuring initiatives, which commenced in June 2023 in connection with the VectivBio Acquisition.

The workforce reduction and restructuring initiatives are more fully described in Note 16, Workforce Reductions and Restructuring , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Interest Expense and Other Financing Costs.

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

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

Interest and Investment Income.

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Gain (Loss) on Derivatives.

In June 2015, we issued 2.25% Convertible Senior Notes due June 15, 2022, or the 2022 Convertible Notes, and in August 2019, we issued 0.75% Convertible Senior Notes due 2024, or the 2024 Convertible Notes, and 1.50% Convertible Senior Notes due 2026, or the 2026 Convertible Notes (together with the 2024 Convertible Notes, the Convertible Senior Notes).

In June 2015, we issued 2.25% Convertible Senior Notes due June 15, 2022, or the 2022 Convertible Notes, and in August 2019, we issued the Convertible Senior Notes.

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

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

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

The Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 9 , Notes Payable , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

The Convertible Note Hedges and Note Hedge Warrants terminated unexercised upon expiry in June 2022 and April 2023, respectively.

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

Income Taxes.

We prepare our income tax provision based on our interpretation of the income tax accounting rules and each jurisdiction’s enacted tax laws and regulations.

At interim reporting dates, we record our income tax provision by applying our estimated annual effective tax rate to year-to-date pre-tax income, plus adjustments for significant unusual or infrequently occurring items.

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

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

We evaluate acquisitions of assets and other similar transactions to assess whether the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated into a single identifiable asset or group of similar identifiable assets.

If the screen test is met, a single asset or group of assets is not a business and is accounted for

as an asset acquisition.

If the screen test is not met, further determination is required as to whether we have acquired inputs and processes that have the ability to create outputs that would meet the requirements of a business.

We account for business combinations using the acquisition method of accounting, which requires the acquiring entity to recognize the fair value of assets acquired and liabilities assumed and establishes the acquisition date as the fair value measurement point.

We determine the fair value of assets acquired and liabilities assumed based on management’s estimate of the fair value of assets acquired and liabilities assumed in the acquisition.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.

Transaction costs are expensed as incurred.

We account for asset acquisitions that are not determined to be a business combination by recognizing net assets based on the consideration paid, inclusive of transaction costs, on a relative fair value basis.

In an asset acquisition, the cost allocated to acquired IPR&D with no alternative future use is charged to research and development expense at the acquisition date.

We classify asset acquisitions of acquired IPR&D as investing activities on its consolidated statements of cash flows.

Revenue Recognition

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

If it is probable

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

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

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

The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied.

The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the

contract are satisfied.

We re-evaluate 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.

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If we are 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, we recognize revenue when the related sales occur.

Net Profit or Net Loss Sharing

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Sale of Active Pharmaceutical Ingredient

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

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

After December 31, 2020, we have occasionally provided development materials from time to time to certain of

our partners and we may continue to do so.

The Company is not currently 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.

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and other outside expenses.

Clinical trial expenses include expenses associated with contract research organizations, or CROs.

Clinical trial expenses include expenses associated with CROs.

The invoicing from CROs for services rendered can lag several months.

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

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

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

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

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Significant judgment is required in evaluating whether our tax positions meet this two-step process.

The nature of the uncertain tax positions is often very complex and subject to change, and the amounts at issue can be substantial.

The nature of the uncertain tax positions is often complex and subject to change, and the amounts at issue can be substantial.

We re-evaluate these uncertain tax positions on a quarterly basis based on a number of factors including, but not limited to, changes in facts or circumstances, changes in tax law, and effectively settled issues under audit and new audit activity.

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Collaborative arrangements revenue

Sale of active pharmaceutical ingredient

Total revenues

Operating expenses:

Costs and expenses:

Research and development

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Restructuring expenses

Total operating expenses

Income from operations

Other (expense) income:

Interest expense

Acquired in-process research and development

Total costs and expenses

Income (loss) from operations

Other income (expense):

Interest expense and other financing costs

Interest and investment income

Gain (loss) on derivatives

Other (expense) income, net

Income before income taxes

Income tax (expense) benefit

Gain on derivatives

Other income (expense), net

Income (loss) before income taxes

Income tax expense

Net income (loss)

Net income (loss) attributable to noncontrolling interests

Net income (loss) attributable to Ironwood Pharmaceuticals, Inc.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

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Collaborative arrangements revenue

Sale of active pharmaceutical ingredient

Total revenues

Collaborative arrangements revenue.

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

Sale of active pharmaceutical ingredient.

