Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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 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;
80
Table of Contents
(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.
As permitted by guidance issued by the SEC that an assessment of internal control over financial reporting of a recently acquired business may be omitted from management's evaluation of disclosure controls and procedures, management excluded an assessment of the internal controls of VectivBio, which we acquired on June 29, 2023, from its evaluation of the effectiveness of our disclosure controls and procedures. VectivBio represented approximately 5% of total assets and 6% of total liabilities as of December 31, 2023, and less than 1% and 2% of revenues and net loss, respectively, for the year ended December 31, 2023.
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, 2023.
The effectiveness of our internal control over financial reporting as of December 31, 2023 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 Over Financial Reporting
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, 2023 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, 2023 materially affected, or were reasonably likely to materially affect, our internal controls over financial reporting.
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, 2023, 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, 2023, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of VectivBio Holding AG, which is included in the 2023 consolidated financial statements of the Company and constituted approximately 5% and 6% of total assets and total liabilities, respectively, as of December 31, 2023 and less than 1% and 2% of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of VectivBio Holding AG.
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, 2023 and 2022, the related
81
Table of Contents
consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and our report dated February 16, 2024 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.
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, 2024
82
Table of Contents
Item 9B. Other Information
During the quarter ended December 31, 2023, the following directors and officers (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K, for the purchase or sale of our securities, the material terms of which are set forth in the table below.
Name (Title)
Action Taken (Date of Action)
Type of Trading Arrangement
Nature of Trading Arrangement
Duration of Trading Arrangement (1)
Aggregate Number of Securities
Ronald Silver ( Corporate Controller )
Adoption ( December 15, 2023 )
Rule 10b5-1
trading arrangement
Sale
December 15, 2025
Indeterminable (2)
(1) The dates in this column represent the scheduled expiration date of each director or officer’s Rule 10b5-1 trading arrangement. Each Rule 10b5-1 trading arrangement may terminate earlier than the date provided should all transactions contemplated thereunder occur prior to such date.
(2) Mr. Silver’s Rule 10b5-1 trading arrangement provides for the (i) sale of 40,873 shares of common stock; (ii) sale of an indeterminable number of shares of common stock that Mr. Silver may purchase under the Company’s ESPP; and (iii) sale of an indeterminable number of shares of common stock. The number of shares in clause (iii) subject to RSUs that will be sold to satisfy applicable tax withholding obligations upon vesting is unknown as the number will vary based on the extent to which vesting conditions are satisfied and the market price of the Company’s common stock at the time of settlement. This trading arrangement, which applies to RSUs vesting, is based on the passage of time provides for the automatic sale of shares that would otherwise be issuable on each settlement date of a RSU in an amount sufficient to satisfy the applicable withholding obligation, with the proceeds of the sale delivered to the Company in satisfaction of the applicable withholding obligation.
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 2024 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from our proxy statement for our 2024 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 2024 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, 2023. As of December 31, 2023, we had four active equity compensation plans, each of which was approved by our stockholders:
83
Table of Contents
● Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan;
● 2019 Equity Incentive Plan;
● Amended and Restated 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)) (3)
(a)
(b)
(c)
Equity compensation plans approved by security holders
12,832,301
$ 12.36
14,647,564
Equity compensation plans not approved by security holders
—
—
—
Total
12,832,301
$ 12.36
14,647,564
(1)
Amount includes the number of shares subject to issuance upon exercise of 5,836,306 outstanding stock options and vesting of 6,995,995 restricted stock units.
(2)
Amount includes all outstanding stock options but does not include restricted stock units, which do not have an exercise price.
(3)
Amount includes 4,272,975 shares available for future issuance under the Amended and Restated 2010 Employee Stock Purchase Plan.
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 2024 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 2024 Annual Meeting of Stockholders.
84
Table of Contents
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
2.2
Transaction Agreement, dated May 21, 2023, by and between Ironwood Pharmaceuticals, Inc. and VectivBio Holding AG
Current Report on Form 8-K (File No. 001-34620)
May 22, 2023
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
85
Table of Contents
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
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 2019 Equity Incentive Plan
Current Report on Form 8-K (File No. 001-34620)
June 22, 2023
10.3.1#
Form of Restricted Stock Unit Agreement under the Amended and Restated 2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File No. 001-34620)
November 9, 2023
10.4#
Amended and Restated 2010 Employee Stock Purchase Plan
Annual Report on Form 10-K (File No. 001-34620)
February 13, 2020
10.5#
Change of Control Severance Benefit Plan, as amended and restated
Quarterly Report on Form 10-Q (File No. 001-34620)
April 29, 2014
86
Table of Contents
10.6#
Form of Executive Severance Agreement
Annual Report on Form 10-K (File No. 001-34620)
February 25, 2019
10.7#
Form of Executive Severance Agreement
Current Report on Form 8-K (File No. 001-34620)
December 1, 2021
10.8#
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
10.9#*
Second Amended and Restated Non-employee Director Compensation Policy, effective January 1, 2024
10.10#
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
87
Table of Contents
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
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
88
Table of Contents
10.19†
Amended and Restated Exclusive License Agreement by and between Ferring International Center S.A. and GlyPharma Therapeutic Inc. dated as of December 6, 2016, as amended
Registration Statement on Form F-1 (File No. 333-254523)
March 19, 2021
10.20†
Development and Commercialization Agreement by and between VectivBio AG and Asahi Kasei Pharma Corporation, dated as of March 30, 2022
Annual Report on Form 20-F (File No. 001-40316)
April 7, 2022
10.21
Credit Agreement, dated May 21, 2023, by and among Ironwood Pharmaceuticals, Inc., as borrower, Wells Fargo Bank, National Association, as administrative agent, collateral agent, a letter of credit issuer and a lender, and the other agents, lenders and letter of credit issuers parties thereto
Current Report on Form 8-K (File No. 001-34620)
May 22, 2023
10.22
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
10.23
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
10.24
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
10.25
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
10.26
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
10.27
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
89
Table of Contents
10.28
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
10.29
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
10.30
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
10.31
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
10.32
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
21.1*
Subsidiaries of Ironwood Pharmaceuticals, Inc.
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
97*
Policy for Recoupment of Incentive Compensation
90
Table of Contents
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
*
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.
†
Schedules and exhibits have been omitted pursuant to Item 601(b)(2)(ii) of Regulation S-K. Ironwood will furnish copies of any such schedules and exhibits to the SEC upon request.
#
Management contract or compensatory plan, contract, or arrangement.
Item 16. Form 10-K Summary
None.
91
Table of Contents
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 2024.
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, 2024
Thomas McCourt
/s/ Sravan k. Emany
Senior Vice President, Chief Financial Officer (Principal Financial Officer)
February 16, 2024
Sravan K. Emany
/s/ Ronald Silver
Vice President, Corporate Controller (Principal Accounting Officer)
February 16, 2024
Ronald Silver
/s/ Julie H. McHugh
Chair of the Board
February 16, 2024
Julie H. McHugh
/s/ Mark Currie
Director
February 16, 2024
Mark Currie
Director
Alexander Denner
/s/ Andrew Dreyfus
Director
February 16, 2024
Andrew Dreyfus
/s/ Jon Duane
Director
February 16, 2024
Jon Duane
/s/ Marla Kessler
Director
February 16, 2024
Marla Kessler
/s/ Catherine Moukheibir
Director
February 16, 2024
Catherine Moukheibir
/s/ Jay P. Shepard
Director
February 16, 2024
Jay P. Shepard
92
Table of Contents
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, 2023 and 2022
F-4
Consolidated Statements of Income (Loss) for the Years Ended December 31, 2023, 2022, and 2021
F-5
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023, 2022, and 2021
F-6
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2023, 2022, and 2021
F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022, and 2021
F-8
Notes to Consolidated Financial Statements
F-9
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, 2023 and 2022, the related consolidated statements of income (loss), comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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, 2024 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 $430.5 million for the sale of LINZESS in the U.S. for the year ended December 31, 2023. As discussed in Note 5 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
Table of Contents
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 provided by 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 received from 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, 2023 related to the sale of LINZESS in the U.S. as well as the amounts due to the Company as of December 31, 2023.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1998.