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

The increase in collaborative arrangements revenue of $32.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily related to a $31.7 million increase in our share of net profits from the sale of LINZESS in the U.S., which was primarily driven by increased prescription demand, partially offset by inventory channel fluctuations.

Cost and Expenses

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Restructuring expenses

Acquired in-process research and development

Total operating expenses

Research and development.

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

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

a decrease of $3.4 million related to linaclotide development;

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

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

The increase in research and development expenses of $71.8 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily related to $43.3 million of apraglutide program costs, $11.3 million of share-based compensation and $3.5 million in related payroll taxes recognized immediately after the closing of the VectivBio Acquisition in connection with the vesting acceleration of outstanding stock options and RSUs under VectivBio’s 2021 Equity Incentive Plan, a $6.0 million payment to COUR related to CNP-104 in connection with the amendment of the COUR Collaboration Agreement, a $3.3 million increase in linaclotide program costs, and a $3.2 million increase in external costs associated with other pipeline programs.

Research and development expenses for the year ended December 31, 2023 included $15.1 million of acquisition-related costs.

Selling, general and administrative.

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

Selling, general and administrative expenses increased $42.3 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to $16.2 million of share-based compensation and $3.0 million in related payroll taxes recognized immediately after the closing of the VectivBio Acquisition in connection with the vesting acceleration of outstanding stock options and RSUs under VectivBio’s 2021 Equity Incentive Plan, $12.9 million of general and administrative costs incurred for operating activities of the acquired VectivBio entities, a $5.8 million increase in compensation, benefits, and other employee-related expenses, a $3.7 million increase of professional services costs, and a $1.6 million increase in sales and marketing activities.

Selling, general and administrative expenses for the year ended December 31, 2023 included $25.6 million of acquisition-related costs.

Restructuring expenses .

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

Other (Expense) Income, Net

Restructuring expenses were $18.3 million for the year ended December 31, 2023 related to employee severance, benefits and related costs for the headquarters-based workforce reduction and VectivBio Acquisition-related workforce reduction.

Acquired In-Process Research & Development.

We incurred approximately $1.1 billion of expense during the year ended December 31, 2023 in connection with the VectivBio Acquisition to acquire apraglutide.

Other Income (Expense), Net

(in thousands)

Other (expense) income:

Interest expense

Other income (expense):

Interest expense and other financing costs

Interest and investment income

Gain (loss) on derivatives

Total other (expense) income, net

Interest expense.

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

Gain on derivatives

Total other income (expense), net

Interest expense and other financing costs.

Interest expense increased by $14.0 million during the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to $15.3 million of interest expense incurred under the revolving credit facility used to partially finance the VectivBio Acquisition in June 2023.

Interest and investment income.

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

Gain (loss) on derivatives.

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

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

Interest and investment income increased by $9.5 million in the year ended December 31, 2023 compared to the year ended December 31, 2022, resulting primarily from an increase in investment interest rates, as well as an increase in investment balances prior to the VectivBio Acquisition.

Gain on derivatives.

During the year ended December 31, 2023, we recorded an insignificant gain on derivatives resulting from a decrease in the fair value of the Note Hedge Warrants, which terminated unexercised upon expiry in April 2023.

Income taxes.

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

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

During the year ended December 31, 2021, we recorded income tax benefit of $327.8 million, which primarily pertained to the non-cash income tax benefit of $333.3 million related to the release of the valuation allowance on the majority of our tax attributes and other deferred tax assets, partially offset by state income taxes of $5.5 million in certain states which have temporarily disallowed or only partially allow the use of net operating losses to fully offset taxable income.

Until the second quarter of 2021, we maintained a valuation allowance on our net operating losses and other deferred tax assets.

Thereafter, we have continued to utilize our net operating losses to offset federal taxable income and taxable income in many states but record a significant portion of income taxes reflecting the utilization of the deferred tax assets.

The majority of this provision for income taxes will be a non-cash expense until our net operating losses are fully utilized.

Further information on the release of the valuation allowance and significant judgments related to its release can be found below in Note 13, Income Taxes , in the accompanying notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K.

During the year ended December 31, 2023, we recorded income tax expense of $83.5 million, comprised of non-cash tax expense of $74.1 million and cash tax expense of $9.4 million for state income taxes in certain states in which state taxable income exceeded available net operating losses.

Liquidity and Capital Resources

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and had an accumulated deficit of $696.4 million as of December 31, 2022.

We have financed our operations to date primarily through both the private sale of our preferred stock and the public sale of our common stock, debt financings, and cash generated from our operations.

As of December 31, 2022, our debt is comprised of $400.0 million aggregate principal amount of convertible notes, due at various dates between 2024 and 2026.

Refer to Note 9, Notes Payable, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for information related to our debt obligations.

As of December 31, 2022, we had $656.2 million of unrestricted cash and cash equivalents.

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

As of December 31, 2023, we had $92.2 million of cash and cash equivalents.

Our cash equivalents include amounts held in money market funds, U.S.

Treasury securities and commercial paper.

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

During the year ended December 31, 2022, our balances of cash and cash equivalents increased by $36.1 million.

Net cash provided by operating activities totaled $273.8 million as a result of profitable operations driven primarily by the sales of LINZESS in the U.S.

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

We anticipate our cash balance, which was $656.2 million as of December 31, 2022, and our expected net cash inflows from operations to allow us to meet our near-term and long-term cash obligations, which are reflected in our consolidated balance sheets.

Our most significant fixed obligations are debt obligations and lease commitments, for which annual payments are disclosed in Note 9, Notes Payable , and Note 6, Leases , respectively, to our financial statements included elsewhere in this Annual Report on Form 10-K.

We anticipate our cash balance and our expected net cash inflows from operations to allow us to meet our near-term and long-term cash obligations, which are reflected in our consolidated balance sheets.

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

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

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Additional information regarding the repurchase program is disclosed in Note 12, Stockholders’ Equity , to our financial statements included elsewhere in this Annual Report on Form 10-K.

Sources of Liquidity

We had incurred losses since our inception in 1998 and until the year ended December 31, 2019.

However, after achieving profitability for the years ended December 31, 2020, 2021 and 2022, we incurred a loss of approximately $1.0 billion for year ended December 31, 2023 due to the approximately $1.1 billion IPR&D charge recognized in connection with the VectivBio Acquisition, and had an accumulated deficit of approximately $1.7 billion as of December 31, 2023.

As of December 31, 2023, our debt is comprised of $400.0 million aggregate principal amount of convertible notes, due at various dates between 2024 and 2026, and $300.0 million aggregate principal amount outstanding under our Revolving Credit Facility, which we entered into in May 2023 to partially finance the VectivBio Acquisition.

The Revolving Credit Facility provides for $500.0 million of borrowing capacity and includes a $10.0 million letter of credit subfacility.

Refer to Note 10, Debt, to our condensed consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for information related to our debt obligations, including the Revolving Credit Facility.

Summary of Cash Flows

The following table summarizes cash flows from operating, investing, and financing activities for the years ended December 31, 2023, 2022, and 2021:

Year Ended December 31,

(in thousands)

Net cash provided by (used in):

Operating activities

Investing activities

Financing activities

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash Flows from Operating Activities

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

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

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

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

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

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

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

Net cash provided by operating activities is derived by adjusting net income for non-cash items and changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in the results of operations.

Net cash inflows during the year ended December 31, 2023 totaled $183.4 million and were derived primarily from collaboration arrangements revenue related to sales of LINZESS in the U.S., partially offset by research and development expenditures for apraglutide and acquisition-related costs in connection with the VectivBio Acquisition.

Net cash inflows during the year ended December 31, 2022 totaled $273.8 million and were derived primarily from collaboration arrangements revenue related to sales of LINZESS in the U.S.

Cash Flows from Investing Activities

Cash used in investing activities for the year ended December 31, 2022 totaled $0.1 million and pertained to the purchase of property and equipment.

Cash used in investing activities for the year ended December 31, 2023 totaled approximately $1.0 billion and pertained primarily to the VectivBio Acquisition.

Cash used in investing activities for the year ended December 31, 2022 totaled $0.1 million and pertained to the purchase of property and equipment.

Cash Flows from Financing Activities

Cash provided by financing activities for the year ended December 31, 2023 totaled $277.2 million and was generated primarily from the incurrence of $400.0 million of borrowings under the Revolving Credit Facility, net of $100.0 million of principal repayments.

Additionally, we paid $26.3 million to acquire subsidiary shares from noncontrolling interests to complete the squeeze-out merger in connection with the VectivBio Acquisition.

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

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

Funding Requirements

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with our collaboration partner, AbbVie, in the fourth quarter of 2012, and we currently derive a significant portion of our revenue from this collaboration.

In addition, we are deploying significant resources to fulfill U.S.

FDA requirements for linaclotide.

Our goal is to generate and maintain positive cash flows, driven by increased revenue generated through sales of LINZESS and other commercial activities and financial discipline.