Boston, Massachusetts
February 16, 2024
F-3
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31,
December 31,
2023
2022
ASSETS
Current assets:
Cash and cash equivalents
$
92,154
$
656,203
Accounts receivable, net
129,122
115,458
Prepaid expenses and other current assets
12,012
7,715
Restricted cash
—
1,250
Total current assets
233,288
780,626
Restricted cash, net of current portion
—
485
Accounts receivable, net of current portion
—
14,589
Property and equipment, net
5,585
6,288
Operating lease right-of-use assets
12,586
14,023
Intangible assets, net
3,682
—
Deferred tax assets
212,324
283,661
Other assets
3,608
847
Total assets
$
471,073
$
1,100,519
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
7,830
$
483
Accrued research and development costs
21,331
5,258
Accrued expenses and other current liabilities
44,254
16,700
Current portion of operating lease liabilities
3,126
3,065
Current portion of convertible senior notes
199,560
—
Note hedge warrants
—
19
Total current liabilities
276,101
25,525
Operating lease obligations, net of current portion
14,543
16,599
Convertible senior notes, net of current portion
198,309
396,251
Revolving credit facility
300,000
—
Other liabilities
28,415
9,766
Commitments and contingencies
Stockholders’ equity (deficit):
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 156,354,238 shares issued and outstanding at December 31, 2023 and 500,000,000 shares authorized and 154,026,949 shares issued and outstanding at December 31, 2022
156
154
Additional paid-in capital
1,355,195
1,348,600
Accumulated deficit
( 1,698,615 )
( 696,376 )
Accumulated other comprehensive loss
( 3,031 )
—
Total stockholders’ equity (deficit)
( 346,295 )
652,378
Total liabilities and stockholders’ equity
$
471,073
$
1,100,519
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Income (Loss)
(In thousands, except per share amounts)
Years Ended December 31,
2023
2022
2021
Revenues:
Collaborative arrangements revenue
$
442,735
$
410,596
$
412,784
Sale of active pharmaceutical ingredient
—
—
969
Total revenues
442,735
410,596
413,753
Costs and expenses:
Research and development
116,085
44,265
70,405
Selling, general and administrative
158,314
115,994
111,133
Restructuring expenses
18,317
—
( 44 )
Acquired in-process research and development
1,095,449
—
—
Total costs and expenses
1,388,165
160,259
181,494
Income (loss) from operations
( 945,430 )
250,337
232,259
Other income (expense):
Interest expense and other financing costs
( 21,629 )
( 7,598 )
( 31,150 )
Interest and investment income
18,971
9,501
726
Gain (loss) on derivatives
19
182
( 1,178 )
Other income (expense), net
( 2,639 )
2,085
( 31,602 )
Income (loss) before income taxes
( 948,069 )
252,422
200,657
Income tax (expense) benefit
( 83,490 )
( 77,357 )
327,791
Net income (loss)
( 1,031,559 )
175,065
528,448
Less: Net income (loss) attributable to noncontrolling interests
( 29,320 )
—
—
Net income (loss) attributable to Ironwood Pharmaceuticals, Inc.
$
( 1,002,239 )
$
175,065
$
528,448
Net income (loss) per share attributable to Ironwood Pharmaceuticals, Inc. stockholders —basic
$
( 6.45 )
$
1.13
$
3.26
Net income (loss) per share attributable to Ironwood Pharmaceuticals, Inc. stockholders —diluted
$
( 6.45 )
$
0.96
$
3.21
Weighted average shares used in computing net income (loss) per share attributable to Ironwood Pharmaceuticals, Inc. stockholders—basic:
155,435
154,366
162,245
Weighted average shares used in computing net income (loss) per share attributable to Ironwood Pharmaceuticals, Inc. stockholders—diluted:
155,435
186,312
164,418
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share amounts)
Years Ended December 31,
2023
2022
2021
Net income (loss) attributable to Ironwood Pharmaceuticals, Inc.
$
( 1,002,239 )
$
175,065
$
528,448
Other comprehensive loss, net of tax:
Currency translation adjustment
( 2,093 )
—
—
Defined benefit pension plan
( 938 )
—
—
Total other comprehensive loss, net of tax
( 3,031 )
—
—
Less: Other comprehensive loss attributable to noncontrolling interest
( 63 )
—
—
Comprehensive income (loss) attributable to Ironwood Pharmaceuticals, Inc.
$
( 1,005,207 )
$
175,065
$
528,448
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equit y (Deficit)
(In thousands, except share amounts)
Accumulated
Ironwood
Class A
Additional
other
Pharmaceuticals, Inc.
Total
Common Stock
paid-in
Accumulated
comprehensive
stockholders’
Noncontrolling
stockholders’
Shares
Amount
capital
deficit
loss
equity (deficit)
interests
equity (deficit)
Balance at December 31, 2020
160,616,675
$
161
$
1,528,535
$
( 1,466,056 )
$
—
$
62,640
$
—
$
62,640
Issuance of common stock related to share-based awards and employee stock purchase plan
3,776,786
3
19,678
—
—
19,681
—
19,681
Share-based compensation expense related to share-based awards and employee stock purchase plan
—
—
22,281
—
—
22,281
—
22,281
Repurchases of common stock
( 2,357,000 )
( 2 )
( 27,137 )
—
—
( 27,139 )
—
( 27,139 )
Net income
—
—
—
528,448
—
528,448
—
528,448
Balance at December 31, 2021
162,036,461
$
162
$
1,543,357
$
( 937,608 )
$
—
$
605,911
$
—
$
605,911
Cumulative effect adjustment upon adoption of ASU 2020-06, net of tax
—
—
( 110,217 )
66,167
—
( 44,050 )
—
( 44,050 )
Issuance of common stock related to share-based awards and employee stock purchase plan
2,756,841
3
11,787
—
—
11,790
—
11,790
Share-based compensation expense related to share-based awards and employee stock purchase plan
—
—
27,048
—
—
27,048
—
27,048
Repurchases of common stock
( 10,766,353 )
( 11 )
( 123,375 )
—
—
( 123,386 )
—
( 123,386 )
Net income
—
—
—
175,065
—
175,065
—
175,065
Balance at December 31, 2022
154,026,949
$
154
$
1,348,600
$
( 696,376 )
$
—
$
652,378
$
—
$
652,378
Issuance of common stock related to share-based awards and employee stock purchase plan
2,327,289
2
4,003
—
—
4,005
—
4,005
Share-based compensation expense related to share-based awards and employee stock purchase plan
—
—
32,005
—
—
32,005
—
32,005
Noncontrolling interests on acquisition of VectivBio Holding AG
—
—
—
—
—
—
26,218
26,218
Purchase of subsidiary shares from noncontrolling interests
—
—
( 29,413 )
—
( 63 )
( 29,476 )
3,165
( 26,311 )
Net loss
—
—
—
( 1,002,239 )
—
( 1,002,239 )
( 29,320 )
( 1,031,559 )
Other comprehensive loss, net of tax
—
—
—
—
( 2,968 )
( 2,968 )
( 63 )
( 3,031 )
Balance at December 31, 2023
156,354,238
$
156
$
1,355,195
$
( 1,698,615 )
$
( 3,031 )
$
( 346,295 )
$
—
$
( 346,295 )
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2023
2022
2021
Cash flows from operating activities:
Net income (loss)
$
( 1,031,559 )
$
175,065
$
528,448
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
1,575
1,418
1,523
Loss on disposal of property and equipment
—
2
93
Share-based compensation expense
32,005
27,048
22,281
Change in fair value of note hedge warrants
( 19 )
( 1,297 )
( 10,772 )
Change in fair value of convertible note hedges
—
1,115
11,950
Non-cash interest expense
2,060
1,853
23,935
Acquired in-process research and development
1,095,449
—
—
Deferred income taxes
72,637
65,739
( 333,294 )
Changes in assets and liabilities:
Accounts receivable, net
924
7,993
7,712
Prepaid expenses and other current assets
4,220
3,224
601
Operating lease right-of-use assets
1,437
1,327
1,226
Other assets
( 319 )
153
( 57 )
Accounts payable and accrued expenses
12,380
( 8,116 )
( 2,644 )
Accrued research and development costs
( 5,875 )
( 10,638 )
13,998
Operating lease liabilities
( 1,995 )
( 1,947 )
( 1,835 )
Other liabilities
507
10,824
( 1,270 )
Net cash provided by operating activities
183,427
273,763
261,895
Cash flows from investing activities:
Purchases of property and equipment
( 273 )
( 136 )
( 265 )
Acquisition of VectivBio Holding AG, net of cash acquired
( 1,026,045 )
—
—
Net cash used in investing activities
( 1,026,318 )
( 136 )
( 265 )
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan
6,357
9,540
19,581
Purchase of subsidiary shares from noncontrolling interests
( 26,311 )
—
—
Repayment of 2022 Convertible Notes
—
( 120,699 )
—
Repurchases of common stock
—
( 126,394 )
( 24,131 )
Proceeds from revolving credit facility
400,000
—
—
Costs associated with revolving credit facility
( 2,886 )
—
—
Repayments of revolving credit facility
( 100,000 )
—
—
Net cash provided by (used in) financing activities
277,160
( 237,553 )
( 4,550 )
Effect of exchange rate changes on cash, cash equivalents and restricted cash
( 53 )
—
—
Net increase (decrease) in cash, cash equivalents and restricted cash
( 565,784 )
36,074
257,080
Cash, cash equivalents and restricted cash, beginning of period
657,938
621,864
364,784
Cash, cash equivalents and restricted cash, end of period
$
92,154
$
657,938
$
621,864
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets
Cash and cash equivalents
$
92,154
$
656,203
$
620,129
Restricted cash
—
1,735
1,735
Total cash, cash equivalents, and restricted cash
$
92,154
$
657,938
$
621,864
Supplemental cash flow disclosure:
Cash paid for interest
$
13,552
$
5,745
$
7,216
Cash paid for income taxes
$
9,945
$
4,615
$
3,452
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.
F-8
Table of Contents
Ironwood Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
1. Nature of Business
Ironwood Pharmaceuticals, Inc. (“Ironwood” or 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”) and for pediatric patients ages 6-17 years-old suffering from functional constipation (“FC”). LINZESS is available to adult men and women suffering from IBS-C or CIC in the United States (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 pediatric patients ages 6-17 years old 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.
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.
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”).
In June 2023, the Company completed a tender offer to purchase 98 % of the outstanding ordinary shares of VectivBio Holding AG (“VectivBio”), a clinical-stage biotechnology company focused on the discovery and development of treatments for severe, rare GI conditions for which there is a significant unmet medical need. In December 2023, the Company completed a squeeze-out merger under Swiss law to acquire all remaining outstanding ordinary shares and VectivBio Holding AG was merged with and into Ironwood Pharmaceuticals GmbH, a wholly-owned subsidiary of Ironwood organized under the laws of Switzerland. Through the acquisition, the Company is advancing apraglutide, a next-generation, synthetic peptide analog of glucagon-like peptide-2 (“GLP-2”), for rare GI diseases, including short bowel syndrome dependent on parenteral support (“SBS-IF”).
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 5, Collaboration, License, and Other Agreements, to these consolidated financial statements.
F-9
Table of Contents
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.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements as of December 31, 2023 include the accounts of Ironwood, its wholly-owned subsidiaries, Ironwood Pharmaceuticals Securities Corporation and Ironwood Pharmaceuticals GmbH, as well as Ironwood Pharmaceuticals GmbH’s wholly-owned subsidiaries, VectivBio AG, VectivBio Comet AG, GlyPharma Therapeutic Inc. and VectivBio US, Inc. All intercompany transactions and balances are eliminated in consolidation.
For consolidated entities in which the Company owns less than 100% of the outstanding shares, the Company records net income (loss) and comprehensive income (loss) attributable to noncontrolling interests in its consolidated statements of income (loss) and comprehensive income (loss), respectively, equal to the percentage of the common stock ownership interest retained in such entities by the noncontrolling parties. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity.
The Company acquired control of VectivBio on June 29, 2023 (Note 3). Accordingly, the accompanying consolidated financial statements reflect the results of operations and cash flows of VectivBio from the acquisition date through December 31, 2023. Net income (loss) and comprehensive income (loss) attributable to noncontrolling interests was recorded during the period between the acquisition date and the completion of the squeeze-out merger on December 12, 2023 (Note 1). As of December 31, 2023, there were no remaining noncontrolling interests in consolidated entities.
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. Estimates and assumptions in the consolidated financial statements include those related to fair value of assets acquired and liabilities assumed in acquisitions; 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; fair value of derivatives; income taxes, including uncertain tax positions and the valuation allowance for deferred tax assets; research and development expenses; contingencies; defined benefit pension liability; 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.
F-10
Table of Contents
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 $ 58.7 million and $ 650.2 million at December 31, 2023 and 2022, 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. Collateral used to secure letters of credit is classified as restricted cash. The amount of restricted cash in current assets and non-current assets was $ 1.3 million and $ 0.5 million at December 31, 2022, respectively. There was no restricted cash as of December 31, 2023.
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 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, 2023 or 2022.
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 consists of amounts due under the linaclotide collaboration agreement with AbbVie for North America (Note 5). The Company does not obtain collateral for its accounts receivable.
The percentages of revenue recognized from significant collaborative partners of the Company in the years ended December 31, 2023, 2022 and 2021 and the account receivable balances, net of any payables due, at December 31, 2023 and 2022 are included in the following table:
Accounts
Receivable
Revenue
December 31,
Year Ended December 31,
2023
2022
2023
2022
2021
Collaborative Partner:
AbbVie (North America and Europe)
87
%
80
%
98
%
98
%
98
%
F-11
Table of Contents
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.
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.
Intangible Assets
Intangible assets are comprised of the assembled workforce acquired in the VectivBio Acquisition and are amortized on a straight-line basis over an estimated useful life of five years .
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 (loss).
F-12
Table of Contents
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 on its balance sheet unamortized debt issuance costs related to convertible notes as a direct deduction from the associated debt liability and unamortized debt issuance costs related to revolving credit arrangements as other assets.
Leases
The Company’s lease portfolio for the year ended December 31, 2023 included: an office lease for its headquarters location and other locations, 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, 2023, 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 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 10). 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 and the Note Hedge Warrants terminated unexercised upon expiry in April 2023. 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
F-13
Table of Contents
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. 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.
F-14
Table of Contents
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 in accordance with the sales-based royalty exception.
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, 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
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.
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.
F-15
Table of Contents
Other
The Company’s deferred revenue balance consists of advance billings and payments received from collaboration partners 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 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 5). 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 ASC Topic 712, Compensation – Nonretirement Postemployment Benefits , 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.
F-16
Table of Contents
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 13). 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 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 $ 1.8 million, $ 1.3 million, and $ 1.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. These costs were charged to selling, general and administrative expenses as incurred.
Net Income (Loss) Per Share
Basic net income (loss) 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 (loss) per share reflects the potential dilution beyond common shares for basic net income (loss) 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.
Foreign Currency Translation
For subsidiaries with a different functional currency than the U.S. dollar, assets and liabilities are translated at the exchange rate as of the balance sheet date and income and expense items are translated at the average exchange rate for the reporting period. Adjustments resulting from the translation of the financial statements of foreign subsidiaries are recorded in accumulated comprehensive income (loss), a separate component of stockholders’ equity.
F-17
Table of Contents
Acquisitions
The Company evaluates 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 the Company has acquired inputs and processes that have the ability to create outputs that would meet the requirements of a business.
The Company accounts 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. The Company determines 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.
The Company accounts 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 in-process research and development (“IPR&D”) with no alternative future use is charged to research and development expense at the acquisition date. The Company classifies asset acquisitions of acquired IPR&D as investing activities on its consolidated statements of cash flows.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes foreign currency translation adjustments and certain changes in the fair value of pension plan assets and projected benefit obligation attributed to the Company’s defined benefit pension plans. Accumulated other comprehensive income (loss) is presented as a separate component of stockholders’ equity (deficit).
Subsequent Events
The Company considers events or transactions that have occurred after the balance sheet date of December 31, 2023, 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. The Company did not adopt any new accounting pronouncements during the year ended December 31, 2023 that had a material effect on its consolidated financial statements.
In November 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280) (“ ASU 2023-07 ”). The guidance in ASU 2023-07 expands prior reportable segment disclosure requirements by requiring entities to disclose significant segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and details of how the CODM uses financial reporting to assess their segment’s performance. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2023-07 may have on its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). The guidance in ASU 2023-09 improves the transparency of income tax disclosures by greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The standard is effective for public companies for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2023-09 may have on its consolidated financial statements.
F-18
Table of Contents
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.
During the year ended December 31, 2022, the Company adopted the following accounting pronouncement 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 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 are no longer 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 became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Upon adoption, entities could elect to apply the new standard on a modified retrospective or full retrospective basis.
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.
3. Acquisitions
On June 29, 2023 , the Company completed a tender offer to purchase 98 % of the outstanding ordinary shares of VectivBio (the “VectivBio Shares”) at a price per share of $ 17.00 , net to the shareholders of VectivBio in cash, without interest and subject to any applicable withholding taxes (the “VectivBio Acquisition”). The aggregate consideration paid by the Company to acquire the shares accepted for payment was approximately $ 1.2 billion. The Company financed the acquisition through proceeds from the borrowings under the Revolving Credit Agreement (as defined elsewhere below), cash on hand.
The total purchase consideration for VectivBio is as follows (in thousands):
Cash consideration paid to selling shareholders (1)
$
1,041,391
Cash consideration paid to settle VectivBio restricted stock units (“RSUs”) and stock options (2)
78,003
Cash consideration paid to settle VectivBio warrants (3)
3,720
F-19
Table of Contents
Transaction costs
26,270
Fair value of noncontrolling interest (4)
26,218
Total purchase consideration
$
1,175,602
(1) The cash consideration paid to selling shareholders was determined based on the total number of VectivBio Shares tendered at closing of 61,258,315 at a per share price of $ 17.00 .
(2) The cash consideration paid to settle VectivBio RSUs and stock options issued under VectivBio’s equity incentive plans was determined based on the total number of underlying VectivBio Shares of 8,904,171 at a per share price of $ 17.00 , less the exercise price for stock options.
(3) The cash consideration paid to settle VectivBio warrants was determined based on the total number of VectivBio warrant shares outstanding at close of 324,190 at a per share price of $ 11.4757 calculated as the per share price of $ 17.00 , less the exercise price of $ 5.5243 per share.
(4) The fair value of the noncontrolling interest was determined based on the total number of VectivBio Shares outstanding at closing of 1,547,723 at the closing date of the tender offer, using the VectivBio closing share price on
June 28, 2023 of $ 16.94 .
On December 12, 2023, the Company completed a squeeze-out merger under Swiss law to acquire all remaining outstanding VectivBio Shares in cash at a price per share of $ 17.00 , totaling $ 26.3 million. As of December 31, 2023, there was no remaining noncontrolling interest in VectivBio. The purchase of subsidiary shares from the noncontrolling interests is recorded as an equity transaction, with no gain or loss reflected in the consolidated statements of income (loss), and is reflected as a financing activity in the consolidated statements of cash flows.
The VectivBio Acquisition was accounted for as an asset acquisition under ASC Topic 805, Business Combinations, because substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable IPR&D asset, apraglutide, VectivBio’s lead investigational asset. Apraglutide is a next generation, long-acting synthetic GLP-2 analog being developed for a range of rare GI diseases and is currently in Phase III clinical trial for the potential treatment of SBS-IF. The Company recognized the acquired assets and assumed liabilities based on the consideration paid, inclusive of transaction costs, on a relative fair value basis. In accordance with the accounting for asset acquisitions, an entity that acquires IPR&D assets in an asset acquisition follows the guidance in ASC Topic 730, Research and Development , which requires that both tangible and intangible identifiable research and development assets with no alternative future use be allocated a portion of the consideration transferred and recorded as research and development expense at the acquisition date. As a result, the Company recorded approximately $ 1.1 billion in acquired in-process research and development expense related to the apraglutide IPR&D asset during the second quarter of 2023.
The following is the allocation of the purchase consideration based on the relative fair value of assets acquired and liabilities assumed by the Company (in thousands):
Assets acquired
Cash and cash equivalents
$
123,340
Prepaid expenses and other current assets
10,867
Property and equipment
126
Intangible assets
4,100
Acquired in-process research and development
1,095,449
Total assets acquired
$
1,233,882
Liabilities assumed
Current liabilities
42,377
Other liabilities
15,903
Total liabilities assumed
$
58,280
Net assets acquired
$
1,175,602
The Company incurred acquisition-related expenses of $ 55.6 million for the year ended December 31, 2023, of which $ 25.6 million was included in selling, general and administrative expenses, $ 15.1 million was included in research and development expense, and $ 14.9 million was included in restructuring expense within the Company’s consolidated statement of income (loss) for the year ended December 31, 2023. Acquisition-related expenses include direct and incremental costs incurred in connection with the transaction, including integration-related professional services and
F-20
Table of Contents
employee retention-related benefits. Acquisition-related expenses exclude transaction costs included in the computation of total consideration paid.
Intangible assets are comprised of the assembled workforce acquired in the VectivBio Acquisition. The Company recognized $ 0.4 million of amortization expense during the period between acquisition date on June 29, 2023 through December 31, 2023 and the net carrying value of the assembled workforce at December 31, 2023 is $ 3.6 million. Future annual amortization expense will be $ 0.8 million for each of the years ended December 31, 2024 through December 31, 2027 and $ 0.4 million for the year ended December 31, 2028 .
4. Net Income (Loss) 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,
2023 (1)
2022
2021
Numerator:
Net income (loss)
$
( 1,031,559 )
$
175,065
$
528,448
Less: Net income (loss) attributable to noncontrolling interests
( 29,320 )
—
—
Net income (loss) attributable to Ironwood Pharmaceuticals, Inc.
( 1,002,239 )
175,065
528,448
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 (loss) per share — diluted
$
( 1,002,239 )
$
179,514
$
528,448
Denominator:
Weighted average number of common shares outstanding used in computing net income (loss) per share — basic
155,435
154,366
162,245
Effect of dilutive securities:
Stock options
—
306
488
Time-based restricted stock units
—
1,375
1,422
Performance-based restricted stock units
—
282
146
Restricted stock
—
115
117
Shares subject to issuance under Employee Stock Purchase Plan
—
—
—
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 (loss) per share — diluted
155,435
186,312
164,418
Net income (loss) per share — basic
$
( 6.45 )
$
1.13
$
3.26
Net income (loss) per share — diluted
$
( 6.45 )
$
0.96
$
3.21
(1) The Company incurred a net loss during the year ended December 31, 2023 and therefore did not differentiate basic and diluted earnings per share, as the effect of dilutive securities would be anti-dilutive.
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):
F-21
Table of Contents
Year Ended December 31,
2023
2022
2021
Stock options
4,829
6,152
7,701
Time-based restricted stock units
28
10
102
Performance-based restricted stock units
216
1,182
121
Note Hedge Warrants
2,514
8,318
8,318
2022 Convertible Notes
—
—
8,318
2024 Convertible Notes
—
—
14,934
2026 Convertible Notes
—
—
14,934
Total
7,587
15,662
54,428
Prior to the adoption of ASU 2020-06, the potentially dilutive impact of the Convertible Senior Notes (Note 10) 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 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.
5. Collaboration, License, and Other Agreements
The Company has 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 following table provides amounts included in the Company’s
F-22
Table of Contents
consolidated statements of income (loss) as collaborative arrangements revenue and sale of API attributable to transactions from these and other agreements (in thousands):
Year Ended December 31,
Collaborative Arrangements Revenue
2023
2022
2021
Linaclotide Collaboration and License Agreements:
AbbVie (North America)
$
433,242
$
401,498
$
403,085
AbbVie (Europe and other)
2,779
2,444
2,558
AstraZeneca (China, including Hong Kong and Macau)
430
635
743
Astellas (Japan)
1,799
2,001
2,232
Other Agreements:
Alnylam (GIVLAARI)
—
2,194
2,411
AKP (apraglutide)
2,009
—
—
Other
2,476
1,824
1,755
Total collaborative arrangements revenue
$
442,735
$
410,596
$
412,784
Sale of API
Linaclotide Agreements:
Astellas (Japan)
$
—
$
—
$
149
AstraZeneca (China, including Hong Kong and Macau)
—
—
597
Other
—
—
223
Total sale of API
$
—
$
—
$
969
Accounts receivable, net, included $ 129.1 million and $ 130.0 million primarily related to collaborative arrangements revenue, collectively, as of December 31, 2023 and 2022, respectively. Accounts receivable, net, included $ 112.6 million and $ 104.4 million due from the Company’s partner, AbbVie, net of $ 4.3 million and $ 4.0 million of accounts payable, as of December 31, 2023 and 2022, 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, 2023, 2022, or 2021.
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 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, 2023, 2022 and 2021, the Company incurred $ 7.0 million, $ 8.0 million, and $ 8.2 million, respectively, 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 $ 11.6 million, $ 8.9 million, and $ 11.5 million in incremental research and development costs during the years ended December 31, 2023, 2022, and 2021, 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
F-23
Table of Contents
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 linaclotide collaboration arrangement for North America 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 linaclotide collaboration agreement 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 following table summarizes collaborative arrangements revenue from the linaclotide collaboration agreement for North America during the years ended December 31, 2023, 2022, and 2021 as follows (in thousands):
Year Ended December 31,
2023
2022
2021
Collaborative arrangements revenue related to sales of LINZESS in the U.S.
$
430,463
$
398,767
$
400,371
Royalty revenue
2,779
2,731
2,714
Total collaborative arrangements revenue
$
433,242
$
401,498
$
403,085
The Company incurred $ 37.1 million, $ 34.3 million, and $ 30.3 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, 2023, 2022, and 2021, respectively.
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 $ 2.8 million, $ 2.7 million, and $ 2.7 million of combined royalty revenues from Canada and Mexico during the years ended December 31, 2023, 2022, and 2021, 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 other 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.
F-24
Table of Contents
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 $ 2.8 million, $ 2.4 million and $ 2.6 million of royalty revenue during the years ended December 31, 2023, 2022, and 2021, 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 years ended December 31, 2023 and 2022, the Company recognized $ 1.8 million and $ 2.0 million of royalty revenue, respectively. During the year ended December 31, 2021, the Company recognized $ 2.2 million of royalty revenue and $ 0.2 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 years ended December 31, 2023 and 2022, the Company recognized $ 0.4 million and $ 0.6 million of royalty revenue, respectively. 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.
The Company is entitled to receive non-contingent payments totaling $ 35.0 million in three installments through 2024, of which $ 15.0 million remained outstanding at December 31, 2023. 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, 2023, the non-contingent receivable due from AstraZeneca was $ 15.0 million and was classified as current. At December 31, 2022, the current portion and the non-current portion of the non-contingent receivable due from AstraZeneca were $ 10.0 million and $ 14.6 million, respectively.
Apraglutide Agreements
Development and Commercialization Agreement with AKP
In March 2022, VectivBio entered into a development and commercialization agreement with Asahi Kasei Pharma Corporation (“AKP”) in which VectivBio granted an exclusive license to AKP, with the right to sublicense in multiple tiers, to develop, commercialize and exploit products derived from apraglutide in Japan.
F-25
Table of Contents
Pursuant to the terms of the development and commercialization agreement with AKP, VectivBio received an upfront payment of JPY 3,000 million ($ 24.6 million at date of agreement) and was eligible to receive development related payments of JPY 1,600 million in the aggregate ($ 13.1 million at date of agreement), development milestones of JPY 1,000 million ($ 8.2 million at date of agreement) and up to JPY 19,000 million ($ 155.8 million at date of agreement) of commercial and sales-based milestone payments. VectivBio is also eligible to receive payments in the commercial period for manufacturing supply equal to cost-plus manufacturing mark-up and tiered royalties of up to a mid-double-digit percentage on product sales continuing until the later of (i) expiration of regulatory exclusivity in Japan, or (ii) expiration of the last valid patent claim that provides exclusivity to apraglutide in Japan (the “Royalty Term”). The development and commercialization agreement will terminate upon the expiration of the Royalty Term.
The Company identified two performance obligations consisting of the (i) exclusive license for the development and commercialization of apraglutide in Japan and (ii) development activities for conducting global trials and sharing of associated development data necessary for obtaining and maintaining regulatory approval in Japan. Each performance obligation was capable of being distinct and distinct in the context of the contract. The initial transaction price was allocated to each performance obligation on a relative standalone selling price basis. The Company assessed that it provided a right to use the license as the license exists (in terms of form and functionality) at the point in time at which it is granted and therefore, was satisfied at the inception of the arrangement. The development activities are being recognized over time as the Company performs development activities related to the global trials. The Company recognizes revenue associated with the development activities using an input method, according to the costs incurred, which in management’s judgment, is the best measure of progress towards satisfying the performance obligation. Under the sales-or-usage-based royalty exception, revenue related to sales-based milestone payments and royalty payments will be recognized as the underlying sales occur.
Prior to its acquisition by the Company, VectivBio had received the upfront payment of JPY 3,000 million ($ 24.6 million at date of agreement), development-related payments of JPY 1,100 million ($ 9.0 million at date of agreement), and development milestones of JPY 500 million ($ 4.1 million at date of agreement). Upon the acquisition of VectivBio on June 29, 2023, the Company assumed a contract liability for deferred revenue related to the development-related payments at its fair value of $ 4.3 million.
The Company recognized $ 2.0 million of revenue during the period between the acquisition date of June 29, 2023 and December 31, 2023 related to development activities. As of December 31, 2023, deferred revenue of $ 2.6 million is reported within accrued expenses and other current liabilities on the consolidated balance sheets. Deferred revenue and future payments received related to development activities are expected to be recognized over the course of the development activities, which are expected to occur through 2028.
License Agreement with Ferring
In August 2012, as subsequently amended and restated in December 2016, GlyPharma Therapeutic Inc., a subsidiary of VectivBio (“GlyPharma”), entered into an exclusive licensing agreement with Ferring International Center, S.A. (“Ferring”), pursuant to which Ferring granted GlyPharma an exclusive, worldwide, sublicensable license under certain patent rights and know-how controlled by Ferring relating to apraglutide and certain know-how controlled by Ferring relating to specified alternate drug compounds, to research, develop, manufacture, make, have made, import, export, use, sell, distribute, promote, advertise, dispose of or offer to sell (i) products containing apraglutide whose manufacture, use or sale is covered by a valid claim of the licensed patents, or licensed products and (ii) products, containing a specified alternate drug compound, or alternate drug products. In April 2021, the license agreement was transferred and assigned to VectivBio AG, a subsidiary of VectivBio.
Under the license agreement, as partial consideration for the rights Ferring granted to it, VectivBio AG is required to pay Ferring a high single-digit percentage royalty on worldwide annual net sales of licensed products and alternate drug products until, on a country-by-country basis and licensed product-by-licensed product or alternate drug product-by-alternate drug product basis, as applicable, the date on which the manufacture, use or sale of such licensed product or alternate drug product, as applicable, ceases to be covered by a valid claim of a patent within the licensed patents in such a country. GlyPharma was also required to pay Ferring a certain number of warrants and Class A preferred shares pursuant to a shareholders’ agreement. The equity obligations under the license agreement have been fully performed by GlyPharma.
F-26
Table of Contents
The Company is also obligated to pay a specified percentage of the annual consideration VectivBio AG or its affiliates, including the Company, received in connection with sales of licensed product or alternate drug product by any third parties to which VectivBio AG or its affiliates, including the Company, grant a sublicense of any of the rights licensed to VectivBio AG by Ferring under this Agreement. Such percentage is in the high single digits for sales of both licensed products and alternate drug products, and such payments are owed for the duration of the royalty term for licensed products or alternate drug products, as applicable.
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 (“PBC”). COUR has initiated a clinical study to evaluate the safety, tolerability, and pharmacodynamic effects and efficacy of CNP-104 in PBC patients .
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, subject to Ironwood’s right to apply a credit against such payment as described below. 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 was probable to occur. At December 31, 2022, payment obligations of $ 3.8 million were included in accrued research and development costs. No payment obligations remained as of December 31, 2023.
In April 2023, the Company and COUR executed an amendment to the COUR Collaboration Agreement, in which the Company agreed to pay a one-time, non-refundable, upfront payment of $ 6.0 million to COUR in exchange for the right to apply a credit of $ 6.6 million against future amounts due to COUR in connection with the exercise of the Option, commercial milestones, or royalties. In connection with such payment, COUR also granted the Company a right of first negotiation over certain additional potential research and development programs. The $ 6.0 million payment was recognized as research and development expense during the year ended December 31, 2023.
Other Agreements
Disease Education and Promotional Agreement with Alnylam
In August 2019, the Company and Alnylam Pharmaceuticals, Inc. (“Alnylam”) entered into a disease education and promotional agreement (the “Alnylam Agreement”) for Alnylam’s GIVLAARI (givosiran) for the treatment of acute hepatic porphyria. 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.
During the years ended December 31, 2022 and 2021, the Company recognized $ 2.2 million and $ 2.4 million, respectively, in royalty revenue.
6. Fair Value of Financial Instruments
The tables below present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2023 and 2022 and indicate the fair value hierarchy of the valuation techniques
F-27
Table of Contents
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
2023
(Level 1)
(Level 2)
(Level 3)
Assets:
Cash and cash equivalents:
Money market funds
$
45,939
$
45,939
$
—
$
—
U.S. Treasury securities
10,507
—
10,507
—
Commercial paper
2,240
—
2,240
—
Total assets measured at fair value
$
58,686
$
45,939
$
12,747
$
—
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
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, 2023 and 2022 are carried at amounts that approximate fair value due to their short-term maturities.
F-28
Table of Contents
Convertible Note Hedges and Note Hedge Warrants with Respect to 2022 Convertible Notes
The Company’s Convertible Note Hedges, which expired unexercised in June 2022, and Note Hedge Warrants, which expired unexercised in April 2023, were recorded as derivative assets and liabilities, respectively, and were classified as Level 3 measurements under the fair value hierarchy. These derivatives were not actively traded and were valued using the Black-Scholes option-pricing model, which required the use of subjective assumptions.
The following inputs were used in the fair market valuation of the Note Hedge Warrants:
December 31, 2022
Risk-free interest rate (1)
4.5
%
Expected term
0.3
Stock price (2)
$
12.39
Strike price (3)
$
18.82
Common stock volatility (4)
27.1
%
Dividend yield (5)
—
%
(1) Based on U.S. Treasury yield curve, with terms commensurate with the expected term of the Note Hedge Warrants.
(2) The closing price of the Company’s Class A Common Stock on the last trading day of the quarter ended December 31, 2022.
(3) As per the agreements for the 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 were recorded at fair value at each reporting date and changes in fair value were recorded in other income (expense), net within the Company's consolidated statements of income.
The following table reflects the change in the Company's Level 3 Note Hedge Warrants from December 31, 2021 through December 31, 2023 (in thousands):
Convertible
Note Hedge
Note Hedges
Warrants
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 )
Change in fair value, recorded as a component of gain on derivatives
—
19
Balance at December 31, 2023
$
—
$
—
Convertible Senior 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 (Note 10) . 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 2024 Convertible Notes was $ 209.6 million and $ 215.9 million as of December 31, 2023 and 2022, respectively. The estimated fair value of the 2026 Convertible Notes was $ 217.1 million and $ 219.0 million as of December 31, 2023 and 2022, 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
F-29
Table of Contents
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 10). 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 and are not subsequently remeasured as long as the conditions for equity classification continue to be met (Note 10).
Revolving Credit Agreement
Outstanding borrowings under the revolving credit facility (Note 10) are carried at amounts that approximate fair value based on their nature, terms, credit spreads, and variable interest rates, which are Level 3 inputs.
Non-recurring Fair Value Measurements
Acquired In-Process Research & Development
The fair value of the acquired IPR&D asset, apraglutide, was determined on the VectivBio acquisition date using the multi-period excess earnings method using Level 3 fair-value measurements and inputs including estimated cash flows and probabilities of success.
Assembled Workforce
The fair value of the assembled workforce was determined on the VectivBio acquisition date using the replacement cost method using Level 3 fair-value measurements and inputs including estimated costs and productivity metrics.
7. Leases
The Company’s lease portfolio for the year ended December 31, 2023 includes: an office lease for its current headquarters location and other locations, vehicle leases for its salesforce representatives, and leases for computer and office equipment.
The Company’s headquarters office lease and vehicle lease require letters of credit to secure the Company’s obligations under the lease agreements totaling $ 1.2 million and $ 1.7 million at December 31, 2023 and 2022, respectively. As of December 31, 2022, the letters of credit were collateralized by money market accounts recorded as restricted cash on the Company’s consolidated balance sheets. During the year ended December 31, 2023, the letters of credit were transitioned to a subfacility of the revolving credit agreement (Note 10) and no longer require cash collateral.
Lease cost is recognized on a straight-line basis over the lease term. The components of lease cost for the years ended December 31, 2023, 2022 and 2021 are as follows (in thousands):
Year Ended December 31,
2023
2022
2021
Operating lease cost
$
2,507
$
2,509
$
2,520
Short-term lease cost
1,241
1,070
960
Total lease cost
$
3,748
$
3,579
$
3,480
Supplemental information related to leases for the periods reported is as follows:
Year Ended December 31,
2023
2022
2021
Cash paid for amounts included in the measurement of lease liabilities (in thousands)
$
3,065
$
3,114
$
3,128
Weighted-average remaining lease term of operating leases (in years)
6.4
7.3
8.3
Weighted-average discount rate of operating leases
5.8
%
5.8
%
5.8
%
F-30
Table of Contents
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, 2023, the balances of the right-of-use asset and operating lease liability were $ 12.6 million and $ 17.7 million, respectively. 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.
Lease costs recorded during each of the years ended December 31, 2023, 2022 and 2021 were $ 2.5 million.
Future minimum lease payments under the Summer Street Lease as of December 31, 2023 are as follows (in thousands):
2024
$
3,126
2025
3,189
2026
3,252
2027
3,317
2028
3,384
2029 and thereafter
4,901
Total future minimum lease payments
21,169
Less: present value adjustment
( 3,500 )
Operating lease liabilities
17,669
Less: current portion of operating lease liabilities
( 3,126 )
Operating lease liabilities, net of current portion
$
14,543
8. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
December 31,
2023
2022
Software
$
1,652
$
5,414
Leasehold improvements
7,407
7,407
Laboratory equipment
1,327
1,327
Furniture and fixtures
1,747
1,542
Computer and office equipment
2,341
1,362
14,474
17,052
Less accumulated depreciation and amortization
( 8,889 )
( 10,764 )
$
5,585
$
6,288
Depreciation expense of property and equipment was $ 1.2 million, $ 1.4 million and $ 1.5 million for the years ended December 31, 2023, 2022 and 2021, respectively.
F-31
Table of Contents
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
December 31,
2023
2022
Accrued compensation and benefits
$
19,937
$
12,268
Accrued interest
5,953
188
Accrued restructuring liabilities
8,303
—
Accrued taxes
1,244
656
Other
8,817
3,588
Total accrued expenses and other current liabilities
$
44,254
$
16,700
As of December 31, 2023, other accrued expenses of $ 8.8 million were comprised primarily of $ 6.1 million of uninvoiced vendor liabilities and $ 2.6 million of deferred revenue. As of December 31, 2022, other accrued expenses of $ 3.6 million was comprised primarily of uninvoiced vendor liabilities.
10. Debt
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 2022 Convertible Notes matured on June 15, 2022. No conversions were exercised by holders of the 2022 Convertible Notes.
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.
F-32
Table of Contents
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.
The Company held the option to determine the settlement method for conversions of the 2024 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 (subject to, and in accordance with, the settlement provisions of the applicable Indenture). The Company has elected to settle conversions of the 2024 Convertible Notes through cash payment equal to the principal value and shares of Class A Common Stock for the conversion premium, if any.
Holders of the 2024 Convertible Notes had the right to convert their 2024 Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding December 15, 2023 upon the occurrence of certain circumstances and no such conversions occurred. On or after December 15, 2023, until the close of business on the second scheduled trading day immediately preceding June 15, 2024, holders may convert their 2024 Convertible Notes, in multiples of $ 1,000 principal amount, at the option of the holder.
The Company will settle conversions of the 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).
Holders of the 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, 2025 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 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, 2025 until the close of business on the second scheduled trading day immediately preceding the applicable June 15, 2026, the holders of the 2026 Convertible 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
F-33
Table of Contents
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.
The Company accounts for each convertible debt instrument as a single liability measured at amortized cost.
The Company’s outstanding balances for the convertible senior notes consisted of the following (in thousands):
2023
2022
Principal:
2024 Convertible Notes
$
200,000
$
200,000
2026 Convertible Notes
200,000
200,000
Less: unamortized debt issuance costs
( 2,131 )
( 3,749 )
Net carrying amount
$
397,869
$
396,251
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 debt issuance costs are reflected as a reduction in the carrying value of the 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, 2023 were 1.2 % and 1.8 % , respectively. The effective annual interest rate is computed using the contractual interest and the amortization of debt issuance costs.
The following table sets forth total interest expense recognized related to convertible senior notes (in thousands):
Year Ended December 31,
2023
2022
2021
Contractual interest expense
$
4,500
$
5,745
$
7,216
Amortization of debt issuance costs
1,618
1,853
1,678
Amortization of debt discount
—
—
22,256
Total interest expense
$
6,118
$
7,598
$
31,150
Future minimum payments under the convertible senior notes as of December 31, 2023, are as follows (in thousands):
2024
$
203,750
2025
3,000
2026
201,500
Total future minimum payments under the convertible senior notes
408,250
Less: amounts representing interest
( 8,250 )
Less: unamortized debt issuance costs
( 2,131 )
Convertible senior notes balance
$
397,869
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
F-34
Table of Contents
related to the Convertible Note Hedge being exercised. In June 2022, the Convertible Note Hedges terminated unexercised upon expiry.
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 underlay the Note Hedge Warrants and each warrant had a strike price of $ 18.82 per share, subject to customary anti-dilution adjustments. The Note Hedge Warrants were exercisable over the 150 -trading day period beginning on September 15, 2022. In April 2023, the Note Hedge Warrants terminated unexercised upon expiry.
The Convertible Note Hedges and the Note Hedge Warrants were separate transactions entered into by the Company and were not part of the terms of 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.
The Convertible Note Hedges and Note Hedge Warrants were accounted for as derivative assets and liabilities, respectively, in accordance with ASC 815, and remeasured to fair value at each reporting date (Note 6).
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.
Revolving Credit Facility
In May 2023, in connection with the VectivBio Acquisition, the Company entered into a credit agreement (the
“Revolving Credit Agreement”) with Wells Fargo Bank, N.A., as administrative agent, collateral agent, a letter of credit issuer and a lender, and the other agents, lenders and letter of credit issuers parties thereto.
The Revolving Credit Agreement provides for a four-year $ 500.0 million secured revolving credit facility (the
"Revolving Credit Facility”), which includes a $ 10.0 million letter of credit subfacility, and loans made thereunder will mature on the earliest to occur of (i) May 21, 2027 or (ii) the date that is 91 days prior to the stated maturity date of the
F-35
Table of Contents
Company’s existing convertible notes then outstanding, unless, in the case of clause (ii), the Company’s minimum liquidity equals or exceeds certain agreed levels.
At the Company’s election, borrowings under the Revolving Credit Agreement will bear interest at a rate equal to (a) Adjusted Term Secured Overnight Financing Rate (“SOFR”) (as defined in Revolving Credit Agreement) plus the applicable rate (ranging from 1.75 % to 3.00 %) or (b) the highest of (1) the weighted average overnight Federal funds rate, as published by the Federal Reserve Bank of New York, plus one half of 1.0% , (2) the prime lending rate or (3) the one-month Adjusted Term SOFR plus 1.0 % in effect from time to time plus the applicable rate (ranging from 0.75 % to 2.00 %). The applicable rates are based on the Company’s consolidated secured net leverage ratio (as defined under the Revolving Credit Facility) at the time of the applicable borrowing.
The Company pays a quarterly commitment fee of 0.30 % to 0.425 % on the daily amount by which the commitments under the Revolving Credit Agreement exceed the outstanding loans and letters of credit.
The loans and other obligations under the Revolving Credit Agreement are secured by substantially all of the
Company’s personal property, including a pledge of all the capital stock of subsidiaries held directly by the Company or any subsidiary that guarantees the Revolving Credit Agreement following the closing date (which pledge, in the case of any foreign subsidiary, is limited to 65 % of the voting stock), subject to certain customary exceptions and limitations. The Revolving Credit Agreement generally prohibits any other liens on the assets of the Company and its restricted subsidiaries, subject to certain exceptions as described in the Revolving Credit Agreement.
Under the terms of the Revolving Credit Agreement, the Company will be able to request an increase in the
commitments or the addition of a term loan secured by a pari passu lien on the collateral of up to an additional amount equal to the greater of $ 200.0 million and 100 % of the trailing twelve-month Consolidated Adjusted EBITDA (as defined in the Revolving Credit Agreement) upon satisfaction of customary conditions, including receipt of commitments from either new lenders or increased commitments from existing lenders.
The Revolving Credit Agreement contains certain customary covenants applicable to the Company and its Restricted Subsidiaries (as defined in the Revolving Credit Agreement), and commencing in the third quarter of 2023, the Company is required to maintain a maximum consolidated secured net leverage ratio of 3.00 to 1.00 and a minimum interest coverage ratio of 3.00 to 1.00, in each case at the end of each fiscal quarter. The Revolving Credit Agreement allows the Company to elect to increase the permitted maximum consolidated secured net leverage ratio to 3.50 to 1.00 for four fiscal quarters in the event it consummates an acquisition for consideration in excess of $ 50.0 million, subject to certain limitations on how often this election can be made. As of December 31, 2023, the Company was in compliance with all covenants.
In connection with the Revolving Credit Agreement, the Company incurred $ 2.9 million of debt issuance costs, which primarily consisted of $ 2.0 million of lender fees and $ 0.9 million of legal and other professional fees. The debt issuance costs are classified as other assets and are amortized on a straight-line basis over the four-year term of the Revolving Credit Agreement. The Company had unamortized capitalized debt issuance costs of $ 2.4 million at December 31, 2023.
In June 2023, the Company borrowed $ 400.0 million to partially finance the VectivBio Acquisition (Note 3). The Company repaid $ 100.0 million of the outstanding principal balance during the year ended December 31, 2023. The outstanding principal balance on the revolving credit facility was $ 300.0 million as of December 31, 2023.
The following table sets forth total interest expense recognized related to Revolving Credit Agreement (in
thousands):
Year Ended
December 31, 2023
Contractual interest expense
$
14,718
Amortization of debt issuance costs
442
Other financing costs
101
Total interest expense
$
15,261
F-36
Table of Contents
11. 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.
Other Funding Commitments
As of December 31, 2023, 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 no t have any liabilities recorded for these obligations as of December 31, 2023 and 2022.
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 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.
F-37
Table of Contents
12. 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, sufficient shares to effect the conversion of the convertible senior notes and the Note Hedge Warrants pursuant to the terms thereof (Note 10).
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 cost 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 .
13. 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,
2023
2022
2021
Stock options
$
226
$
1,471
$
3,154
Time-based restricted stock units
19,829
17,643
14,539
Performance-based restricted stock units
9,321
5,008
1,295
Restricted stock awards
1,997
2,439
2,684
Employee stock purchase plan
502
412
419
Stock awards
130
75
190
VectivBio Holding AG stock options and RSUs accelerated upon change in control
27,548
—
—
Total share-based compensation expense
$
59,553
$
27,048
$
22,281
F-38
Table of Contents
The following table summarizes the share-based compensation expense reflected in the consolidated statements of income (in thousands):
Year Ended December 31,
2023
2022
2021
Share-based compensation expense:
Research and development
$
17,448
$
4,936
$
4,849
Selling, general and administrative
41,194
22,112
17,323
Restructuring expenses
911
—
109
Total share-based compensation expense included in operating expenses
59,553
27,048
22,281
Income tax benefit
2,964
1,644
—
Total share-based compensation expense, net of tax
$
56,589
$
25,404
$
22,281
In connection with the VectivBio Acquisition, the Company incurred $ 27.5 million of share-based compensation expense during the second quarter of 2023 related to the vesting acceleration and settlement of outstanding VectivBio stock options and RSUs under VectivBio’s 2021 Equity Incentive Plan, of which $ 11.3 million was recorded within research and development expense and $ 16.2 million was recorded within selling, general and administrative expenses.
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, 2023, the Company has the following active stock benefit plans pursuant to which awards are currently outstanding: the Amended and Restated 2019 Equity Incentive Plan (the “A&R 2019 Equity Plan”), 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, 2023, there were 14,647,564 shares available for future grant under the A&R 2019 Equity Plan and the 2010 Purchase Plan.
A&R 2019 Equity Plan
During 2023, the Company’s stockholders approved the A&R 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 A&R 2019 Equity Plan, 6,000,000 shares of Class A Common Stock were initially reserved for issuance. Subsequent to the approval of the A&R 2019 Equity Plan, shares available for grant under the 2019 Equity Plan are made available for grant under the A&R 2019 Equity Plan and awards that are returned to the A&R 2019 Equity Plan, 2019 Equity Plan and 2010 Equity Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for future grant under the A&R 2019 Equity Plan. As of December 31, 2023, 10,374,589 shares were available for future grant under the A&R 2019 Equity Plan.
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. Prior to the approval of the A&R 2019 Equity Plan, awards that were returned to the 2010 Equity Plan as a result of their expiration, cancellation, termination or repurchase were automatically made available for issuance under the 2019 Equity Plan and awards that expired, cancelled, terminated, or were repurchased under the 2019 Equity Plan were no longer available for future grant. As of December 31, 2023, there were no shares available for future grant under the 2019 Equity Plan.
F-39
Table of Contents
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, 2023, there were 4,272,975 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. As of December 31, 2023, 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, 2023 is presented below:
Weighted-
Average
Number of
Grant Date
Shares
Fair Value
Unvested as of December 31, 2022
189,118
$
11.22
Granted
178,800
10.77
Vested
( 189,118 )
11.22
Forfeited
—
—
Unvested as of December 31, 2023
178,800
$
10.77
The weighted-average grant date fair value per share of RSAs granted during the years ended December 31, 2023, 2022, and 2021 was $ 10.77 , $ 11.22 , and $ 11.67 , respectively. The total fair value of RSAs that vested during the years ended December 31, 2023, 2022, and 2021 was $ 2.1 million, $ 2.8 million, and $ 2.5 million, respectively.
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.
F-40
Table of Contents
A summary of time-based RSU activity for the year ended December 31, 2023 is as follows:
Weighted-
Average
Number
Grant Date
of RSUs
Fair Value
Outstanding as of December 31, 2022
4,290,145
$
10.91
Granted
3,125,831
10.55
Vested and released
( 1,663,981 )
10.95
Forfeited
( 409,268 )
10.94
Outstanding as of December 31, 2023
5,342,727
$
10.68
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) on April 1, 2019 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 Item 5 elsewhere within this Annual Report on Form 10-K.
The weighted-average grant date fair value per share of time-based RSUs granted during the years ended December 31, 2023, 2022, and 2021 was $ 10.55 , $ 11.08 , and $ 10.40 , respectively. The total fair value of time-based RSUs that vested during the years ended December 31, 2023, 2022, and 2021 was $ 18.3 million, $ 14.8 million, and $ 17.8 million, respectively.
Performance-based RSUs
Performance-based RSUs (“PSUs”) are granted to certain executives. PSUs currently outstanding vest upon the achievement of specified performance criteria over a 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 2022 and 2021 were realizing relative total shareholder return goals (the “Relative TSR PSUs”). The performance criteria applicable to the PSUs granted in 2023 consisted of an equal weighting of (i) Relative TSR PSUs and (ii) achieving specified stock price targets (the “Absolute TSR PSUs”).
The Relative TSR PSUs and Absolute 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 and Absolute TSR PSUs were as follows for the years ended December 31, 2023, 2022, and 2021:
Year Ended December 31,
2023
2022
2021
Relative
Absolute
Relative
Relative
TSR PSUs
TSR PSUs
TSR PSUs
TSR PSUs
Fair value of common stock
$
11.39
$
10.74
$
11.13
$
11.39
Expected volatility
37.0
%
37.0
%
41.7
%
47.9
%
Expected term (in years)
3.0
3.0
2.8
2.6
Risk-free interest rate
4.7
%
4.7
%
1.6
%
0.3
%
Expected dividend yield
—
%
—
%
—
%
—
%
A summary of PSU activity for the year ended December 31, 2023 is as follows:
Weighted-
Average
Number
Grant Date
of PSUs
Fair Value
Outstanding as of December 31, 2022
1,168,771
$
14.72
Granted
568,103
14.09
Vested and released
( 71,588 )
12.31
Forfeited
( 12,018 )
13.17
Outstanding as of December 31, 2023
1,653,268
$
14.55
F-41
Table of Contents
The weighted-average grant date fair value per share of PSUs granted during the years ended December 31, 2023, 2022, and 2021 was $ 14.09 , $ 14.30 , and $ 14.65 , respectively. The total fair value of PSUs that vested during the years ended December 31, 2023 and 2022 was $ 0.8 million and $ 1.7 million, respectively. No PSUs vested during the year ended December 31, 2021.
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.
The Company ceased granting stock options during the year ended December 31, 2020. 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 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, 2022
6,931,372
$
12.34
3.32
$
5,786
Granted
—
—
—
—
Exercised
( 255,209 )
10.58
—
—
Cancelled
( 839,857 )
12.76
—
—
Outstanding at December 31, 2023
5,836,306
12.36
2.56
2,920
Vested or expected to vest at December 31, 2023
5,836,306
12.36
2.56
2,920
Exercisable at December 31, 2023
5,836,280
12.36
2.56
2,920
(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, 2023, 2022, and 2021 was $ 0.2 million, $ 0.9 million, and $ 2.7 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, 2023, 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
$
—
0.03
Restricted stock awards
897
0.46
Time-based restricted stock units
30,988
2.50
Performance-based restricted stock units
5,267
1.13
F-42
Table of Contents
The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures.
14. Income Taxes
The Company is subject to U.S. federal, state, and foreign income taxes. The components of income (loss) before income taxes during the years ended on December 31, 2023, 2022, and 2021 consisted of the following (in thousands):
Year Ended December 31,
2023
2022
2021
United States
$
226,532
$
252,422
$
200,657
Foreign
( 1,174,601 )
—
—
Income (loss) before income taxes
$
( 948,069 )
$
252,422
$
200,657
The components of the provision for (benefit from) income taxes during the years ended December 31, 2023, 2022, and 2021 consisted of the following (in thousands):
Year Ended December 31,
2023
2022
2021
Current taxes:
Federal
$
—
$
—
$
—
State
10,587
11,618
5,503
Foreign
346
—
—
Total current taxes
10,933
11,618
5,503
Deferred taxes:
Federal
47,864
52,191
( 251,367 )
State
24,693
13,548
( 81,927 )
Foreign
—
—
—
Total deferred taxes
72,557
65,739
( 333,294 )
Income tax expense (benefit)
$
83,490
$
77,357
$
( 327,791 )
During the year ended December 31, 2023, the Company 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. 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.
A reconciliation of income taxes computed using the U.S. federal statutory rate of 21 % to that reflected in the consolidated statements of income (loss) are as follows (in thousands):
F-43
Table of Contents
Year Ended December 31,
2023
2022
2021
Income tax expense (benefit) using U.S. federal statutory rate
$
( 199,094 )
$
53,009
$
42,138
Acquisition accounting for VectivBio Acquisition
139,301
—
—
Foreign tax rate differential
93,394
—
—
Disallowed transaction costs
3,424
—
—
Permanent differences
704
( 290 )
426
State income taxes, net of federal benefit
14,024
16,160
12,554
Executive compensation - Section 162(m)
3,979
2,654
695
Excess tax benefits
1,903
3,613
6,270
Fair market valuation of Note Hedge Warrants and Convertible Note Hedges
( 5 )
( 50 )
325
Tax credits
( 79 )
( 252 )
( 9 )
Expiring net operating losses and tax credits
933
1,087
491
Effect of change in state tax rate on deferred tax assets and deferred tax liabilities
2,134
2,581
123
Change in the valuation allowance
22,492
( 1,155 )
( 390,804 )
Other
380
—
—
Income tax expense (benefit)
$
83,490
$
77,357
$
( 327,791 )
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.
December 31,
2023
2022
Deferred tax assets:
Net operating loss carryforwards
$
105,401
$
88,769
Tax credit carryforwards
58,437
59,290
Capitalized research and development
18,267
12,683
Share-based compensation
12,323
13,666
Basis difference on collaboration agreement for North America with AbbVie
80,638
95,460
Accruals and reserves
7,149
5,935
Basis difference on Convertible Notes
1,613
2,845
Intangible assets
10,968
5,299
Operating lease liability
4,774
5,337
Other
1,810
1,242
Total deferred tax assets
301,380
290,526
Deferred tax liabilities:
Operating lease right-of-use asset
( 3,407 )
( 3,810 )
Total deferred tax liabilities
( 3,407 )
( 3,810 )
Net deferred tax asset
297,973
286,716
Valuation allowance
( 85,649 )
( 3,055 )
Net deferred tax asset
$
212,324
$
283,661
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. As of December 31, 2023, the Company maintained a valuation allowance of $ 85.6 million on deferred tax assets not expected to be realized, related primarily to deferred tax assets acquired in the VectivBio Acquisition comprised primarily of net operating loss carryforwards in Switzerland, as well as certain tax credits that are expected to expire prior to utilization. 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 increased by $ 82.6 million during the year ended December 31, 2023 primarily to offset the acquired foreign net operating losses from the VectivBio Acquisition. Additionally, in response to a state tax law change enacted in October 2023, the Company increased its valuation allowance on certain state tax credits that are
F-44
Table of Contents
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.
Additionally, the Company increased its reserves for uncertain tax positions by $ 11.0 million in the second quarter of 2023 in connection with a liability assumed in the VectivBio Acquisition.
Subject to the limitations described below, at December 31, 2023, the Company had federal net operating loss carryforwards of $ 411.8 million, of which $ 282.2 million is subject to expiration between 2033 and 2038 and $ 129.6 million may be carried forward indefinitely. As of December 31, 2023, the Company had state net operating loss carryforwards of $ 352.8 million to offset future state taxable income, which is subject to expiration at various dates through 2039. The Company also had tax credit carryforwards of $ 62.9 million as of December 31, 2023 to offset future federal and state income taxes, which is subject to expiration at various dates through 2040. The Company had foreign net operating loss carryforwards of $ 535.5 million, which are subject to expiration at various dates through 2030.
Utilization of federal and state 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 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, 2023, 2022, and 2021 (in thousands):
December 31,
2023
2022
2021
Balance at the beginning of the period
$
102,625
$
84,606
$
68,087
Increases based on tax positions related to the current period
85,446
101,225
83,206
Increases for tax positions assumed in VectivBio Acquisition
11,372
—
—
Decreases for tax positions in prior periods
( 101,225 )
( 83,206 )
( 66,687 )
Balance at the end of the period
$
98,218
$
102,625
$
84,606
The Company had gross unrecognized tax benefits of $ 98.2 million, $ 102.6 million, and $ 84.6 million as of December 31, 2023, 2022, and 2021 , respectively . Of the $ 98.2 million of total unrecognized tax benefits at December 31, 2023, $ 12.8 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 $ 23.0 million and $ 9.2 million are recorded in other liabilities on the Company’s consolidated balance sheets as of December 31, 2023 and 2022, respectively.
The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. The Company recognized $ 1.0 million and an insignificant amount of interest and penalties related to uncertain tax positions during the years ended December 31, 2023 and 2022, respectively. The Company did no t recognize any interest and penalties related to uncertain tax positions during the year ended December 31, 2021. As of December 31, 2023 and 2022, $ 5.2 million and an insignificant amount of interest and penalties have been accrued, respectively.
The statute of limitations for assessment by the Internal Revenue Service (“IRS”) and state tax authorities is open for tax years ended December 31, 2020 through the present, although net operating losses generated from years prior to 2020 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. The statute of limitations for assessment for foreign jurisdictions is open for tax years ended December 31, 2019 through the present. There are currently no foreign income tax audits in progress.
15. Retirement Plans
Defined Contribution Retirement Plans
F-45
Table of Contents
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, 2023, 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 each of the years ended December 31, 2023, 2022, and 2021, the Company recorded $ 2.2 million of expense related to its 401(k) company match.
Defined Benefit Retirement Plans
As a result of the VectivBio Acquisition, the Company maintains defined benefit plans for employees in Switzerland and Belgium , as required by local laws. The pension plans provide employees retirement benefits and risk insurance for death and disability. The contributions of employers and employees in general are defined in percentages of the insured’s salary. The retirement pension is calculated based on the old-age credit balance on retirement multiplied by the fixed conversion rate. The employee has the option to withdraw the capital on demand.
During the post-acquisition period from June 29, 2023 through December 31, 2023, the Company recognized $ 1.8 million of expense and $ 0.9 million of other comprehensive loss related to its defined benefit plans. Employer contributions and employee contributions during the post-acquisition period from June 29, 2023 through December 31, 2023 were $ 1.2 million and $ 13.7 million, respectively. As of December 31, 2023 the total fair value of pension plan assets was $ 33.0 million and the fair values of projected benefit obligations was $ 37.6 million, resulting in a net liability status of $ 4.6 million recorded as other liabilities.
16. Workforce Reductions and Restructuring
In April 2023, the Company reduced its workforce by approximately 10 % of its headquarters-based personnel in an effort to further strengthen the operational efficiency of the organization. The workforce reduction was substantially completed during the second quarter of 2023. The Company recorded $ 3.4 million of restructuring expenses and adjustments, which are primarily comprised of employee severance, benefits and related costs, during the year ended December 31, 2023.
In June 2023, the Company commenced the elimination of certain positions in connection with the VectivBio
Acquisition. The majority of the eliminations were initiated in June 2023 and the remaining eliminations were substantially completed during the third quarter of 2023. The Company recorded $ 14.9 million of restructuring expenses, which are primarily comprised of employee severance, benefits and related costs, during the year ended December 31, 2023.
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, 2023 (in thousands):
Amounts
Amounts
Accrued at
Accrued at
December 31, 2022
Charges
Amount Paid
Adjustments
December 31, 2023
Headquarters-based workforce reduction
$
—
$
2,540
$
( 2,232 )
$
( 38 )
$
270
VectivBio Acquisition-related workforce reduction
—
14,903
( 7,181 )
380
8,102
Total
$
—
$
17,443
$
( 9,413 )
$
342
$
8,372
F-46
Table of Contents
17. Selected Quarterly Financial Data (Unaudited)
The following table contains quarterly financial information for the years ended December 31, 2023 and 2022. 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)
2023
Total revenues
$
104,061
$
107,382
$
113,739
$
117,553
$
442,735
Total cost and expenses
43,964
1,190,521
73,716
79,964
1,388,165
Other income (expense), net
5,764
6,917
( 8,091 )
( 7,229 )
( 2,639 )
Net income (loss)
45,714
( 1,089,478 )
13,950
( 1,745 )
( 1,031,559 )
Net income (loss) attributable to Ironwood Pharmaceuticals, Inc.
45,714
( 1,062,187 )
15,321
( 1,087 )
( 1,002,239 )
Comprehensive income (loss) attributable to Ironwood Pharmaceuticals, Inc.
45,714
( 1,062,187 )
14,569
( 3,303 )
( 1,005,207 )
Net income (loss) per share—basic (1)
0.30
( 6.84 )
0.10
( 0.01 )
( 6.45 )
Net income (loss) per share—diluted (1)
0.25
( 6.84 )
0.09
( 0.01 )
( 6.45 )
(1) The summation of quarterly diluted net income per share does not equate to the calculation for the full fiscal year, as quarterly calculations are performed on a discrete basis.
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.
F-47