Our goal is to generate and maintain positive cash flows, driven by increased revenue generated through sales of LINZESS and other commercial activities and financial discipline, while continuing to invest in the development and commercialization of linaclotide, apraglutide, and other product candidates.

Under our collaboration with AbbVie for North America, total net sales of LINZESS in the U.S., as recorded by AbbVie, are reduced by commercial costs incurred by each party, and the resulting amount is shared equally between us and AbbVie.

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

We also anticipate that we will continue to incur substantial expenses for the next several years as we further develop and commercialize linaclotide in the U.S., develop and commercialize other products, and invest in building our pipeline through internal or external opportunities, including potential payments associated with exercising the Option under the COUR Collaboration Agreement.

We also anticipate that we will continue to incur substantial expenses for the next several years as we further develop and commercialize linaclotide in the U.S., develop and commercialize other products, including apraglutide, and invest in building our pipeline through internal or external opportunities, including potential payments associated with exercising the Option under the COUR Collaboration Agreement.

We believe that our cash on hand as of December 31, 2023 will be sufficient to meet our projected operating needs at least through the next twelve months from the issuance of these financial statements.

Our forecast of the period of time through which our financial resources will be adequate to support our operations, including the underlying revenue expectations and estimates regarding the costs to develop, obtain regulatory approval for, and commercialize linaclotide in the U.S., as well as our expectations regarding revenue from Astellas for Japan and AstraZeneca for China (including Hong Kong and Macau), and our goal to generate and maintain positive cash flows, are forward-looking statements that involve risks and uncertainties.

from Astellas for Japan and AstraZeneca for China (including Hong Kong and Macau), and our goal to generate and maintain positive cash flows, are forward-looking statements that involve risks and uncertainties.

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

We have based our estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate precisely the amounts of capital outlays and operating expenditures necessary to develop, obtain regulatory approval for, and commercialize linaclotide and our other product candidates, in each case, for all of the markets, indications, populations and formulations for which we believe each is suited.

Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate precisely the amounts of capital outlays and operating expenditures necessary to develop, obtain regulatory approval for, and commercialize linaclotide, apraglutide and our other product candidates, in each case, for all of the markets, indications, populations and formulations for which we believe each is suited.

Our funding requirements will depend on many factors, including, but not limited to, the following:

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● the success of our third-party manufacturing activities;

● the time and costs involved in developing, and obtaining regulatory approvals for, our product candidates, as well as the timing and cost of any post-approval development and regulatory requirements;

● the time and costs involved in developing, and obtaining regulatory approvals for, our product candidates, including apraglutide, as well as the timing and cost of any post-approval development and regulatory requirements;

● the time and cost associated with integrating VectivBio’s business and assets into our business operations;

● the time and costs associated with commercial manufacturing, sales, marketing and distribution of apraglutide, if successfully developed and approved;

● the success of our research and development efforts;

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Off-Balance Sheet Arrangements

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

facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

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We did not otherwise adopt any new accounting pronouncements during the fiscal year ended December 31, 2023 that had a material effect on our consolidated financial statements included in this report.

Trends and Uncertainties

Impact of the COVID-19 Pandemic

The COVID-19 pandemic, including containment and mitigation measures, has impacted, and may continue to impact, our business and operations and financial results, particularly in our day-to-day operations and our collaboration agreement for North America with AbbVie.

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

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

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

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

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

and present net payments to us as collaborative arrangements revenue.

As a result of the COVID-19 pandemic, since 2020, we and AbbVie agreed to include certain costs associated with remote selling activities performed by our and AbbVie’s customer-facing employees in collaboration-related selling, general and administrative expenses in our calculation of net profits from the sale of LINZESS in the U.S.

In 2020, we experienced fluctuations in our settlement payments based on the ratio of selling, general and administrative expenses incurred by each party throughout 2020 and may continue to experience such fluctuations in the future as a result of the reimbursement of costs associated with remote selling activities and potential limitations in the number of in-person details we or AbbVie may be able to conduct due to containment and mitigation measures related to the COVID-19 pandemic.

The COVID-19 pandemic may negatively impact future net sales of LINZESS in the U.S., including as a result of reduced and/or restricted in-person promotion or potential changes in patient access to healthcare (including due to unemployment or modifications in insurance coverage) and payor reimbursement levels.

Given the uncertainties surrounding the extent and duration of the impact of the pandemic on our business and operations, we continue to evaluate the impact of the COVID-19 pandemic on our operating results and financial condition, and we may incur additional expenses in future periods as a result.

Refer to “Risk Factors” in Item 1A of this Annual Report on Form 10-K for additional information on risks associated with COVID-19 that could impact our operations and results.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis