IRONWOOD PHARMACEUTICALS INC
FORM 10-K(Annual Report)
Filed 02/19/16 for the Period Ending 12/31/15
Address 301 BINNEY STREET
CAMBRIDGE, MA 02142Telephone 617-621-7722
CIK 0001446847Symbol IRWD
SIC Code 2834 - Pharmaceutical PreparationsIndustry Biotechnology & Drugs
Sector Healthcare
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UsetheselinkstorapidlyreviewthedocumentTABLEOFCONTENTSIndextoConsolidatedFinancialStatementsofIronwoodPharmaceuticals,Inc.
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UNITEDSTATESSECURITIESANDEXCHANGECOMMISSION
Washington,D.C.20549
FORM10-K
CommissionFileNumber001-34620
IRONWOODPHARMACEUTICALS,INC.(Exactnameofregistrantasspecifiedinitscharter)
Delaware(Stateorotherjurisdictionofincorporationororganization)
04-3404176(I.R.S.Employer
IdentificationNumber)
301BinneyStreetCambridge,Massachusetts(AddressofPrincipalExecutive
Offices)
02142(ZipCode)
Registrant'stelephonenumber,includingareacode:(617)621-7722
SecuritiesregisteredpursuanttoSection12(b)oftheAct:
Titleofeachclass NameofeachexchangeonwhichregisteredClassAcommonstock,$0.001par
value TheNASDAQStockMarketLLC (NASDAQGlobalSelectMarket)
SecuritiesregisteredpursuanttoSection12(g)oftheAct:None
Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YesýNoo
IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13or15(d)oftheExchangeAct.YesoNoý
Indicatebycheckmarkwhethertheregistrant:(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports)and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesýNoo
IndicatebycheckmarkwhethertheRegistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-Tduringthepreceding12months(orforsuchshorterperiodthattheRegistrantwasrequiredto
(MarkOne)
ý ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
ForthefiscalyearendedDecember31,2015
OR
o TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
Forthetransitionperiodfromto
submitandpostsuchfiles).YesýNoo
IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedhereinandwillnotbecontained,tothebestofregistrant'sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.o
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfilerorasmallerreportingcompany.Seedefinitionsof"largeacceleratedfiler,""acceleratedfiler"and"smallerreportingcompany"inRule12b-2oftheExchangeAct.
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).YesoNoý
Aggregatemarketvalueofvotingstockheldbynon-affiliatesoftheRegistrantasofJune30,2015:$1,647,058,706
AsofFebruary12,2016,therewere127,453,930sharesofClassAcommonstockoutstandingand15,934,458sharesofClassBcommonstockoutstanding.
DOCUMENTSINCORPORATEDBYREFERENCE:
Portionsofthedefinitiveproxystatementforour2016AnnualMeetingofStockholdersareincorporatedbyreferenceintoPartIIIofthisreport.
Largeacceleratedfilerý Acceleratedfilero Non-acceleratedfilero(Donotcheckifa
smallerreportingcompany)
Smallerreportingcompanyo
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NOTEREGARDINGFORWARD-LOOKINGSTATEMENTS
ThisAnnualReportonForm10-K,includingthesectionstitled"Business,""RiskFactors"and"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"containsforward-lookingstatements.AllstatementscontainedinthisAnnualReportonForm10-Kotherthanstatementsofhistoricalfactareforward-lookingstatements.Forward-lookingstatementsincludestatementsregardingourfuturefinancialposition,businessstrategy,budgets,projectedcosts,plansandobjectivesofmanagementforfutureoperations.Thewords"may,""continue,""estimate,""intend,""plan,""will,""believe,""project,""expect,""seek,""anticipate,""goal"andsimilarexpressionsmayidentifyforward-lookingstatements,buttheabsenceofthesewordsdoesnotnecessarilymeanthatastatementisnotforward-looking.Theseforward-lookingstatementsinclude,amongotherthings,statementsabout:
• thedemandandmarketpotentialforlinaclotideintheUnitedStates,ortheU.S.(LINZESS®),intheEuropeanUnion,ortheE.U.(CONSTELLA®),andinothercountrieswhereitisapprovedformarketing,aswellastherevenuestherefrom;
• thetiming,investmentandassociatedactivitiesinvolvedincommercializingLINZESSbyusandAllerganplcintheU.S.;
• thetimingandexecutionofthelaunchesandcommercializationofCONSTELLAintheE.U.;
• thetiming,investmentandassociatedactivitiesinvolvedindeveloping,launching,andcommercializinglinaclotidebyusandourpartnersworldwide;
• ourabilityandtheabilityofourpartnerstosecureandmaintainadequatereimbursementforlinaclotide;
• theabilityofourpartnersandthird-partymanufacturerstomanufactureanddistributesufficientamountsoflinaclotideactivepharmaceuticalingredient,orAPI,drugproductandfinishedgoodsonacommercialscale;
• ourexpectationsregardingU.S.andforeignregulatoryrequirementsforlinaclotideandourproductcandidates,includingourpost-approval,nonclinicalandclinicalpost-marketingplanwiththeFoodandDrugAdministration,ortheFDA;
• ourpartners'abilitytoobtainforeignregulatoryapprovaloflinaclotideandtheabilityofallofourproductcandidatestomeetexistingorfutureregulatorystandards;
• thesafetyprofileandrelatedadverseeventsoflinaclotideandourproductcandidates;
• thetherapeuticbenefitsandeffectivenessoflinaclotideandourproductcandidatesandthepotentialindicationsandmarketopportunitiestherefor;
• ourabilitytoobtainandmaintainintellectualpropertyprotectionforlinaclotideandourproductcandidatesandthestrengththereof;
• theabilityofourpartnerstoperformtheirobligationsunderourcollaboration,licenseandotheragreementswiththem,andourabilitytoachievemilestoneandotherpaymentsundersuchagreements;
• ourplanswithrespecttothedevelopment,manufactureorsaleofourproductcandidatesandtheassociatedtimingthereof,includingthedesignandresultsofpre-clinicalandclinicalstudies;
• thein-licensingoracquisitionofexternallydiscoveredbusinesses,productsortechnologies;
• ourexpectationsastofuturefinancialperformance,revenues,expenselevels,payments,cashflows,profitability,taxobligations,capitalraisingandliquiditysources,andrealestateneeds,aswellasthetiminganddriversthereof;
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• ourabilitytorepayouroutstandingindebtednesswhendue,orredeemorrepurchasealloraportionofsuchdebt,aswellasthepotentialbenefitsofthenotehedgetransactionsdescribedherein;
• inventorylevelsandwritedownsandthedriversthereof,andinventorypurchasecommitments;
• ourabilitytocompetewithothercompaniesthatareormaybedevelopingorsellingproductsthatarecompetitivewithourproductsandproductcandidates;
• thestatusofgovernmentregulationinthelifesciencesindustry,particularlywithrespecttohealthcarereform;
• trendsandchallengesinourpotentialmarkets;
• ourabilitytoattractandmotivatekeypersonnel;and
• otherfactorsdiscussedelsewhereinthisAnnualReportonForm10-K.
Anyorallofourforward-lookingstatementsinthisAnnualReportonForm10-Kmayturnouttobeinaccurate.Theseforward-lookingstatementsmaybeaffectedbyinaccurateassumptionsorbyknownorunknownrisksanduncertainties,includingtherisks,uncertaintiesandassumptionsidentifiedundertheheading"RiskFactors"inthisAnnualReportonForm10-K.Inlightoftheserisks,uncertaintiesandassumptions,theforward-lookingeventsandcircumstancesdiscussedinthisAnnualReportonForm10-Kmaynotoccurascontemplated,andactualresultscoulddiffermateriallyfromthoseanticipatedorimpliedbytheforward-lookingstatements.
Youshouldnotundulyrelyontheseforward-lookingstatements,whichspeakonlyasofthedateofthisAnnualReportonForm10-K.Unlessrequiredbylaw,weundertakenoobligationtopubliclyupdateorreviseanyforward-lookingstatementstoreflectnewinformationorfutureeventsorotherwise.Youshould,however,reviewthefactorsandriskswedescribeinthereportswewillfilefromtimetotimewiththeU.S.SecuritiesandExchangeCommission,ortheSEC,afterthedateofthisAnnualReportonForm10-K.
NOTEREGARDINGTRADEMARKS
LINZESS®andCONSTELLA®aretrademarksofIronwoodPharmaceuticals,Inc.AnyothertrademarksreferredtointhisAnnualReportForm10-Karethepropertyoftheirrespectiveowners.Allrightsreserved.
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Page PARTI
Item1. Business 5Item1A. RiskFactors 23Item1B. UnresolvedStaffComments 49Item2. Properties 50Item3. LegalProceedings 50Item4. MineSafetyDisclosures 50
PARTII Item5. MarketForRegistrant'sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquity
Securities 51
Item6. SelectedConsolidatedFinancialData 52Item7. Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations 55Item7A. QuantitativeandQualitativeDisclosuresaboutMarketRisk 83Item8. ConsolidatedFinancialStatementsandSupplementaryData 84Item9. ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure 84Item9A. ControlsandProcedures 85Item9B. OtherInformation 88
PARTIII Item10. Directors,ExecutiveOfficersandCorporateGovernance 89Item11. ExecutiveCompensation 89Item12. SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters 89Item13. CertainRelationshipsandRelatedTransactions,andDirectorIndependence 89Item14. PrincipalAccountantFeesandServices 89
PARTIV Item15. ExhibitsandFinancialStatementSchedules 90
Signatures 98 IndextoConsolidatedFinancialStatements F-1
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PARTI
Item1.Business
OurCompany
Weareacommercialbiotechnologycompanyleveragingourprovendevelopmentandcommercialcapabilitiesasweseektobringmultiplemedicinestopatients.Weareadvancingtwotherapeuticplatforms,whichincludeproductopportunitiesinareasoflargeunmetneed,includingirritablebowelsyndromewithconstipation,orIBS-C,andchronicidiopathicconstipation,orCIC,vascularandfibroticdiseases,andrefractorygastroesophagealrefluxdisease,orGERD.
Ourfirstandto-dateonlycommercialproduct,linaclotide,isavailabletoadultmenandwomensufferingfromIBS-CorCICintheUnitedStates,ortheU.S.,underthetrademarkednameLINZESS®,andisavailabletoadultmenandwomensufferingfromIBS-CincertainEuropeancountriesunderthetrademarkednameCONSTELLA®.WeandourU.S.partnerAllerganplc(togetherwithitsaffiliates),orAllergan(formerlyActavisplc),arealsoadvancinglinaclotidecolonicrelease,asecond-generationproductcandidatewiththepotentialtoimproveabdominalpainreliefinadultIBS-Cpatients,aswellasinpatientswithadditionalgastrointestinal,orGI,disorderswherelowerabdominalpainisapredominantsymptomsuchasIBS-mixed,orIBS-M.Further,weandAllerganareexploringwaystoenhancetheclinicalprofileofLINZESSbyseekingtoexpanditsutilitywithinIBS-CandCIC,aswellasstudyinglinaclotideinadditionalindicationsandpopulationstoassessitspotentialtotreatvariousGIconditions.Linaclotideisalsobeingdevelopedandcommercializedinotherpartsoftheworldbycertainofourpartners.Inaddition,weareadvancingotherGIdevelopmentprogramsforindicationssuchasrefractoryGERDanddiabeticgastroparesis.
Withinourvascular/fibroticplatform,weareleveragingourpharmacologicalexpertiseinguanylatecyclase,orGC,pathwaysgainedthroughthediscoveryanddevelopmentoflinaclotidetoadvancedevelopmentprogramstargetingsolubleguanylatecyclase,orsGC.sGCisavalidatedmechanismwiththepotentialforbroadtherapeuticutilityandmultipleopportunitiesforproductdevelopmentinvascularandfibroticdiseases,aswellasothertherapeuticareas.
OurGIandvascular/fibroticplatformsincludethefollowing:
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Thestatusofourdevelopmentprogramsinthetableaboverepresentstheongoingphaseofdevelopment,anddoesnotcorrespondtotheinitiationorcompletionofaparticularphase.Drugdevelopmentinvolvesahighdegreeofriskandinvestment,andthestatus,timingandscopeofourdevelopmentprogramsaresubjecttochange.Importantfactorsthatcouldadverselyaffectourdrugdevelopmenteffortsarediscussedinthe"RiskFactors"sectionofthisAnnualReportonForm10-K.AspartofthelinaclotidecolonicreleasePhaseIIbclinicaltrialinIBS-Cpatients,weandAllerganarealsoevaluatingasecondcolonicreleaseformulationthatisexpectedtoinformapathforwardinadditionalGIdisorders,suchasIBS-M.Initscurrenttargetproductprofile,IW-9179isawhollyownedasset.
LINZESSandourcurrentproductcandidateshaveallbeendiscoveredinternally.Webelieveourdiscoveryteamhascreatedanumberofpromisingcandidatesoverthepastfewyearsandhasdevelopedanextensiveintellectualpropertyestateineachoftheseareas.Wehavecommittedsignificantresourcesintotheresearchanddevelopmentofourproductcandidatesandintendtocontinuetodosofortheforeseeablefuture.FortheyearsendedDecember31,2015,2014and2013,researchanddevelopmentexpenseswereapproximately$108.7million,$101.9millionand$102.4million,respectively.Inaddition,weintendtoaccessexternally-discovereddrugcandidatesthatfitwithinourcorestrategy.Inevaluatingthesepotentialassets,weapplythesameinvestmentcriteriaasthoseusedforinvestmentsininternallydiscoveredassets.
WewereincorporatedinDelawareonJanuary5,1998asMicrobia,Inc.OnApril7,2008,wechangedournametoIronwoodPharmaceuticals,Inc.Todate,wehavededicatedsubstantiallyallofouractivitiestotheresearch,developmentandcommercializationoflinaclotide,aswellastotheresearchanddevelopmentofourotherproductcandidates.
GIPlatform
IBS-C/CIC
IBS-CandCICarechronic,functionalGIdisordersthatafflictmillionsofsufferersworldwide.Asmanyas13millionadultssufferfromIBS-Candasmanyas35millionadultssufferfromCICintheU.S.alone,accordingtoouranalysisofstudiesincludingNJTalley,etal.(publishedin1995intheAmericanJournalofEpidemiology),PPare,etal.(publishedin2001intheAmericanJournalofGastroenterology)andJ.F.Johanson,etal.(publishedin2007inAlimentaryPharmacologyandTherapeutics).SymptomsofIBS-Cincludeabdominalpain,discomfortorbloatingandconstipationsymptoms(e.g.,incompleteevacuation,infrequentbowelmovements,hard/lumpystools),whileCICisprimarilycharacterizedbyconstipationsymptoms.
Linaclotide—U.S.InAugust2012,theFDAapprovedLINZESSasaonce-dailytreatmentforadultmenandwomensufferingfromIBS-CorCIC.WeandAllerganbegancommercializingLINZESSintheU.S.inDecember2012.Linaclotideisthefirst,andtodate,onlyproductapprovedbytheU.S.FoodandDrugAdministration,orFDA,inanewclassofGImedicinescalledguanylatecyclasetype-C,orGC-C,agonists.WeandAllerganarealsoexploringdevelopmentopportunitiestoenhancetheclinicalprofileofLINZESSbyseekingtoexpanditsutilitywithinIBS-CandCIC,aswellasstudyinglinaclotideinadditionalindicationsandpopulationstoassessitspotentialtotreatvariousGIconditions.Forexample,inNovember2015,theFDAapprovedtheinclusionoflabelinginstructionsinthefullLINZESSPrescribingInformationallowingadultIBS-CandCICpatientswithswallowingdifficultiestheoptiontoadministerthecontentsofLINZESScapsulesinapplesauceorwater.
72mcgforCICinAdults.InOctober2015,wereportedpositivetop-linedatafromaPhaseIIIclinicaltrialintheU.S.withAllerganevaluatinga72mcgdoseoflinaclotideinadultpatientswithCIC.Webelievethesedatasupportthesubmissionofasupplementalnewdrugapplication,orsNDA,totheFDAforapprovaltomarketthe72mcgdoseoflinaclotideintheU.S.Ifapproved,the
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72mcgdosewouldprovideabroaderrangeoftreatmentoptionstophysiciansandadultCICpatientsintheU.S.
Pediatrics.WeandAllerganhaveestablishedanonclinicalandclinicalpost-marketingplanwiththeFDAtounderstandthesafetyandefficacyofLINZESSinpediatricpatients.Thefirststepinthisplanwastoundertakecertainadditionalnonclinicalstudies.WeandAllerganhavecompletedthesenonclinicalstudiesandhaveinitiatedtwoPhaseIIclinicalpediatricstudiesinIBS-Cpatientsagesevento17andfunctionalconstipationpatientsagesixto17.
UponFDA-approvalofLINZESSintheU.S.,wereceivedfiveyearsofexclusivityundertheDrugPriceCompetitionandPatentTermRestorationActof1984,ortheHatch-WaxmanAct.Inaddition,LINZESSiscoveredbyaU.S.compositionofmatterpatentthatexpiresin2026,includingpatenttermextension,aswellasthreeadditionalpatentscoveringthecommercialformulationofLINZESSandmethodsofusingthisformulationtotreatpatientswithIBS-CorCIC,allofwhichexpirein2031.
Linaclotide—Global.InNovember2012,theEuropeanCommissiongrantedmarketingauthorizationtoCONSTELLAforthesymptomatictreatmentofmoderatetosevereIBS-Cinadults.CONSTELLAisthefirst,andtodate,onlydrugapprovedintheEuropeanUnion,orE.U.,forIBS-C.OurformerEuropeanpartner,Almirall,S.A.,orAlmirall,begancommercializingCONSTELLAinEuropeinthesecondquarterof2013.InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan.Currently,CONSTELLAiscommerciallyavailableincertainEuropeancountries,includingtheUnitedKingdom,ItalyandSpain.
InDecember2013andFebruary2014,linaclotidewasapprovedinCanadaandMexico,respectively,asatreatmentforadultwomenandmensufferingfromIBS-CorCIC.AllerganhasexclusiverightstocommercializelinaclotideinCanadaasCONSTELLAand,throughasublicensefromAllergan,AlmirallhadexclusiverightstocommercializelinaclotideinMexicoasLINZESS.InMay2014,AllerganbegancommercializingCONSTELLAinCanadaandinJune2014,AlmirallbegancommercializingLINZESSinMexico.InOctober2015,AlmirallandAllerganterminatedthesublicensearrangementwithrespecttoMexico,returningtheexclusiverightstocommercializeCONSTELLAinMexicotoAllergan.CONSTELLAcontinuestobeavailabletoadultIBS-CpatientsinMexico.
AstellasPharmaInc.,orAstellas,ourpartnerinJapan,isdevelopinglinaclotideforthetreatmentofpatientswithIBS-Candchronicconstipationinitsterritory.InNovember2015,weandAstellasreportedpositivetop-linedatafromAstellas'PhaseIIIclinicaltrialoflinaclotideinadultpatientswithIBS-CforJapan.Webelievethesedatasupportthesubmissionofanewdrugapplication,orNDA,totheMinistryofHealth,LaborandWelfareforapprovaltomarketlinaclotideinJapan.WeandAstraZenecaAB,orAstraZeneca,areco-developinglinaclotideinChina,HongKongandMacau,withAstraZenecahavingprimaryresponsibilityforthelocaloperationalexecution.InDecember2015,weandAstraZenecafiledforapprovalwiththeChinaFoodandDrugAdministrationtomarketlinaclotideinChina.WecontinuetoassessalternativestobringlinaclotidetoIBS-CandCICsufferersinthepartsoftheworldoutsideofourpartneredterritories.
LinaclotideiscoveredbyEuropeanandJapanesecompositionofmatterpatents,allofwhichexpirein2024,subjecttopossiblepatenttermextension,aswellasChinesecompositionofmatterpatentsandcommercialformulationpatentswhichexpirein2024and2029,respectively.
LinaclotideColonicRelease.AbdominalpainisoneofthepredominantsymptomsassociatedwithIBS,withgreaterthan75%ofIBS-Cpatientsreportingcontinuousorfrequentabdominalpain,accordingtoinformationpublishedin2007bytheInternationalFoundationforFunctionalGastrointestinalDisorders.InPhaseIIIclinicaltrialssupportingitsU.S.approval,linaclotidewasdemonstratedtoreducetheabdominalpainassociatedwithIBS-C.
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WeandAllerganaredevelopinglinaclotidecolonicrelease,atargetedoraldeliveryformulationoflinaclotidedesignedtopotentiallyimproveabdominalpainreliefinadultIBS-Cpatients.InNovember2015,weandAllerganinitiatedaPhaseIIbclinicaltrialevaluatinglinaclotidecolonicreleaseinadultpatientswithIBS-C.
RefractoryGERD
IW-3718.Accordingtoastudypublishedin2010byH.El-SaraginAlimentaryPharmacology&Therapeuticsand2015U.S.censusdata,thereareanestimated10millionAmericanswhosufferregularlyfromsymptomsofgastroesophagealrefluxdisease,orGERD,suchasheartburnandregurgitation,despitereceivingthecurrentstandardofcareoftreatmentwithaprotonpumpinhibitor,orPPI,tosuppressstomachacid.ResearchsuggestssomerefractoryGERDpatientsmayexperiencerefluxofbilefromtheintestineintothestomachandesophagus.
WeareinvestigatingIW-3718,agastricretentiveformulationofabileacidsequestrantdesignedtobindoveranextendedperiodoftimetobilethatrefluxesintothestomachanduppersmallintestine,potentiallyprovidingsymptomaticreliefinpatientswithrefractoryGERD.InFebruary2015,wereportedtop-linedatafromanexploratoryPhaseIIaclinicalstudyofIW-3718inpatientswithrefractoryGERD.DatafromthisstudydemonstratedencouragingimprovementsinreliefofheartburnandcertainotherupperGIsymptomsoftenassociatedwithrefractoryGERD.
OtherGIDisorders
IW-9179.WeareinvestigatingIW-9179,aGC-CagonistdesignedtotargetupperGIconditions,forthetreatmentofgastroparesisandfunctionaldyspepsia.
GastroparesisisanupperGIdisorderinwhichthemusclesand/ornervesofthestomachdonotfunctionproperly,whichdisruptsthefunctionalactivitiesofthestomach.Diabeticgastroparesis,whichisthefocusofourPhaseIIastudydiscussedbelow,isaconditioninwhichsymptomsofgastroparesisoccurinpatientswithtype1ortype2diabetes,andhasadditionalharmfuleffectsonglycemiccontrol,aswellassecondaryeffectsonorgans,whichmayleadtoincreasedmortality.Informationpublishedin2009byH.P.Parkman,etal.inNeuro&Motprovidesthatgastroparesissymptomsarereportedbyapproximatelyfiveto12percentofdiabeticpatients.InDecember2014,weinitiatedarandomized,placebo-controlled,multi-sitePhaseIIaclinicalstudyevaluatingwhetherIW-9179canprovidesymptomaticrelieftoadultpatientswithdiabeticgastroparesis.
Functionaldyspepsia,orFD,isanupperGIdisordercharacterizedbykeysymptomsofepigastricpain,epigastricbloating,postprandialfullness,epigastricburning,nausea,belchingandearlysatiety.Baseduponastudypublishedin2005byG.R.LockeinNeuro&Mot,itisestimatedthatapproximately35millionpeoplesufferfromFDintheU.S.InOctober2014,wepresenteddatafromaPhaseIIaclinicalstudyevaluatingIW-9179forthetreatmentoffunctionaldyspepsia.PatientstreatedwithIW-9179reportedanumericallygreaterimprovementfrombaseline,comparedwithplacebo-treatedpatients,onsixoutofsevenFDsymptomsevaluated.ThemostcommonadverseeventinIW-9179-treatedpatientswasdiarrhea.EnrollmentinthisstudywaslimitedbystringentenrollmentcriteriathatsoughttoidentifypatientssufferingonlyfromGIsymptomsofFD.ThesedatainformourcontinuedworkwithGIexpertsandregulatoryauthoritiestodefinethepathtobringforwardnewtherapiesinFD.
LinaclotideColonicRelease.InadditiontoIBS-C,wearealsoexploringlinaclotidecolonicreleaseforuseinadditionalGIdisorderswherelowerabdominalpainisapredominantsymptom,includingIBS-M,ulcerativecolitisanddiverticulitis,amongothers.AspartofthelinaclotidecolonicreleasePhaseIIbclinicaltrialinIBS-Cpatients,weandAllerganarealsoevaluatingasecondcolonicreleaseformulationthatisexpectedtoinformapathforwardintheseadditionalGIdisorders.
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Linaclotide.WeandAllerganareevaluatinglinaclotideinadditionalindicationstoassessitspotentialtotreatvariousGIconditions.
WeandAllerganareexploringthepotentialoflinaclotidetoprovidereliefoftheGIdysfunctionassociatedwithopioidinducedconstipation,orOIC.InNovember2015,wereportedpositivetop-linedatafromaPhaseIIclinicalstudyevaluatinglinaclotideinadultpatientswithOICinwhichlinaclotide-treatedpatientsshowedastatisticallysignificantimprovementinbowelmovementfrequencycomparedtoplacebo-treatedpatients.Inaddition,theNationalCancerInstitute,orNCI,isexploringlinaclotideinaPhaseIbiomarkerstudy,inpartnershipwithusandAllergan,designedtoassessthecolorectalbioactivityoflinaclotideinhealthyvolunteers,andtoinformthefeasibilityanddesignofastudytoevaluatethepotentialforlinaclotidetopreventcolorectalcancer.TheNCIisfundingandmanagingtheclinicalstudy.
Vascular/FibroticPlatform
WeareadvancingdevelopmentprogramstargetingsGC,andexploringitsutilityinvascularandfibroticdiseases.ThestimulationofsGCisaclinicallyvalidatedapproachwithbroadtherapeuticpotential.Foundthroughoutthebody,sGCisanenzymethatisactivatedbythekeyregulatornitricoxidetoincreaselevelsofthesecondmessengercyclicguanosinemonophosphate,orcGMP,whichultimatelyregulatesprocessessuchasbloodflow,inflammationandfibrosis.Asmodulatorsofthesecorephysiologicalprocesses,sGCstimulatorsmayberelevantinthetreatmentofabroadrangeofdiseasesincludingcardiovasculardiseasessuchaspulmonaryarterialhypertensionandcongestiveheartfailure,aswellasmusculardystrophy,diabeticnephropathyandotherdisorders.Todate,wehaveidentifiedtwosGCdevelopmentcandidates,IW-1973andIW-1701,whichhavedistinctpharmacologicprofilesthatwebelievemaybedifferentiatingandenableopportunitiesinmultipleindications.
IW-1973.InNovember2015,weinitiatedaPhaseIbclinicalstudyofIW-1973.Thestudyincludestwostages:anopen-label,singledose,crossoverstageandarandomized,double-blind,placebo-controlled,multiple-ascending-dosestage.ThePhaseIbclinicalstudyisdesignedtoassessthesafety,tolerability,pharmacokineticprofileandpharmacodynamicseffectsofIW-1973inhealthysubjects.
IW-1701.InNovember2015,weinitiatedarandomized,double-blind,placebo-controlled,single-ascending-dosePhaseIaclinicalstudyofIW-1701toassessthesafety,tolerability,pharmacokineticprofileandpharmacodynamicseffectsofIW-1701inhealthysubjects.
CollaborationsandPartnerships
Aspartofourstrategy,wehaveestablisheddevelopmentandcommercialcapabilitiesthatweplantoleverageasweseektobringmultiplemedicinestopatients.WeintendtoplayanactiveroleinthedevelopmentandcommercializationofourinternallydevelopedproductsintheU.S.,andtoestablishastrongglobalbrandbyout-licensingcommercializationrightsinotherterritoriestohigh-performingpartners.Webelieveinthelong-termvalueofourdrugcandidates,soweseekcollaborationsthatprovidemeaningfuleconomicsandincentivesforusandanypotentialpartner.Furthermore,weseekpartnerswhoshareourvalues,culture,processesandvisionforourproducts,whichwebelievewillenableustoworkwiththosepartnerssuccessfullyfortheentirepotentialpatentlifeofourdrugs.Inadditiontoourinternallydevelopedproducts,wealsointendtoaccessinnovativeproductsthroughstrategictransactionsandleverageourexistingcapabilitiestodevelopandcommercializetheseproductsintheU.S.
ThefollowingchartshowsourrevenuefortheU.S.andterritoriesoutsideoftheU.S.asapercentageofourtotalrevenueforeachoftheyearsendedDecember31,2015,2014and2013.Revenueattributabletoourlinaclotidepartnershipscomprisedsubstantiallyallofourrevenueforeachoftheyearsindicated;noneofourotherproductcandidatesgeneratedrevenueduringtheseperiods.Further,wecurrentlyderivesubstantiallyallofourrevenuefromourLINZESScollaborationwith
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AllerganfortheU.S.andbelievethattherevenuesfromthiscollaborationwillcontinuetoconstituteasignificantportionofourtotalrevenuefortheforeseeablefuture.Inaddition,ourcollaborativearrangementsrevenueoutsideoftheU.S.hasfluctuatedfortheyearsendedDecember31,2015,2014and2013,andmaycontinuetofluctuateasaresultofthetimingandamountoflicensefeesandclinicalandcommercialmilestonesreceivedandrecognizedunderourcurrentandfuturestrategicpartnershipsoutsideoftheU.S.,aswellasthetimingandamountofroyaltiesfromthesalesoflinaclotideintheEuropean,CanadianorMexicanmarketsoranyothermarketswherelinaclotidereceivesapproval.
Wehavepursuedapartneringstrategyforcommercializinglinaclotidethathasenabledustoretainsignificantoversightoverlinaclotide'sdevelopmentandcommercializationworldwide,sharethecostswithcollaboratorswhosecapabilitiescomplementours,andretainasignificantportionoflinaclotide'sfuturelong-termvalue.AsofDecember31,2015,licensingfees,milestones,royaltiesandrelatedequityinvestmentsfromourlinaclotidepartnerstotaledapproximately$378.1million.Inaddition,weandAllerganjointlyfundthedevelopmentandcommercializationofLINZESSintheU.S.,sharingequallyinanynetprofitsorlosses,andweandAstraZenecajointlyfundthedevelopmentandcommercializationoflinaclotideinChina,HongKongandMacau,withAstraZenecareceiving55%ofthenetprofitsorincurring55%ofthenetlossesuntilacertainspecifiedcommercialmilestoneisachieved,atwhichtimeprofitsorlosseswillbesharedequallythereafter.SuchreimbursementsforourdevelopmentandcommercializationcostsreceivedfromAllerganintheU.S.orAstraZenecaareexcludedfromtheamountabove.WecontinuetoassessalternativestobringlinaclotidetoIBS-CandCICsufferersinthepartsoftheworldoutsideofourpartneredterritories.
Allerganplc.InSeptember2007,weenteredintoacollaborationagreementwithAllergantodevelopandcommercializelinaclotideforthetreatmentofIBS-C,CICandotherGIconditionsinNorthAmerica.Underthetermsofthecollaborationagreement,weandAllerganarejointlyandequallyfundingthedevelopmentandcommercializationofLINZESSintheU.S.,withequalshareofanyprofitsorlosses.Additionally,wegrantedAllerganexclusiverightstodevelopandcommercializelinaclotideinCanadaandMexicoinwhichwereceiveroyaltiesinthemid-teenspercentonnetsalesinthosecountries.Allerganissolelyresponsibleforthefurtherdevelopment,regulatoryapprovalandcommercializationoflinaclotideinthosecountriesandfundinganycosts.Totallicensing,milestonepaymentsandrelatedequityinvestmentstousundertheAllergancollaborationagreementforNorthAmericacouldtotalupto$330.0million,includingthe$205.0millionthatAllerganhasalreadypaidtousinlicensefeesanddevelopment-relatedmilestonesandthe$25.0millionofourcapitalstockthatAllerganhasalreadypurchased.
InApril2009,weenteredintoalicenseagreementwithAlmiralltodevelopandcommercializelinaclotideinEurope(includingtheCommonwealthofIndependentStatesandTurkey)forthetreatmentofIBS-C,CICandotherGIconditions.Underthetermsofthisagreement,wewereeligibletoreceivelicensing,milestonepaymentsandrelatedequityinvestmentsthatcouldhavetotaledupto$118.0million,includingthe$61.0millioninmilestones,netofforeignwithholdingtaxes,thatAlmirallalreadypaidtous,andthe$15.0millionofourcapitalstockthatAlmirallalreadypurchased.WewerealsoeligibletoreceiveroyaltiesbasedonsalesvolumeintheAlmirallterritory,beginninginthelow-twentiespercentandescalatingtothemid-fortiespercentthroughApril2017,andthereafterbeginninginthemid-twentiespercentandescalatingtothemid-fortiespercentatlowersalesthresholds.Theseroyaltypaymentswerereducedbythetransferpricepaidfortheactive
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2015 2014 2013 U.S. 92.3% 62.3% 12.9%Restofworld 7.7% 37.7% 87.1%
100.0% 100.0% 100.0%
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pharmaceuticalingredient,orAPI,includedintheproductactuallysoldintheAlmirallterritoryandothercontractualdeductions.InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan,andweseparatelyenteredintoanamendmenttothelicenseagreementwithAllerganrelatingtothedevelopmentandcommercializationoflinaclotideinEurope.Pursuanttothetermsoftheamendment,(i)theremainingsales-basedmilestonespayabletousunderthelicenseagreementweremodifiedsuchthat,whenaggregatedwiththeremainingcommerciallaunchmilestones,theycouldtotalupto$42.5million,(ii)theroyaltiespayabletousduringthetermofthelicenseagreementweremodifiedsuchthattheroyaltiesbasedonsalesvolumeinEuropebegininthemid-singledigitpercentandescalatetotheupper-teenspercentbycalendaryear2019,and(iii)AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEuropefromus,aswellastheassociatedcosts.Furthermore,aswearenolongerresponsibleforthemanufacturingoflinaclotideAPIforEurope,theroyaltiesunderthelicenseagreementwillnolongerbereducedbythetransferpricepaidfortheAPIincludedintheproductactuallysoldbyAllerganinEuropeinanygivenperiod.
InAugust2015,weandAllerganenteredintoanagreementfortheco-promotionofVIBERZI™(eluxadoline)intheU.S.,Allergan'streatmentforadultssufferingfromIBSwithdiarrhea,orIBS-D.Underthetermsoftheagreement,ourclinicalsalesspecialistsaredetailingVIBERZItotheapproximately25,000healthcarepractitionerstowhomtheydetailLINZESS.AllerganisresponsibleforallcostsandactivitiesrelatingtothecommercializationofVIBERZIoutsideoftheco-promotion.Ourpromotionaleffortsarecompensatedbasedonthevolumeofcallsdeliveredbyoursalesforce,withthetermsoftheagreementreducingoreliminatingcertainoftheunfavorableadjustmentstoourshareofnetprofitsstipulatedbythelinaclotidecollaborationagreementwithAllerganforNorthAmerica,providedthatwedeliveraminimumnumberofVIBERZIcallsonphysicians.Wehavethepotentialtoachievemilestonepaymentsofupto$10.0millionbasedonthenetsalesofVIBERZIineachof2017and2018,andarealsocompensatedviareimbursementsformedicaleducationinitiatives.OurpromotionaleffortsundertheagreementbeganwhenVIBERZIbecamecommerciallyavailableinDecember2015,andwillcontinueuntilDecember31,2017,unlessearlierterminatedbyeitherpartypursuanttotheprovisionsoftheagreement.
InNovember2015,AllerganandPfizerInc.enteredintoadefinitiveagreementprovidingforthecombinationofthetwocompanies.Ourcollaborationforthedevelopmentandcommercializationoflinaclotide,aswellasouragreementtoco-promoteVIBERZI,remainsineffect.
AstellasPharmaInc.InNovember2009,weenteredintoalicenseagreementwithAstellastodevelopandcommercializelinaclotideforthetreatmentofIBS-C,CICandotherGIconditionsinJapan,SouthKorea,Taiwan,Thailand,thePhilippinesandIndonesia.AsaresultofanamendmenttothelicenseagreementexecutedinMarch2013,weregainedrightstolinaclotideinSouthKorea,Taiwan,Thailand,thePhilippinesandIndonesia.IflinaclotideissuccessfullydevelopedandcommercializedintheAstellasterritory,licensingandmilestonepaymentstouscouldtotalupto$75.0million,includingthe$30.0millionup-frontlicensingfeeandthe$15.0milliondevelopmentmilestonethathavealreadybeenpaidtous.IfAstellasreceivesapprovaltomarketandselllinaclotide,AstellaswillpayusgrossroyaltieswhichescalatebasedonsalesvolumeintheAstellasterritory,beginninginthelow-twentiespercent,lessthetransferpricepaidfortheAPIincludedintheproductactuallysoldintheAstellasterritoryandothercontractualdeductions.
AstraZenecaAB.InOctober2012,weenteredintoacollaborationwithAstraZenecatoco-developandco-commercializelinaclotideinChina,HongKongandMacau.Underthetermsoftheagreement,weandAstraZenecaarejointlyfundingthedevelopmentandcommercializationoflinaclotideintheAstraZenecaterritory,withAstraZenecareceiving55%ofthenetprofitsorincurring55%ofthenetlossesuntilacertainspecifiedcommercialmilestoneisachieved,atwhichtimeprofitsorlosseswillbesharedequallythereafter.IflinaclotideissuccessfullydevelopedandcommercializedinChina,totallicensingandmilestonepaymentstousunderthecollaborationagreementcouldtotalup
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to$150.0million,includingthe$25.0millionthatAstraZenecahasalreadypaidtous.Aspartofthecollaboration,Ironwood'ssalesforcepromotedAstraZeneca'sNEXIUM®(esomeprazolemagnesium),oneofAstraZeneca'sproducts,intheU.S.throughMay2014.
ExactSciencesCorp.InMarch2015,weandExactSciencesCorp,orExactSciences,enteredintoanagreementtoco-promoteCologuard®,thefirstandonlyFDA-approvednoninvasivestoolDNAscreeningtestforcolorectalcancer.Underthetermsoftheagreement,oursalesteamispromotingandeducatinghealthcarepractitionersregardingCologuard.Wearealsocollaboratingonmedicaleducationinitiativestosupportmorein-depthunderstandingofCologuardandtheimportanceofcolorectalcancerscreening.ExactSciencesmaintainsresponsibilityforallotheraspectsofthecommercializationofCologuardoutsideoftheco-promotion.Wearecompensatedviareimbursementsforsalesdetailing,promotionalsupportservicesandmedicaleducationinitiatives.Duringtheinitialone-yeartermoftheagreement,wecouldreceiveuptoamaximumreimbursementofapproximately$4.8million.WealsoearnroyaltiesonthenetsalesofCologuardgeneratedfromthehealthcarepractitionersonwhomwecalllessthesalespromotionreimbursementtous,suchroyaltiesbeingpayableduringthetermandforoneyearfollowingtheterminationofourco-promotionefforts.
Owner-relatedBusinessPrinciples
Weencourageallcurrentandpotentialstockholderstoreadtheowner-relatedbusinessprinciplesbelowthatguideouroverallstrategyanddecisionmaking.
1.Ironwood'sstockholdersownthebusiness;allofouremployeesworkforthem.
Eachofouremployeesalsohasequityinthebusiness,aligningtheirinterestswiththoseoftheirfellowstockholders.Asemployeesandco-ownersofIronwood,ourmanagementandemployeeteamseektoeffectivelyallocatescarcestockholdercapitaltomaximizetheaverageannualgrowthofpersharevalue.
Throughourpoliciesandcommunication,weseektoattractlike-mindedowner-orientedstockholders.Westrivetoeffectivelycommunicateourviewsofthebusinessopportunitiesandrisksovertimesothatenteringandexitingstockholdersaredoingsoatapricethatapproximatelyreflectsourintrinsicvalue.
2.Webelievewecanbestmaximizelong-termstockholdervaluebybuildingagreatpharmaceuticalfranchise.
WebelievethatIronwoodhasthepotentialtodeliveroutstandinglong-termreturnstostockholderswhoaresobertotherisksinherentinthepharmaceuticalproductlifecycleandtothepotentialdramatichighsandlowsalongtheway,andwhofocusonsuperiorlong-term,persharecashflows.
Sincethepharmaceuticalproductlifecycleislengthyandunpredictable,webelieveitiscriticaltohavealong-termstrategichorizon.Weworkhardtoembedourlong-termfocusintoourpoliciesandpractices,whichmaygiveusacompetitiveadvantageinattractinglike-mindedstockholdersandthehighestcaliberemployees.Ourcurrentandfutureemployeesmayperceivebothfinancialandqualitativeadvantagesinhavingtheirinventionsorhardworkresultinmarketeddrugsthattheyandtheirfellowstockholderscontinuetoown.Someofourkeypoliciesandpracticesthatarealignedwiththisimperativeinclude:
a.Ourdualclassequityvotingstructure(whichprovidesforsuper-votingrightsofourpre-IPOstockholdersonlyintheeventofachangeofcontrolvote)isdesignedtoconcentratechangeofcontroldecisionsinthehandsoflong-termfocusedownerswhohaveahistoryofexperiencewithus.
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b.Wegranteachofouremployeesstock-basedawards,andlong-termequityisasignificantcomponentoftheirtotalcompensation.Webelieveouremphasisonequityplaysanimportantroleinattractingandmotivatingtheowner-orientedemployeesweseekandaligningtheirinterestswiththoseoftheirfellowstockholders.
c.Wehaveadoptedachangeofcontrolseveranceplanforallofouremployeesthatisintendedtoencouragethemtobringforwardtheirbestideasbyprovidingthemwiththecomfortthatifachangeofcontroloccursandtheiremploymentisterminated,theywillstillhaveanopportunitytoshareintheeconomicvaluethattheyhavehelpedcreateforstockholders.
d.Allofthemembersofourboardofdirectorsareinvestorsinthecompany.Furthermore,eachdirectorisrequiredtoholdallsharesofstockacquiredaspaymentforhisorherserviceasadirectorthroughouthisorhertermontheboard.
e.OurpartnershipswithAllergan,AstellasandAstraZenecaallincludestandstillagreements,whichservetoprotectusfromanunwelcomeacquisitionattemptbyoneofourpartners.Inaddition,wehavechangeofcontrolprovisionsinourpartnershipagreementsinordertoprotecttheeconomicvalueoflinaclotideshouldtheacquirerofoneofourpartnersbeunableorunwillingtodevotethetimeandresourcesrequiredtomaximizelinaclotide'sbenefittopatientsintheirrespectiveterritory.
3.Weareandwillremaincarefulstewardsofourstockholders'capital.
Weworkintenselytoallocatecapitalcarefullyandprudently,continuallyreinforcingalean,cost-consciousculture.
Whilewearemindfulofthedecliningproductivityandinherentchallengesofpharmaceuticalresearchanddevelopment,weintendtoinvestindiscoveryanddevelopmentresearchformanyyearstocome.Oursingularpassionistocreate,developandcommercializenoveldrugcandidates,seekingtointegratethemostsuccessfuldrugmakingandmarketingpracticesofthepastandthebestoftoday'scutting-edgetechnologiesandbasicresearch,developmentandcommercializationadvances.
Whilewehopetoimprovetheproductivityandefficiencyofourdrugcreationeffortsovertime,ourdiscoveryprocessrevolvesaroundsmall,highlyinteractive,cross-functionalteams.Webelievethatthisisoneareawhereourrelativelysmallsizeisacompetitiveadvantage,sofortheforeseeablefuture,wedonotexpectourdrugdiscoveryteamtogrowbeyond100-150scientists.Wewillcontinuetoprioritizeconstrainedresourcesandmaintainorganizationaldiscipline.Onceinternallyorexternallyderivedcandidatesadvanceintodevelopment,compoundsfollowcarefulstage-gatedplans,withfurtheradvancementdependingoncleardatapoints.Sincemostpharmaceuticalresearchanddevelopmentprojectsfail,itiscriticalthatourteamsarerigorousinmakingearlygo/nogodecisions,followingthedata,terminatingunsuccessfulprograms,andallocatingscarcedollarsandtalenttothemostpromisingefforts,thusenhancingthelikelihoodoflatephasedevelopmentsuccess.
Ourglobaloperationsandcommercialteamstakeasimilarapproachtocapitalallocationanddecision-making.Byworkingwithourpartnerstoestablishredundancyateachcriticalnodeofthelinaclotideglobalsupplychain,wearemitigatingagainstafundamentalriskinherentwithpharmaceuticals—unanticipatedshortagesofcommercialproduct.Likewise,wehaveestablishedacommercialorganizationdedicatedtobringinginnovative,highly-valuedhealthcaresolutionstoallofourcustomers.Ourcommercialorganizationworkscloselyandmethodicallywithourglobalcommercializationpartners,strivingtomaximizelinaclotide'scommercialpotentialthroughfocusedeffortsaimedateducatingpatients,payersandhealthcareproviders.
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4.Ourfinancialgoalistomaximizelong-termpersharecashflows.
Ourgoalistomaximizelong-termcashflowspershare,andwewillprioritizethisevenifitleadstounevenshort-termfinancialresults.Ifandwhenwebecomeprofitable,weexpectandacceptunevenearningsgrowth.Ourunderlyingproductdevelopmentmodelisriskyandunpredictable,andwehavenointentiontoadvancemarginaldevelopmentcandidatesorconsummatesuboptimalin-licensetransactionsinanattempttofillanticipatedgapsinrevenuegrowth.Successfuldrugscanbeenormouslybeneficialtopatientsandhighlyprofitableandrewardingtostockholders,andwebelievestronglyinourabilitytooccasionally(butnotinregularorpredictablefashion)createandcommercializegreatmedicinesthatmakeameaningfuldifferenceinpatients'lives.
Ifandwhenwereachprofitability,wedonotintendtoissuequarterlyorannualearningsguidance;howeverweplantocontinuetobetransparentaboutthekeyelementsofourperformance,includingnear-termoperatingplansandlonger-termstrategicgoals.
OurStrategy
Ourmissionistocreatemedicinesthatmakeadifferenceforpatients,buildvalueforourfellowstockholders,andempowerourpassionateteam.OurcorestrategytoachievethismissionistoleverageourdevelopmentandcommercialcapabilitiesinaddressingGIdisordersaswellasourpharmacologicexpertiseinGCpathwaystobringmultiplemedicinestopatients.Keyelementsofourstrategyinclude:
• attractingandincentivizingateamwithasingularpassionforcreating,developingandcommercializingmedicinesthatcanmakeasignificantdifferenceinpatients'lives;
• successfullyandprofitablycommercializingLINZESSincollaborationwithAllerganintheU.S.;
• exploringdevelopmentopportunitiestoenhancetheclinicalprofileofLINZESSbyseekingtoexpanditsutilityinitsindicatedpopulations,aswellasstudyinglinaclotideinadditionalindications,populationsandformulationstoassessitspotentialtotreatvariousGIconditions;
• investinginourpipelineofnovelGIproductcandidatesandadvancingoursGCstimulatorstargetingvascular/fibroticdiseases;
• solidifyingandexpandingourpositionastheleaderinthefieldofGC-CagonistsandcGMPpharmacology;
• leveragingourU.S.-focusedcommercialcapabilitiesinmarketing,reimbursement,patientengagementandsales;
• evaluatingcandidatesoutsideofthecompanyforin-licensingoracquisitionopportunities;
• maximizingthecommercialpotentialofourdrugsandplayinganactiveroleintheircommercializationorfindpartnerswhoshareourvision,values,cultureandprocesses;
• supportingglobalpartnerstocommercializelinaclotideoutsideoftheU.S.;
• harvestingthemaximumvalueoflinaclotideoutsideofourcurrentlypartneredterritories;and,
• executingourstrategywithourstockholders'long-terminterestsinmindbyseekingtomaximizelong-termpersharecashflows.
Competition
Linaclotide,ouronlymarketedproducttodate,competesgloballywithcertainprescriptiontherapiesandover-the-counter,orOTC,productsforthetreatmentofIBS-CandCIC,ortheirassociatedsymptoms.
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Polyethyleneglycol,orPEG(suchasMiraLAX®),andlactuloseaccountforthemajorityofprescriptionlaxativetreatments.Bothagentsdemonstrateanimprovementinstoolfrequencyandconsistencybutdonotimprovebloating,abdominaldiscomfortortherecurrenceofsymptoms.ClinicaltrialsandproductlabelsdocumentseveraladverseeffectswithPEGandlactulose,includingexacerbationofbloating,crampingand,accordingtoastudypublishedin2005byL.E.Brandt,etal.intheAmericanJournalofGastroenterology,uptoa40%incidenceofdiarrhea.Overall,upto75%ofpatientstakingprescriptionlaxativesreportnotbeingcompletelysatisfiedwiththepredictabilityofwhentheywillexperienceabowelmovementontreatment,and50%werenotcompletelysatisfiedwithreliefofthemultiplesymptomsassociatedwithconstipation,accordingtotheJ.F.Johansonstudypublishedin2007inAlimentaryPharmacology&Therapeutics.
OTClaxativesmakeupthemajorityoftheIBS-CandCICtreatmentmarket,accordingtoaGIpatientlandscapesurveyperformedin2010byLiebermanetal.Giventhelowbarrierstoaccess,manyIBS-CandCICsuffererstryOTCfiberandlaxatives,butaccordingtothissamepatientlandscapesurvey,lessthanhalfofthemareverysatisfiedwiththeabilityoftheseOTCproductstomanagetheirsymptoms.TwoofthelargestsellingOTClaxativesintheU.S.,basedon2013U.S.salesvolumedatafromEuromonitorInternational,areMiraLAXandDulcolax®.
UntilthelaunchofLINZESS,theonlyavailableprescriptiontherapyforIBS-CandCICintheU.S.wasAmitiza®(lubiprostone),whichwasapprovedforthetreatmentofCICin2006,forthetreatmentofIBS-Cin2008,andforthetreatmentofopioid-inducedconstipationin2013.AmitizaisalsoapprovedforthetreatmentofCICintheUnitedKingdomandSwitzerland,andforthetreatmentofchronicconstipationinJapan.Thereareadditionalcompoundsinlate-stagedevelopmentbyothercompaniesforthetreatmentofpatientswithIBS-CandCIC.
ManufacturingandSupply
Wecurrentlymanageourglobalsupplyanddistributionoflinaclotidethroughacombinationofcontractmanufacturersandcollaborationpartners.Itisourobjectivetoproducesafeandeffectivemedicineonaworldwidebasis,withredundancybuiltintocriticalstepsofthesupplychain.Webelievethatwehavesufficientin-houseexpertisetomanageourmanufacturingandsupplychainnetworktomeetworldwidedemand.
Linaclotideproductionconsistsofthreephases—manufactureoftheAPI(sometimesreferredtoasdrugsubstance),manufactureofdrugproductandmanufactureoffinishedgoods.WehaveenteredintoagreementswithmultiplethirdpartymanufacturersfortheproductionoflinaclotideAPI.WebelieveourcommercialsuppliershavethecapabilitiestoproducelinaclotideAPIinaccordancewithcurrentgoodmanufacturingpractices,orGMP,onasufficientscaletomeetourdevelopmentandcommercialneeds.Ourcommercialsuppliersaresubjecttoroutineinspectionsbyregulatoryagenciesworldwideandalsoundergoperiodicauditandcertificationbyourqualitydepartment.InconnectionwiththetransferofAlmirall'sexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan,AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEurope.
EachofAllerganandAstellasisresponsiblefordrugproductandfinishedgoodsmanufacturing(includingbottlingandpackaging)foritsrespectiveterritories,anddistributingthefinishedgoodstowholesalers.Wehaveanagreementwithanindependentthirdpartytoserveasanadditionalsourceofdrugproductmanufacturingoflinaclotideforourpartneredterritoriesandwehaveworkedwithourpartnerstoachievesufficientredundancyinthiscomponentofthelinaclotidesupplychain.UnderourcollaborationwithAstraZeneca,weareaccountablefordrugproductandfinishedgoodsmanufacturingforChina,HongKongandMacau.
Priortolinaclotide,therewasnoprecedentforlong-termroomtemperatureshelfstorageformulationforanorallydosedpeptidetobeproducedinmillionsofcapsulesperyear.Oureffortstodatehaveledtoaformulationthatisbothcosteffectiveandabletomeetthestabilityrequirementsfor
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commercialpharmaceuticalproducts.Ourworkinthisareahascreatedanopportunitytoseekadditionalintellectualpropertyprotectionaroundthelinaclotideprogram.InconjunctionwithAllerganandAstellas,wehavefiledpatentapplicationsintheU.S.andforeignjurisdictionsandhavebeenissuedthreeU.S.patentstoprotectthecurrentcommercialformulationoflinaclotideaswellasrelatedformulations.ThethreeissuedU.S.patentsexpirein2031.Ifissued,thependingpatentapplicationswouldexpirein2029orlaterintheU.S.andforeignjurisdictionsandwouldbeeligibleforpotentialpatenttermadjustmentsorpatenttermextensionsincountrieswheresuchextensionsmaybeavailable.
SalesandMarketing
Fortheforeseeablefuture,weintendtodevelopandcommercializeourdrugsintheU.S.aloneorwithpartners,andexpecttorelyonpartnerstocommercializeourdrugsinterritoriesoutsidetheU.S.Inexecutingourstrategy,ourgoalistoretainsignificantworldwideoversightoverthedevelopmentprocessandcommercializationofourproducts,byplayinganactiveroleintheircommercializationorfindingpartnerswhoshareourvision,values,cultureandprocesses.
Wehavebuiltourcommercialcapabilities,includingmarketing,reimbursement,patientengagementandsales,aroundlinaclotide,withtheintenttoleveragethesecapabilitiesforfutureinternallyandexternallydevelopedproducts.Todate,wehaveestablishedahigh-qualitycommercialorganizationdedicatedtobringinginnovative,highly-valuedhealthcaresolutionstoourcustomers,includingpatients,payers,andhealthcareproviders.Aspartofourstrategy,weandAllerganhavebeeninvestinginadirect-to-consumerpatientawarenesscampaignforLINZESSdesignedtohelpadultsintheU.S.sufferingfromIBS-CorCICrecognizethesymptomsoftheirdisorder,describetheirsymptomstotheirdoctor,andasktheirdoctorwhetherLINZESScanhelpproactivelymanagetheirdisease.
Wearecoordinatingeffortswithallofourpartnerstoensurethatwelaunchandmaintainanintegrated,globallinaclotidebrand.Byleveragingtheknowledgebaseandexpertiseofourexperiencedcommercialteamandtheinsightsofeachofourlinaclotidecommercializationpartners,wecontinuallyimproveourcollectivemarketingstrategies.
PatentsandProprietaryRights
Weactivelyseektoprotecttheproprietarytechnologythatweconsiderimportanttoourbusiness,includingpursuingpatentsthatcoverourproductsandcompositions,theirmethodsofuseandtheprocessesfortheirmanufacture,aswellasanyotherrelevantinventionsandimprovementsthatarecommerciallyimportanttothedevelopmentofourbusiness.Wealsorelyontradesecretsthatmaybeimportanttothedevelopmentofourbusiness.
Oursuccesswilldependsignificantlyonourabilitytoobtainandmaintainpatentandotherproprietaryprotectionforthetechnology,inventionsandimprovementsweconsiderimportanttoourbusiness;defendourpatents;preservetheconfidentialityofourtradesecrets;andoperatewithoutinfringingthepatentsandproprietaryrightsofthirdparties.
LinaclotidePatentPortfolio
OurlinaclotidepatentportfolioiscurrentlycomposedofnineU.S.patentslistedintheFDApublication,"ApprovedDrugProductswithTherapeuticEquivalenceEvaluations"(alsoknownasthe"OrangeBook"),threegrantedEuropeanpatents(eachofwhichhasbeenvalidatedin31Europeancountries),fivegrantedJapanesepatents,fourgrantedChinesepatents,33issuedpatentsinotherforeignjurisdictions,andnumerouspendingprovisional,U.S.non-provisional,foreignandPCTpatentapplications.Weownorjointlyownalloftheissuedpatentsandpendingapplications.
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TheissuedU.S.patents,whichwillexpirebetween2024and2031,containclaimsdirectedtothelinaclotidemolecule,pharmaceuticalcompositionsthereof,methodsofusinglinaclotidetotreatGIdisorders,processesformakingthemolecule,androomtemperaturestableformulationsoflinaclotideandmethodsofusethereof.ThegrantedEuropeanpatents,whichwillexpirein2024,subjecttopotentialpatenttermextension,containclaimsdirectedtothelinaclotidemolecule,pharmaceuticalcompositionsthereofandusesoflinaclotidetopreparemedicamentsfortreatingGIdisorders.ThegrantedChinesepatents,whichwillexpirebetween2024and2031,andthegrantedJapanesepatents,whichwillexpirebetween2024and2029subjecttopotentialpatenttermextension,containclaimsdirectedtothelinaclotidemolecule,pharmaceuticalcompositionsoflinaclotideforuseintreatingGIdisorders,androomtemperaturestableformulationsoflinaclotide.
Wehavependingpatentapplicationsworldwidecoveringthecurrentcommercialformulationoflinaclotidethat,ifissued,willexpirein2029orlater.
Wehavependingapplicationsdirectedtolinaclotideproductsunderdevelopmentthatwillextendpatentprotection,ifissued,until2035orlater.Wealsohavependingprovisional,U.S.non-provisional,foreignandPCTapplicationsdirectedtolinaclotideandrelatedmolecules,pharmaceuticalformulationsthereof,methodsofusinglinaclotidetotreatvariousdiseasesanddisordersandprocessesformakingthemolecule.Theseadditionalpatentapplications,ifissued,willexpirebetween2024and2036.
ThepatenttermofapatentthatcoversanFDA-approveddrugisalsoeligibleforpatenttermextension,whichpermitspatenttermrestorationascompensationforsomeofthepatenttermlostduringtheFDAregulatoryreviewprocess.TheHatch-WaxmanActpermitsapatenttermextensionofasinglepatentapplicabletoanapproveddrugforuptofiveyearsbeyondtheexpirationofthepatentbuttheextensioncannotextendtheremainingtermofapatentbeyondatotalof14yearsfromthedateofproductapprovalbytheFDA.TheUnitedStatesPatentandTrademarkOfficehasissuedaCertificateofPatentTermExtensionforU.S.Patent7,304,036,whichcoverslinaclotideandmethodsofusethereof.Asaresult,thepatenttermofthispatentwasextendedtoAugust30,2026,14yearsfromthedateoflinaclotide'sapprovalbytheFDA.SimilarprovisionsareavailableinEuropeandcertainotherforeignjurisdictionstoextendthetermofapatentthatcoversanapproveddrug.
PipelinePatentPortfolio
OurpipelinepatentportfoliorelatingtoourdevelopmentprogramsoutsideoflinaclotideiscurrentlycomposedofeightissuedU.S.patents;11issuedpatentsinforeignjurisdictions;andnumerouspendingprovisional,U.S.non-provisional,foreignandPCTpatentapplications.Weownalloftheissuedpatentsandpendingapplications.TheissuedU.S.patentsexpirebetween2028and2032.Theforeignissuedpatentsexpirebetween2027and2036.Thependingpatentapplications,ifissued,willexpirebetween2027and2035.
AdditionalIntellectualProperty
InadditiontothepatentsandpatentapplicationsrelatedtolinaclotideandourGIandsGCpipeline,wecurrentlyhavefiveissuedU.S.patents;sixpatentsgrantedinforeignjurisdictions;andanumberofpendingprovisional,U.S.non-provisional,foreignandPCTapplicationsdirectedtootherGC-Cagonistmoleculesandusesthereof.Wealsohaveotherissuedpatentsandpendingpatentapplicationsrelatingtoourotherresearchanddevelopmentprograms,andwearethelicenseeofanumberofissuedpatentsandpendingpatentapplications.
Thetermofindividualpatentsdependsuponthelegaltermofthepatentsinthecountriesinwhichtheyareobtained.Inmostcountriesinwhichwefile,thepatenttermis20yearsfromthedateoffilingthenon-provisionalapplication.IntheU.S.,apatent'stermmaybelengthenedbypatenttermadjustment,whichcompensatesapatenteeforadministrativedelaysbytheU.S.PatentandTrademark
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Officeingrantingapatent,ormaybeshortenedifapatentisterminallydisclaimedoveranearlier-filedpatent.Wealsoexpecttoapplyforpatenttermextensionsforsomeofourpatentsonceissued,dependinguponthelengthofclinicaltrialsandotherfactorsinvolvedinthesubmissionofaNDA.
GovernmentRegulation
IntheU.S.,pharmaceuticalproductsaresubjecttoextensiveregulationbytheFDA.TheFederalFood,Drug,andCosmeticActandotherfederalandstatestatutesandregulations,govern,amongotherthings,theresearch,development,testing,manufacture,storage,recordkeeping,approval,labeling,promotionandmarketing,distribution,FDApostmarketingrequirementsandassessments,post-approvalmonitoringandreporting,sampling,andimportandexportofpharmaceuticalproducts.TheFDAhasverybroadenforcementauthorityandfailuretoabidebyapplicableregulatoryrequirementscanresultinadministrativeorjudicialsanctionsbeingimposedonus,includingwarningletters,refusalsofgovernmentcontracts,clinicalholds,civilpenalties,injunctions,restitution,disgorgementofprofits,recallorseizureofproducts,totalorpartialsuspensionofproductionordistribution,withdrawalofapproval,refusaltoapprovependingapplications,andcivilorcriminalprosecution.
FDAApprovalProcess
WebelievethatourproductcandidateswillberegulatedbytheFDAasdrugs.NocompanymaymarketanewdruguntilithassubmittedanNDAtotheFDA,andtheFDAhasapprovedit.ThestepsrequiredbeforetheFDAmayapproveanNDAgenerallyinclude:
• conductingnonclinicallaboratorytestsandanimaltestsincompliancewithFDA'sgoodlaboratorypracticerequirements;
• development,manufactureandtestingofactivepharmaceuticalproductanddosageformssuitableforhumanuseincompliancewithcurrentGMP;
• conductingadequateandwell-controlledhumanclinicaltrialsthatestablishthesafetyandefficacyoftheproductforitsspecificintendeduse(s);
• InordertoevaluateadruginhumansintheU.S.,aninvestigationalnewdrugapplication,orIND,mustbesubmittedandcomeintoeffectbeforehumanclinicaltrialsmaybegin.
• thesubmissiontotheFDAofanNDA;
• satisfactorycompletionofoneormoreFDAinspectionsofthemanufacturingfacilityorfacilitiesatwhichtheproduct,orcomponentsthereof,areproducedtoassesscompliancewithcurrentGMPrequirementsandtoassurethatthefacilities,methodsandcontrolsareadequatetopreservetheproduct'sidentity,strength,qualityandpurity;and
• InspectionsofothersourcesofdataintheNDA,suchasinspectionofclinicaltrialsitestoassesscompliancewithgoodclinicalpractice,orGCP,requirementsarealsogenerallyrequired.
• FDAreviewandapprovaloftheNDA.
Nonclinicaltestsincludelaboratoryevaluationoftheproductcandidate,aswellasanimalstudiestoassessthepotentialsafetyandefficacyoftheproductcandidate.Theconductofthenonclinicaltestsmustcomplywithfederalregulationsandrequirementsincludinggoodlaboratorypractices.Wemustsubmittheresultsofthenonclinicaltests,togetherwithmanufacturinginformation,analyticaldataandaproposedclinicaltrialprotocoltotheFDAaspartofanIND,whichmustbecomeeffectivebeforewemaycommencehumanclinicaltrialsintheU.S.TheINDwillautomaticallybecomeeffective30daysafteritsreceiptbytheFDA,unlesstheFDAraisesconcernsorquestionsbeforethattime
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abouttheconductoftheproposedtrial.Insuchacase,wemustworkwiththeFDAtoresolveanyoutstandingconcernsbeforetheclinicaltrialcanproceed.WecannotbesurethatsubmissionofanINDwillresultintheFDAallowingclinicaltrialstobegin,orthat,oncebegun,issueswillnotarisethatwillcauseusortheFDAtomodify,suspendorterminatesuchtrials.Thestudyprotocolandinformedconsentinformationforpatientsinclinicaltrialsmustalsobesubmittedtoaninstitutionalreviewboardforapproval.Aninstitutionalreviewboardmayalsorequiretheclinicaltrialatthesitetobehalted,eithertemporarilyorpermanently,forfailuretocomplywiththeinstitutionalreviewboard'srequirementsorifthetrialhasbeenassociatedwithunexpectedseriousharmtosubjects.Aninstitutionalreviewboardmayalsoimposeotherconditionsonthetrial.
Clinicaltrialsinvolvetheadministrationoftheproductcandidatetohumansunderthesupervisionofqualifiedinvestigators,generallyphysiciansnotemployedbyorunderthetrialsponsor'scontrol.Clinicaltrialsaretypicallyconductedinthreesequentialphases,thoughthephasesmayoverlaporbecombined.InPhaseI,theinitialintroductionofthedrugintohealthyhumansubjects,thedrugisusuallytestedforsafety(adverseeffects),dosagetoleranceandpharmacologicaction,aswellastounderstandhowthedrugistakenupbyanddistributedwithinthebody.PhaseIIusuallyinvolvesstudiesinalimitedpatientpopulation(individualswiththediseaseunderstudy)to:
• evaluatepreliminarilytheefficacyofthedrugforspecific,targetedconditions;
• determinedosagetoleranceandappropriatedosageaswellasotherimportantinformationabouthowtodesignlargerPhaseIIItrials;and
• identifypossibleadverseeffectsandsafetyrisks.
PhaseIIItrialsgenerallyfurtherevaluateclinicalefficacyandtestforsafetywithinanexpandedpatientpopulation.Theconductofclinicaltrialsissubjecttoextensiveregulation,includingcompliancewithGCPregulationsandguidance,andregulationsdesignedtoprotecttherightsandsafetyofsubjectsinvolvedininvestigations.
TheFDAmayorderthetemporaryorpermanentdiscontinuationofaclinicaltrialatanytimeorimposeothersanctionsifitbelievesthattheclinicaltrialisnotbeingconductedinaccordancewithFDArequirementsorpresentsanunacceptablerisktotheclinicaltrialpatients.Wemayalsosuspendclinicaltrialsatanytimeonvariousgrounds.
Theresultsofthenonclinicalandclinicalstudies,togetherwithotherdetailedinformation,includingthemanufactureandcompositionoftheproductcandidate,aresubmittedtotheFDAintheformofanNDArequestingapprovaltomarketthedrug.FDAapprovaloftheNDAisrequiredbeforemarketingoftheproductmaybeginintheU.S.IftheNDAcontainsallpertinentinformationanddata,theFDAwill"file"theapplicationandbeginreview.Thereviewprocess,however,maybeextendedbyFDArequestsforadditionalinformation,nonclinicalorclinicalstudies,clarificationregardinginformationalreadyprovidedinthesubmission,orsubmissionofariskevaluationandmitigationstrategy.TheFDAmayreferanapplicationtoanadvisorycommitteeforreview,evaluationandrecommendationastowhethertheapplicationshouldbeapproved.TheFDAisnotboundbytherecommendationsofanadvisorycommittee,butitconsiderssuchrecommendationscarefullywhenmakingdecisions.BeforeapprovinganNDA,theFDAwilltypicallyinspectthefacilitiesatwhichtheproductcandidateismanufacturedandwillnotapprovetheproductcandidateunlesscurrentGMPcomplianceissatisfactory.FDAalsotypicallyinspectsfacilitiesresponsibleforperforminganimaltesting,aswellasclinicalinvestigatorswhoparticipateinclinicaltrials.TheFDAmayrefusetoapproveanNDAifapplicableregulatorycriteriaarenotsatisfied,ormayrequireadditionaltestingorinformation.TheFDAmayalsolimittheindicationsforuseand/orrequirepost-marketingtestingandsurveillancetomonitorthesafetyorefficacyofaproduct.Oncegranted,productapprovalsmaybewithdrawnifcompliancewithregulatorystandardsisnotmaintainedorproblemsareidentifiedfollowinginitialmarketing.
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Thetestingandapprovalprocessrequiressubstantialtime,effortandfinancialresources,andourproductcandidatesmaynotbeapprovedonatimelybasis,ifatall.ThetimeandexpenserequiredtoperformtheclinicaltestingnecessarytoobtainFDAapprovalforregulatedproductscanfrequentlyexceedthetimeandexpenseoftheresearchanddevelopmentinitiallyrequiredtocreatetheproduct.Theresultsofnonclinicalstudiesandinitialclinicaltrialsofourproductcandidatesarenotnecessarilypredictiveoftheresultsfromlarge-scaleclinicaltrials,andclinicaltrialsmaybesubjecttoadditionalcosts,delaysormodificationsduetoanumberoffactors,includingdifficultyinobtainingenoughpatients,investigatorsorproductcandidatesupply.Failurebyusorourcollaborators,licensorsorlicensees,includingAllergan,AstellasandAstraZeneca,toobtain,oranydelayinobtaining,regulatoryapprovalsorincomplyingwithrequirementscouldadverselyaffectcommercializationandourabilitytoreceiveproductorroyaltyrevenues.
Hatch-WaxmanAct
TheHatch-WaxmanActestablishedabbreviatedapprovalproceduresforgenericdrugs.Approvaltomarketanddistributethesedrugsisobtainedbysubmittinganabbreviatednewdrugapplication,orANDA,withtheFDA.Theapplicationforagenericdrugis"abbreviated"becauseitneednotincludenonclinicalorclinicaldatatodemonstratesafetyandeffectivenessandmayinsteadrelyontheFDA'spreviousfindingthatthebranddrug,orreferencedrug,issafeandeffective.InordertoobtainapprovalofanANDA,anapplicantmust,amongotherthings,establishthatitsproductisbioequivalenttoanexistingapproveddrugandthatithasthesameactiveingredient(s),strength,dosageform,andthesamerouteofadministration.Agenericdrugisconsideredbioequivalenttoitsreferencedrugiftestingdemonstratesthattherateandextentofabsorptionofthegenericdrugisnotsignificantlydifferentfromtherateandextentofabsorptionofthereferencedrugwhenadministeredundersimilarexperimentalconditions.
TheHatch-WaxmanActalsoprovidesincentivesbyawarding,incertaincircumstances,certainlegalprotectionsfromgenericcompetition.Thisprotectioncomesintheformofanon-patentexclusivityperiod,duringwhichtheFDAmaynotaccept,orapprove,anapplicationforagenericdrug,whethertheapplicationforsuchdrugissubmittedthroughanANDAorathroughanotherformofapplication,knownasa505(b)(2)application.
TheHatch-WaxmanActgrantsfiveyearsofexclusivitywhenacompanydevelopsandgainsNDAapprovalofanewchemicalentitythathasnotbeenpreviouslyapprovedbytheFDA.ThisexclusivityprovidesthattheFDAmaynotacceptanANDAor505(b)(2)applicationforfiveyearsafterthedateofapprovalofpreviouslyapproveddrug,orfouryearsinthecaseofanANDAor505(b)(2)applicationthatchallengesapatentclaimingthereferencedrug(seediscussionbelowregardingParagraphIVCertifications).TheHatch-WaxmanActalsoprovidesthreeyearsofexclusivityforapprovedapplicationsfordrugsthatarenotnewchemicalentities,iftheapplicationcontainstheresultsofnewclinicalinvestigations(otherthanbioavailabilitystudies)thatwereessentialtoapprovaloftheapplication.Examplesofsuchapplicationsincludeapplicationsfornewindications,dosageforms(includingnewdrugdeliverysystems),strengths,orconditionsofuseforanalreadyapprovedproduct.Thisthree-yearexclusivityperiodonlyprotectsagainstFDAapprovalofANDAsand505(b)(2)applicationsforgenericdrugsthatincludetheinnovationthatrequirednewclinicalinvestigationsthatwereessentialtoapproval;itdoesnotprohibittheFDAfromacceptingorapprovingANDAsor505(b)(2)NDAsforgenericdrugsthatdonotincludesuchaninnovation.
ParagraphIVCertifications.UndertheHatch-WaxmanAct,NDAapplicantsandNDAholdersmustprovideinformationaboutcertainpatentsclaimingtheirdrugsforlistingintheFDApublication,"ApprovedDrugProductswithTherapeuticEquivalenceEvaluations,"alsoknownasthe"OrangeBook."WhenanANDAor505(b)(2)applicationissubmitted,itmustcontainoneofseveralpossiblecertificationsregardingeachofthepatentslistedintheOrangeBookforthereferencedrug.A
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certificationthatalistedpatentisinvalidorwillnotbeinfringedbythesaleoftheproposedproductiscalleda"ParagraphIV"certification.
Within20daysoftheacceptancebytheFDAofanANDAor505(b)(2)applicationcontainingaParagraphIVcertification,theapplicantmustnotifytheNDAholderandpatentownerthattheapplicationhasbeensubmitted,andprovidethefactualandlegalbasisfortheapplicant'sopinionthatthepatentisinvalidornotinfringed.TheNDAholderorpatentholdermaytheninitiateapatentinfringementsuitinresponsetotheParagraphIVnotice.Ifthisisdonewithin45daysofreceivingnoticeoftheParagraphIVcertification,a30-monthstayoftheFDA'sabilitytoapprovetheANDAor505(b)(2)applicationistriggered.TheFDAmayapprovetheproposedproductbeforetheexpirationofthe30-monthstayonlyifacourtfindsthepatentinvalidornotinfringed,orifthecourtshortenstheperiodbecausethepartieshavefailedtocooperateinexpeditingthelitigation.
PatentTermRestoration.UndertheHatch-WaxmanAct,aportionofthepatenttermlostduringproductdevelopmentandFDAreviewofanNDAor505(b)(2)applicationisrestoredifapprovaloftheapplicationisthefirstpermittedcommercialmarketingofadrugcontainingtheactiveingredient.Thepatenttermrestorationperiodisgenerallyone-halfthetimebetweentheeffectivedateoftheINDandthedateofsubmissionoftheNDA,plusthetimebetweenthedateofsubmissionoftheNDAandthedateofFDAapprovaloftheproduct.Themaximumperiodofpatenttermextensionisfiveyears,andthepatentcannotbeextendedtomorethan14yearsfromthedateofFDAapprovaloftheproduct.Onlyonepatentclaimingeachapprovedproductiseligibleforrestorationandthepatentholdermustapplyforrestorationwithin60daysofapproval.TheU.S.PatentandTrademarkOffice,inconsultationwiththeFDA,reviewsandapprovestheapplicationforpatenttermrestoration.
OtherRegulatoryRequirements
Afterapproval,drugproductsaresubjecttoextensivecontinuingregulationbytheFDA,whichincludecompanyobligationstomanufactureproductsinaccordancewithcurrentGMP,maintainandprovidetotheFDAupdatedsafetyandefficacyinformation,reportadverseexperienceswiththeproduct,keepcertainrecordsandsubmitperiodicreports,obtainFDAapprovalofcertainmanufacturingorlabelingchanges,andcomplywithFDApromotionandadvertisingrequirementsandrestrictions.Failuretomeettheseobligationscanresultinvariousadverseconsequences,bothvoluntaryandFDA-imposed,includingproductrecalls,withdrawalofapproval,restrictionsonmarketing,andtheimpositionofcivilfinesandcriminalpenaltiesagainsttheNDAholder.Inaddition,laterdiscoveryofpreviouslyunknownsafetyorefficacyissuesmayresultinrestrictionsontheproduct,manufacturerorNDAholder.
WeandanymanufacturersofourproductsarerequiredtocomplywithapplicableFDAmanufacturingrequirementscontainedintheFDA'scurrentGMPregulations.CurrentGMPregulationsrequire,amongotherthings,qualitycontrolandqualityassuranceaswellasthecorrespondingmaintenanceofrecordsanddocumentation.ThemanufacturingfacilitiesforourproductsmustmeetcurrentGMPrequirementstothesatisfactionoftheFDApursuanttoapre-approvalinspectionbeforewecanusethemtomanufactureourproducts.Weandanythird-partymanufacturersarealsosubjecttoperiodicinspectionsoffacilitiesbytheFDAandotherauthorities,includingproceduresandoperationsusedinthetestingandmanufactureofourproductstoassessourcompliancewithapplicableregulations.
Withrespecttopost-marketproductadvertisingandpromotion,theFDAimposesanumberofcomplexregulationsonentitiesthatadvertiseandpromotepharmaceuticals,whichinclude,amongothers,standardsfordirect-to-consumeradvertising,prohibitionsonpromotingdrugsforusesorinpatientpopulationsthatarenotdescribedinthedrug'sapprovedlabeling(knownas"off-labeluse"),andprinciplesgoverningindustry-sponsoredscientificandeducationalactivities.FailuretocomplywithFDArequirementscanhavenegativeconsequences,includingadversepublicity,enforcementletters
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fromtheFDA,mandatedcorrectiveadvertisingorcommunicationswithdoctorsorpatients,andcivilorcriminalpenalties.Althoughphysiciansmayprescribelegallyavailabledrugsforoff-labeluses,manufacturersmaynotmarketorpromotesuchoff-labeluses.
Changestosomeoftheconditionsestablishedinanapprovedapplication,includingchangesinindications,labeling,ormanufacturingprocessesorfacilities,requiresubmissionandFDAapprovalofanewNDAorNDAsupplementbeforethechangecanbeimplemented.AnNDAsupplementforanewindicationtypicallyrequiresclinicaldatasimilarintypeandqualitytotheclinicaldatasupportingtheoriginalapplicationfortheoriginalindication,andtheFDAusessimilarproceduresandactionsinreviewingsuchNDAsupplementsasitdoesinreviewingNDAs.
AdverseeventreportingandsubmissionofperiodicreportsisrequiredfollowingFDAapprovalofanNDA.TheFDAalsomayrequirepost-marketingtesting,knownasPhaseIVtesting,riskminimizationactionplans,andsurveillancetomonitortheeffectsofanapprovedproductortoplaceconditionsonanapprovalthatrestrictthedistributionoruseoftheproduct.
OutsidetheU.S.,ourandourcollaborators'abilitiestomarketaproductarecontingentuponreceivingmarketingauthorizationfromtheappropriateregulatoryauthorities.Therequirementsgoverningmarketingauthorization,pricingandreimbursementvarywidelyfromjurisdictiontojurisdiction.Atpresent,foreignmarketingauthorizationsareappliedforatanationallevel,althoughwithintheE.U.registrationproceduresareavailabletocompanieswishingtomarketaproductinmorethanoneE.U.memberstate.
Employees
AsofDecember31,2015,wehad474employees.Approximately36werescientistsengagedindiscoveryresearch,136wereinourdrugdevelopmentorganization,204wereinoursalesandcommercialteam,and98wereingeneralandadministrativefunctions.Noneofouremployeesarerepresentedbyalaborunion,andweconsiderouremployeerelationstobegood.
ExecutiveOfficersoftheRegistrant
Thefollowingtablesetsforththename,ageandpositionofeachofourexecutiveofficersasofFebruary12,2016:
Peter M. Hecht hasservedasourchiefexecutiveofficerandadirectorsinceourfoundingin1998.Underhisleadership,IronwoodhasgrownfromninePh.D.scientiststoacommercialbiotechnologycompany.PriortofoundingIronwood,Dr.HechtwasaresearchfellowatWhiteheadInstituteforBiomedicalResearch.Dr.HechtearnedaB.S.inmathematicsandanM.S.inbiologyfromStanfordUniversity,andholdsaPh.D.inmolecularbiologyfromtheUniversityofCaliforniaatBerkeley.
Tom Graney hasservedasourchieffinancialofficerandseniorvicepresidentoffinanceandcorporatestrategysincejoiningusinAugust2014.Priortojoiningourcompany,Mr.Graneyheldanumberofpositionsintheareasofmergersandacquisitions,strategicmarketing,financeandaccountingatJohnson&Johnson,orJ&J,anditsaffiliatessince1994.MostrecentlyMr.Graney
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Name Age PositionPeterM.Hecht,Ph.D. 52 ChiefExecutiveOfficer,DirectorTomGraney 51 ChiefFinancialOfficerandSeniorVicePresident,FinanceandCorporateStrategyMarkG.Currie,Ph.D. 61 SeniorVicePresident,ChiefScientificOfficerandPresidentofR&DHalleyE.Gilbert 46 SeniorVicePresident,ChiefLegalOfficer,andSecretaryThomasA.McCourt 58 SeniorVicePresident,MarketingandSalesandChiefCommercialOfficer
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servedasworldwidevicepresidentoffinanceandchieffinancialofficerofEthicon,agloballeaderinsurgicalmedicaldevices,fromJanuary2010toAugust2014.Priortothat,Mr.GraneywasvicepresidentoffinanceforJ&JGlobalSupplyChainfromAugust2009toJanuary2010,chieffinancialofficerofJ&J'sJanssenPharmaceuticalsfromFebruary2008toAugust2009,andchieffinancialofficerforJ&JGlobalVirology(includingTibotecPharmaceuticals)fromNovember2005toFebruary2008.Acharteredfinancialanalystcharterholder,Mr.GraneyholdsaBachelorofSciencedegreeinaccountingfromtheUniversityofDelawareandanM.B.A.inmarketing,financeandinternationalbusinessfromtheLeonardN.SternSchoolofBusinessatNewYorkUniversity.
Mark G. Currie servesasourseniorvicepresident,chiefscientificofficerandpresidentofresearchanddevelopment,andhasledourresearchanddevelopmenteffortssincejoiningusin2002.PriortojoiningIronwood,Dr.CurriedirectedcardiovascularandcentralnervoussystemdiseaseresearchasvicepresidentofdiscoveryresearchatSepracorInc.Previously,Dr.Currieinitiated,builtandleddiscoverypharmacologyandalsoservedasdirectorofarthritisandinflammationatMonsantoCompany.Dr.CurrieearnedaB.S.inbiologyfromtheUniversityofSouthAlabamaandholdsaPh.D.incellbiologyfromtheBowman-GraySchoolofMedicineofWakeForestUniversity.
Halley E. Gilbert servesasourseniorvicepresident,chieflegalofficer,andsecretaryandhasledourlegalandcompliancefunctionsincejoiningusin2008.Priortojoiningus,Ms.GilbertwasvicepresidentanddeputygeneralcounselatCubistPharmaceuticals,Inc.andcorporatecounselatGenzymeCorp.,andpriortothat,shewasanassociatespecializinginmergersandacquisitionsandsecuritieslawatSkadden,Arps,Slate,Meagher&FlomLLP.Ms.GilbertreceivedherJ.D.fromNorthwesternUniversitySchoolofLawandaB.A.fromTuftsUniversity.
Thomas A. McCourt hasservedasourseniorvicepresidentofmarketingandsalesandchiefcommercialofficersincejoiningIronwoodin2009.PriortojoiningIronwood,Mr.McCourtledtheU.S.brandteamfordenosumabatAmgenInc.fromApril2008toAugust2009.Priortothat,Mr.McCourtwaswithNovartisAGfrom2001to2008,wherehedirectedthelaunchandgrowthofZelnormforthetreatmentofpatientswithIBS-CandCICandheldanumberofseniorcommercialroles,includingvicepresidentofstrategicmarketingandoperations.Mr.McCourtwasalsopartofthefoundingteamatAstraMerckInc.,leadingthedevelopmentofthemedicalaffairsandscienceliaisongroupandthenservingasbrandmanagerforPrilosec™andNEXIUM®.Mr.McCourthasadegreeinpharmacyfromtheUniversityofWisconsin.
AvailableInformation
YoumayobtainfreecopiesofourAnnualReportsonForm10-K,QuarterlyReportsonForm10-QandCurrentReportsonForm8-K,andamendmentstothosereports,assoonasreasonablypracticableaftertheyareelectronicallyfiledorfurnishedtotheSEC,ontheInvestorssectionofourwebsiteatwww.ironwoodpharma.comorbycontactingourInvestorRelationsdepartmentat(617)374-5082.Thecontentsofourwebsitearenotincorporatedbyreferenceintothisreportandyoushouldnotconsiderinformationprovidedonourwebsitetobepartofthisreport.
Item1A.Risk Factors
InadditiontotheotherinformationinthisAnnualReportonForm10-K,anyofthefactorsdescribedbelowcouldsignificantlyandnegativelyaffectourbusiness,financialcondition,resultsofoperationsorprospects.ThetradingpriceofourClassAcommonstockmaydeclineduetotheserisks.
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RisksRelatedtoOurBusinessandIndustry
We are highly dependent on the commercial success of LINZESS in the U.S. for the foreseeable future; we cannot guarantee when, or if, we will attainprofitability or positive cash flows.
Weandourpartner,Allerganplc(togetherwithitsaffiliates),orAllergan(formerlyActavisplc),begansellingLINZESSintheU.S.duringDecember2012.ThecommercialsuccessofLINZESSdependsonanumberoffactors,including:
• theeffectivenessofLINZESSasatreatmentforadultpatientswithIBS-CorCIC;
• thesizeofthetreatablepatientpopulation;
• theeffectivenessofthesales,managedmarketsandmarketingeffortsbyusandAllergan;
• theadoptionofLINZESSbyphysicians,whichdependsonwhetherphysiciansviewitasasafeandeffectivetreatmentforadultpatientswithIBS-CandCIC;
• oursuccessineducatingandactivatingadultIBS-CandCICpatientstoenablethemtomoreeffectivelycommunicatetheirsymptomsandtreatmenthistorytotheirphysicians;
• ourabilitytobothsecureandmaintainadequatereimbursementfor,andoptimizepatientaccessto,LINZESSbyprovidingthirdpartypayerswithastrongvaluepropositionbasedontheexistingburdenofillnessassociatedwithIBS-CandCICandthebenefitsofLINZESS;
• theeffectivenessofourpartners'distributionnetworks;
• theoccurrenceofanysideeffects,adversereactionsormisuse,oranyunfavorablepublicityintheseareas,associatedwithLINZESS;and
• thedevelopmentorcommercializationofcompetingproductsortherapiesforthetreatmentofIBS-CorCIC,ortheirassociatedsymptoms.
OurrevenuesfromthecommercializationofLINZESSaresubjecttothesefactors,andthereforemaybeunpredictablefromquarter-to-quarter.Ultimately,wemaynevergeneratesufficientrevenuesfromLINZESStoreachormaintainprofitabilityforourcompanyortosustainouranticipatedlevelsofoperations.
Linaclotide may cause undesirable side effects or have other properties that could limit its commercial potential.
ThemostcommonlyreportedadversereactioninthePhaseIIIplacebo-controlledtrialsforlinaclotideinIBS-CandCICwasdiarrhea.Severediarrheawasreportedin2%orlessofthelinaclotide-treatedpatients,anditsincidencewassimilarbetweentheIBS-CandCICpopulationsinthesetrials.Ifweorothersidentifypreviouslyunknownsideeffects,ifknownsideeffectsaremorefrequentorseverethaninthepast,ifweorothersdetectunexpectedsafetysignalsforlinaclotideoranyproductsperceivedtobesimilartolinaclotide,orifanyoftheforegoingareperceivedtohaveoccurred,theninanyofthesecircumstances:
• salesoflinaclotidemaybeimpaired;
• regulatoryapprovalsforlinaclotidemaybedenied,restrictedorwithdrawn;
• wemaydecideto,orberequiredto,sendproductwarninglettersorfieldalertstophysicians,pharmacistsandhospitals;
• reformulationoftheproduct,additionalnonclinicalorclinicalstudies,changesinlabelingorchangestoorreapprovalsofmanufacturingfacilitiesmayberequired;
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• wemaybeprecludedfrompursuingadditionaldevelopmentopportunitiestoenhancetheclinicalprofileofLINZESSwithinitsindicatedpopulations,aswellasbeprecludedfromstudyinglinaclotideinadditionalindications,populationsandformulations;
• ourreputationinthemarketplacemaysuffer;and
• governmentinvestigationsorlawsuits,includingclassactionsuits,maybebroughtagainstus.
Anyoftheaboveoccurrenceswouldharmorpreventsalesoflinaclotide,increaseourexpensesandimpairourabilitytosuccessfullycommercializelinaclotide.
Furthermore,withLINZESSandCONSTELLAcommerciallyavailableincertaincountriesandusedinwiderpopulationsandinlessrigorouslycontrolledenvironmentsthaninclinicalstudies,andasweandAllerganexploredevelopmentopportunitiestoenhancetheclinicalprofileofLINZESSthroughadditionalclinicaltrials,thenumberofpatientstreatedwithlinaclotidewithinandoutsideofitscurrentindicationsorpatientpopulationsmayexpand,whichcouldresultintheidentificationofpreviouslyunknownsideeffects,increasedfrequencyorseverityofknownsideeffects,ordetectionofunexpectedsafetysignals.Asaresult,regulatoryauthorities,healthcarepractitioners,thirdpartypayersorpatientsmayperceiveorconcludethattheuseoflinaclotideisassociatedwithseriousadverseeffects,underminingourcommercializationefforts.
Inaddition,theFDA-approvedlabelforLINZESScontainsaboxedwarningaboutitsuseinpediatricpatients.LINZESSiscontraindicatedinpediatricpatientsupto6yearsofagebasedonnonclinicaldatafromstudiesinneonatalmiceapproximatelyequivalenttohumanpediatricpatientslessthan2yearsofage.ThereisalsoawarningadvisingphysicianstoavoidtheuseofLINZESSinpediatricpatients6through17yearsofage.Thiswarningisbasedondatainyoungjuvenilemiceandthelackofclinicalsafetyandefficacydatainpediatricpatientsofanyagegroup.WeandAllerganhaveestablishedanonclinicalandclinicalpost-marketingplanwiththeFDAtounderstandthesafetyandefficacyofLINZESSinpediatricpatients,whichisdiscussedbelow.
We rely entirely on contract manufacturers and our collaboration partners to manufacture and distribute linaclotide. If they are unable to comply withapplicable regulatory requirements, unable to source sufficient raw materials, experience manufacturing or distribution difficulties, or are otherwise unable tomanufacture and distribute sufficient quantities to meet demand, our commercialization efforts may be materially harmed.
Wehavenointernalmanufacturingordistributioncapabilities.Instead,werelyonacombinationofcontractmanufacturersandourpartnerstomanufacturelinaclotideAPIandfinallinaclotidedrugproduct,andtodistributethatdrugproducttothirdpartypurchasers.WeandcertainofourpartnershavecommercialsupplyagreementswithindependentthirdpartiestomanufacturethelinaclotideAPIusedtosupportallofourpartneredandunpartneredterritories.EachofAllerganandAstellasisresponsiblefordrugproductandfinishedgoodsmanufacturing(includingbottlingandpackaging)foritsrespectiveterritories,anddistributingthefinishedgoodstowholesalers.Amongourdrugproductmanufacturers,onlyAllerganhasmanufacturedlinaclotideonacommercialscale.Wehaveanagreementwithanindependentthirdpartytoserveasanadditionalsourceofdrugproductmanufacturingoflinaclotideforourpartneredterritoriesandwehaveworkedwithourpartnerstoachievesufficientredundancyinthiscomponentofthelinaclotidesupplychain.UnderourcollaborationwithAstraZeneca,weareaccountablefordrugproductandfinishedgoodsmanufacturingforChina,HongKongandMacau.
EachofourlinaclotideAPIanddrugproductmanufacturersmustcomplywithcurrentgoodmanufacturingpractices,orGMP,andotherstringentregulatoryrequirementsenforcedbytheFDAandforeignregulatoryauthoritiesinotherjurisdictions.Theserequirementsinclude,amongotherthings,qualitycontrol,qualityassuranceandthemaintenanceofrecordsanddocumentation,whichoccurinadditiontoourqualityassurancereleaseoflinaclotideAPI.Manufacturersoflinaclotidemay
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beunabletocomplywiththeseGMPrequirementsandwithotherregulatoryrequirements.Wehavelittlecontroloverourmanufacturers'orcollaborationpartners'compliancewiththeseregulationsandstandards.
Ourmanufacturersmayexperienceproblemswiththeirrespectivemanufacturinganddistributionoperationsandprocesses,includingforexample,qualityissues,includingproductspecificationandstabilityfailures,proceduraldeviations,improperequipmentinstallationoroperation,utilityfailures,contaminationandnaturaldisasters.Inaddition,ourAPImanufacturersacquiretherawmaterialsnecessarytomakelinaclotideAPIfromalimitednumberofsources.Anydelayordisruptionintheavailabilityoftheserawmaterialsorachangeinrawmaterialsupplierscouldresultinproductiondisruptions,delaysorhighercostswithconsequentadverseeffectsonus.
Themanufactureofpharmaceuticalproductsrequiressignificantexpertiseandcapitalinvestment,includingthedevelopmentofadvancedmanufacturingtechniquesandprocesscontrols.Manufacturersofpharmaceuticalproductsoftenencounterdifficultiesincommercialproduction.Theseproblemsincludedifficultieswithproductioncostsandyields,qualitycontrol,includingstabilityoftheproductandqualityassurancetesting,andshortagesofqualifiedpersonnel,aswellascompliancewithfederal,stateandforeignregulationsandthechallengesassociatedwithcomplexsupplychainmanagement.Evenifourmanufacturersdonotexperienceproblemsandcommercialmanufacturingisachieved,theirmaximumoravailablemanufacturingcapacitiesmaybeinsufficienttomeetcommercialdemand.Findingalternativemanufacturersoraddingadditionalmanufacturersrequiresasignificantamountoftimeandinvolvessignificantexpense.Newmanufacturerswouldneedtodevelopandimplementthenecessaryproductiontechniquesandprocesses,whichalongwiththeirfacilities,wouldneedtobeinspectedandapprovedbytheregulatoryauthoritiesineachapplicableterritory.
IfourAPIordrugproductmanufacturersfailtoadheretoapplicableGMPorotherregulatoryrequirements,experiencedelaysordisruptionsintheavailabilityofrawmaterialsorexperiencemanufacturingordistributionproblems,wewillsuffersignificantconsequences,includingproductseizuresorrecalls,lossofproductapproval,finesandsanctions,reputationaldamage,shipmentdelays,inventoryshortages,inventorywrite-offsandotherproduct-relatedchargesandincreasedmanufacturingcosts.Ifweexperienceanyoftheseresults,orifourmanufacturers'maximumoravailablecapacitiesareinsufficienttomeetdemand,wemaynotbeabletosuccessfullycommercializelinaclotide.
If any of our partners undergoes a change in control or in management, this may adversely affect our collaborative relationship or the success of thecommercialization of LINZESS in the U.S. or the continued launches and commercialization of CONSTELLA in the E.U., or the ability to achieve regulatoryapproval, launch and commercialize linaclotide in our other partnered territories.
Weworkjointlyandcollaborativelywitheachofourpartnersonmanyaspectsofthedevelopment,manufacturingandcommercializationoflinaclotide.Indoingso,wehaveestablishedrelationshipswithseveralkeymembersofthemanagementteamsofourlinaclotidepartnersinfunctionalareassuchasdevelopment,quality,regulatory,drugsafetyandpharmacovigilance,operations,marketing,sales,fieldoperationsandmedicalscience.Further,thesuccessofourcollaborationsishighlydependentontheresources,effortsandskillsofourpartnersandtheirkeyemployees.AsweandourpartnerscommercializeLINZESSintheU.S.,continuetolaunchandcommercializeCONSTELLAintheE.U.anddevelop,launchandcommercializelinaclotideinotherpartsoftheworld,thedrug'ssuccessbecomesmoredependentonusmaintaininghighlycollaborativeandwellalignedpartnerships.InNovember2015,AllerganandPfizerInc.enteredintoadefinitiveagreementprovidingforthecombinationofthetwocompanies.Ifthetransactioniscompleted,orifourpartnersotherwiseundergoachangeofcontrolorinmanagement,wewillneedtoreestablishmanyrelationshipsandconfirmcontinuedalignmentonourdevelopmentandcommercializationstrategyforlinaclotide.Further,inconnectionwithanychangeofcontrolorinmanagement,thereisinherentuncertaintyanddisruptioninoperations,whichcouldresultindistraction,inefficiencies,andmisalignmentofpriorities.
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Asaresult,intheeventofachangeofcontrolorinmanagementatoneofourpartners,wecannotbesurethatwewillbeabletosuccessfullyexecuteonourdevelopmentandcommercializationstrategyforlinaclotideinaneffectiveandefficientmannerandwithoutdisruptionorreducedperformance.Finally,anychangeofcontrolorinmanagementmayresultinareprioritizationoflinaclotidewithinapartner'sportfolio,orsuchpartnermayfailtomaintainthefinancialorotherresourcesnecessarytocontinuesupportingitsportionofthedevelopment,manufacturingorcommercializationoflinaclotide.
Ifanyofourpartnersundergoesachangeofcontrolandtheacquirereitherisunabletoperformsuchpartner'sobligationsunderitscollaborationorlicenseagreementwithusorhasaproductthatcompeteswithlinaclotidethatsuchacquirerdoesnotdivest,wehavetherighttoterminatethecollaborationorlicenseagreementandreacquirethatpartner'srightswithrespecttolinaclotide.Ifweelecttoexercisetheserightsinsuchcircumstances,wewillneedtoeitherestablishthecapabilitytodevelop,manufactureandcommercializelinaclotideinthatpartneredterritoryonourownorwewillneedtoestablisharelationshipwithanewpartner.Wehaveassembledateamofspecialistsinmanufacturing,quality,sales,marketing,payer,pricingandfieldoperations,andspecializedmedicalscientists,whorepresentthefunctionalareasnecessaryforasuccessfulcommerciallaunchofahighpotential,GItherapyandwhosupportthecommercializationofLINZESSintheU.S.IfAllerganwassubjecttoachangeofcontrolthatallowedustofurthercommercializeLINZESSintheU.S.onourown,andwechosetodoso,wewouldneedtoenhanceeachofthesefunctionalaspectstoreplacethecapabilitiesthatAllerganwaspreviouslyprovidingtothecollaboration.Anysuchtransitionmightresultinaperiodofreducedefficiencyorperformancebyouroperationsandcommercializationteams,whichcouldadverselyaffectourabilitytocommercializeLINZESS.
Althoughmanymembersofourglobaloperations,commercialandmedicalaffairsteamshavestrategicoversightof,andacertainlevelofinvolvementin,theirfunctionalareasglobally,wedonothavecorrespondingoperationalcapabilitiesintheseareasoutsideoftheU.S.IfAllergan,AstellasorAstraZenecawassubjecttoachangeofcontrolthatallowedustocontinuelinaclotide'sdevelopmentorcommercializationanywhereoutsideoftheU.S.onourown,andwechosetodosoratherthanestablishingarelationshipwithanewpartner,wewouldneedtobuildoperationalcapabilitiesintherelevantterritory.Inanyofthesesituations,thetimelineandlikelihoodofachievingregulatoryapprovaland,ultimately,thecommercializationoflinaclotidecouldbenegativelyimpacted.
We must work effectively and collaboratively with Allergan to market and sell LINZESS in the U.S. in order for it to achieve its maximum commercialpotential.
WeareworkingcloselywithAllergantoimplementourjointcommercializationplanforLINZESS.ThecommercializationplanincludesanagreeduponmarketingcampaignthattargetsthephysicianswhoseepatientswhocouldbenefitfromLINZESStreatment.OurmarketingcampaignalsotargetstheadultmenandwomenwhosufferfromIBS-CorCIC.OurcommercializationplanalsoincludesanintegratedcallplanforoursalesforcestooptimizetheeducationofspecificgastroenterologistsandprimarycarephysiciansonwhomourandAllergan'ssalesrepresentativescall,andthefrequencywithwhichtherepresentativesmeetwiththem.
InordertooptimizethecommercialpotentialofLINZESS,weandAllerganmustexecuteuponthiscommercializationplaneffectivelyandefficiently.Inaddition,weandAllerganmustcontinuallyassessandmodifyourcommercializationplaninacoordinatedandintegratedfashioninordertoadapttothepromotionalresponse.Further,weandAllerganmustcontinuetofocusandrefineourmarketingcampaigntoensureaclearandunderstandablephysician-patientdialoguearoundIBS-C,CICandthepotentialforLINZESSasanappropriatetherapy.Inaddition,weandAllerganmustprovideoursalesforceswiththehighestqualitysupport,guidanceandoversightinorderforthemtocontinuetoeffectivelypromoteLINZESStogastroenterologistsandprimarycarephysicians.IfweandAllerganfailtoperformthesecommercialfunctionsinthehighestqualitymannerandinaccordancewithourjointcommercializationplanandrelatedagreements,LINZESSwillnotachieveitsmaximum
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commercialpotentialandwemaysufferfinancialharm.OureffortstofurthertargetandengageadultpatientswithIBS-CorCICmaynoteffectivelyincreaseappropriatepatientawarenessorpatient/physiciandialogue,andmaynotincreasetherevenuesthatwegeneratefromLINZESS.
We are subject to uncertainty relating to pricing and reimbursement policies which, if not favorable for linaclotide, could hinder or prevent linaclotide'scommercial success.
OurandAllergan'sabilitytocommercializeLINZESSintheU.S.successfullydependsinpartonthecoverageandreimbursementlevelssetbygovernmentalauthorities,privatehealthinsurersandotherthird-partypayers.IndeterminingwhethertoapprovereimbursementforLINZESSandatwhatlevel,weexpectthatthird-partypayerswillconsiderfactorsthatincludetheefficacy,costeffectivenessandsafetyofLINZESS,aswellastheavailabilityofothertreatmentsincludinggenericprescriptiondrugsandover-the-counteralternatives.Further,inordertomaintainacceptablereimbursementlevelsandaccessforpatientsatcopaylevelsthatarereasonableandcustomary,wemayfaceincreasingpressuretoofferdiscountsorrebatesfromlistpricesordiscountstoagreaternumberofthird-partypayersorotherunfavorablepricingmodifications.Obtainingandmaintainingfavorablereimbursementcanbeatimeconsumingandexpensiveprocess,andthereisnoguaranteethatweorAllerganwillbeabletocontinuetonegotiatepricingtermswiththird-partypayersatlevelsthatareprofitabletous,oratall.Certainthird-partypayersalsorequirepriorauthorizationfor,orevenrefusetoprovide,reimbursementforLINZESS,andothersmaydosointhefuture.OurbusinesswouldbemateriallyadverselyaffectedifweandAllerganarenotabletoreceiveapprovalforreimbursementofLINZESSfromthird-partypayersonabroad,timelyorsatisfactorybasis;ifreimbursementissubjecttooverlybroadorrestrictivepriorauthorizationrequirements;orifreimbursementisnotmaintainedatasatisfactorylevelorbecomessubjecttopriorauthorization.Inaddition,ourbusinesscouldbeadverselyaffectedifprivatehealthinsurers,includingmanagedcareorganizations,theMedicareorMedicaidprogramsorotherreimbursingbodiesorpayerslimitorreducetheindicationsfororconditionsunderwhichLINZESSmaybereimbursed.
Weexpecttoexperiencepricingpressuresinconnectionwiththesaleoflinaclotideandourfutureproductsduetothehealthcarereformsdiscussedbelow,aswellasthetrendtowardprogramsaimedatreducinghealthcarecosts,theincreasinginfluenceofmanagedcare,theongoingdebatesonreducinggovernmentspendingandadditionallegislativeproposals.Thesehealthcarereformeffortsoranyfuturelegislationorregulatoryactionsaimedatcontrollingandreducinghealthcarecosts,includingthroughmeasuresdesignedtolimitreimbursement,restrictaccessorimposeunfavorablepricingmodificationsonpharmaceuticalproducts,couldimpactourandourpartners'abilitytoobtainormaintainreimbursementforLINZESSatasatisfactorylevel,oratall,whichcouldmateriallyharmourbusinessandfinancialresults.
Insomeforeigncountries,particularlyCanadaandthecountriesofEurope,thepricingandpaymentofprescriptionpharmaceuticalsissubjecttogovernmentalcontrol.Inthesecountries,pricingnegotiationswithgovernmentalauthoritiescantakesixto12monthsorlongerafterthereceiptofregulatoryapprovalandproductlaunch.Toobtainfavorablereimbursementfortheindicationssoughtorpricingapprovalinsomecountries,weandourpartnersmayberequiredtoconductaclinicaltrialthatcomparesthecost-effectivenessofourproducts,includinglinaclotide,tootheravailabletherapies.Inaddition,incountriesinwhichlinaclotideistheonlyapprovedtherapyforaparticularindication,suchasCONSTELLAastheonlyproductapprovedforthesymptomatictreatmentofmoderatetosevereIBS-CinadultsinEurope,theremaybedisagreementastowhatthemostcomparableproductis,orifthereevenisone.Further,severalEuropeancountrieshaveimplementedgovernmentmeasurestoeitherfreezeorreducepricingofpharmaceuticalproducts.Manythird-partypayersandgovernmentalauthoritiesalsoconsiderthepriceforwhichthesameproductisbeingsoldinothercountriestodeterminetheirownpricingandreimbursementstrategy,soiflinaclotideispricedloworgetslimitedreimbursementinaparticularcountry,thiscouldresultinsimilarlylowpricingand
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reimbursementinothercountries.Ifreimbursementforourproductsisunavailableinanycountryinwhichreimbursementissought,limitedinscopeoramount,orifpricingissetatorreducedtounsatisfactorylevels,ourabilitytosuccessfullycommercializelinaclotideinsuchcountrywouldbeimpactednegatively.Furthermore,ifthesemeasurespreventusoranyofourpartnersfromsellinglinaclotideonaprofitablebasisinaparticularcountry,theycouldpreventthecommerciallaunchorcontinuedsaleoflinaclotideinthatcountry.
If the pricing and reimbursement of CONSTELLA in the E.U. is low, our royalty revenues based on sales of linaclotide will be adversely affected.
Inthesecondquarterof2013,ourformerEuropeanpartnerAlmirallbegancommercializingCONSTELLAinEuropeforthesymptomatictreatmentofmoderatetosevereIBS-Cinadults.InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan.Currently,CONSTELLAiscommerciallyavailableincertainEuropeancountries,includingtheUnitedKingdom,ItalyandSpain.
ThepricingandreimbursementstrategyisakeycomponentofAllergan'scommercializationplanforCONSTELLAinEurope.Reimbursementsourcesaredifferentineachcountry,andeachcountrymayincludeacombinationofdistinctpotentialpayers,includingprivateinsuranceandgovernmentalpayers.CountriesinEuropemayrestricttherangeofmedicinalproductsforwhichtheirnationalhealthinsurancesystemsprovidereimbursementandcontrolthepricesofmedicinalproductsforhumanuse.OurrevenuesmaysufferifAllerganisunabletosuccessfullyandtimelyconcludereimbursement,priceapprovalorfundingprocessesandmarketCONSTELLAinkeymemberstatesoftheE.U.,orifcoverageandreimbursementforCONSTELLAislimitedorreduced.IfAllerganisnotabletoobtaincoverage,pricingorreimbursementonacceptabletermsoratall,orifsuchtermschangeinanycountriesinitsterritory,Allerganmaynotbeableto,ormaydecidenotto,sellCONSTELLAinsuchcountries.Further,AllergancouldsellCONSTELLAatalowprice.SincewereceiveroyaltiesonnetsalesofCONSTELLAintheE.U.,whichiscorrelateddirectlytothepriceatwhichAllergansellsCONSTELLAintheE.U.,ourroyaltyrevenuesgloballycouldbelimitedshouldAllergansellCONSTELLAatalowpriceorelectnottolaunchinacertaincountrywithintheE.U.
Because we work with partners to develop, manufacture and commercialize linaclotide, we are dependent upon third parties, and our relationships with thosethird parties, in our efforts to commercialize LINZESS and to obtain regulatory approval for, and to commercialize, linaclotide in our other partneredterritories.
Allerganplayedasignificantroleintheconductoftheclinicaltrialsforlinaclotideandinthesubsequentcollectionandanalysisofdata,andAllerganholdstheNDAforLINZESS.Inaddition,wearecommercializingLINZESSintheU.S.withAllergan.Allerganisalsoresponsibleforthedevelopment,regulatoryapprovalandcommercializationoflinaclotideinCanadaandMexico,which,forMexico,ithadsublicenseditscommercializationrightstoAlmirall.InOctober2015,inconnectionwiththetransferoftheexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan,AlmirallandAllerganterminatedthesublicensearrangementwithrespecttoMexico,returningtheexclusiverightstocommercializelinaclotideinMexicotoAllergan.Asaresult,AllerganisalsocommercializingLINZESSinMexicoandCONSTELLAinCanada,aswellascommercializingCONSTELLAincertaincountriesinEurope,withresponsibilityforobtainingregulatoryapprovaloflinaclotideintheothercountriesinitsterritory.Astellas,ourpartnerinJapan,isresponsibleforcompletingtheclinicalprogramsandobtainingregulatoryapprovaloflinaclotideinitsterritory.Further,wearejointlyoverseeingthedevelopment,andwilljointlyoverseethecommercialization,oflinaclotideinChina,HongKongandMacauthroughourcollaborationwithAstraZeneca,withAstraZenecahavingprimaryresponsibilityforthelocaloperationalexecution.Uponanyapproval,eachofAstellasandAstraZeneca,aswellasAllerganfortheEuropeanregion,isresponsibleforcommercializinglinaclotideinitsrespectiveterritory,andeachhasagreedtousecommercially
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reasonableeffortstodoso.Eachofourpartnersisresponsibleforreportingadverseeventinformationfromitsterritorytous.Finally,eachofourpartners,otherthanAstraZeneca,isresponsiblefordrugproductmanufacturingoflinaclotideandmakingitintofinishedgoods(includingbottlingandpackaging)foritsrespectiveterritory.Theintegrationofoureffortswithourpartners'effortsissubjecttotheuncertaintyofthemarketsforpharmaceuticalproductsineachpartner'srespectiveterritories,andaccordingly,theserelationshipsmustevolvetomeetanynewchallengesthatariseinthoseregions.
Theseintegratedfunctionsmaynotbecarriedouteffectivelyandefficientlyifwefailtocommunicateandcoordinatewithourpartners,andviceversa.Ourpartneringstrategyimposesobligations,risksandoperationalrequirementsonusasthecentralnodeinourglobalnetworkofpartners.Ifwedonoteffectivelycommunicatewitheachpartnerandensurethattheentirenetworkismakingintegratedandcohesivedecisionsfocusedontheglobalbrandforlinaclotide,linaclotidewillnotachieveitsmaximumcommercialpotential.Astheholderoftheglobalsafetydatabaseforlinaclotide,weareresponsibleforcoordinatingthesafetysurveillanceandadverseeventreportingeffortsworldwide.Ifweareunsuccessfulindoingsoduetopoorprocess,execution,oversight,communication,adjudicationorotherwise,thenourandourpartner'sabilitytoobtainandmaintainregulatoryapprovaloflinaclotidewillbeatrisk.
Wehavelimitedabilitytocontroltheamountortimingofresourcesthatourpartnersdevotetolinaclotide.Ifanyofourpartnersfailstodevotesufficienttimeandresourcestolinaclotide,orifitsperformanceissubstandard,itwilldelaythepotentialsubmissionorapprovalofregulatoryapplicationsforlinaclotide,aswellasthemanufacturingandcommercializationoflinaclotideintheparticularterritory.Amaterialbreachbyanyofourpartnersofourcollaborationorlicenseagreementwithsuchpartner,orasignificantdisagreementbetweenusandapartner,couldalsodelaytheregulatoryapprovalandcommercializationoflinaclotide,potentiallyleadtocostlylitigation,andcouldhaveamaterialadverseimpactonourfinancialcondition.Moreover,althoughwehavenon-competerestrictionsinplacewitheachofourpartners,theymayhaverelationshipswithothercommercialentities,someofwhichmaycompetewithus.Ifanyofourpartnersassistsourcompetitors,itcouldharmourcompetitiveposition.
Even though LINZESS is approved by the FDA for the treatment of adults with IBS-C or CIC, it faces post-approval development and regulatory requirements,which will present additional challenges.
InAugust2012,theFDAapprovedLINZESSasaonce-dailytreatmentforadultmenandwomensufferingfromIBS-CorCIC.LINZESSissubjecttoongoingFDArequirementsgoverningthelabeling,packaging,storage,advertising,promotion,recordkeepingandsubmissionofsafetyandotherpost-marketinformation.
LINZESSiscontraindicatedinpediatricpatientsupto6yearsofagebasedonnonclinicaldatafromstudiesinneonatalmiceapproximatelyequivalenttohumanpediatricpatientslessthan2yearsofage.ThereisalsoawarningadvisingphysicianstoavoidtheuseofLINZESSinpediatricpatients6through17yearsofage.Thiswarningisbasedondatainyoungjuvenilemiceandthelackofclinicalsafetyandefficacydatainpediatricpatientsofanyagegroup.WeandAllerganhaveestablishedanonclinicalandclinicalpost-marketingplanwiththeFDAtounderstandthesafetyandefficacyofLINZESSinpediatricpatients.ThefirststepinthisplanwastoundertakeadditionalnonclinicalstudiestofurtherunderstandtheresultsoftheearlierneonatalmousestudyandtounderstandthetolerabilityofLINZESSinolderjuvenilemice.WeandAllerganhavecompletedthesenonclinicalstudiesandhaveinitiatedtwoPhaseIIclinicalpediatricstudiesinIBS-Cpatientsagesevento17andfunctionalconstipationpatientsagesixto17.Ourabilitytoconductclinicalstudiesinyoungerpediatricpatientswilldepend,inpart,onthesafetyandefficacydatafromourclinicalstudiesinolderpediatricpatients.OurabilitytoeverexpandtheindicationforLINZESStopediatricswilldependon,amongotherthings,oursuccessfulcompletionofpediatricclinicalstudies.
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WeandAllerganhavealsocommittedtocertainnonclinicalandclinicalstudiesaimedatunderstanding:(a)whetherorallyadministeredlinaclotidecanbedetectedinbreastmilk,(b)thepotentialforantibodiestobedevelopedtolinaclotide,andifso,(c)whetherantibodiesspecificforlinaclotidecouldhaveanytherapeuticorsafetyimplications.Weexpecttocompletethesestudiesoverthenexttwotofouryears.
Thesepost-approvalrequirementsimposeburdensandcostsonus.Failuretocompletetherequiredstudiesandmeetourotherpost-approvalcommitmentswouldleadtonegativeregulatoryactionattheFDA,whichcouldincludewithdrawalofregulatoryapprovalofLINZESSforthetreatmentofadultswithIBS-CorCIC.
ManufacturersofdrugproductsandtheirfacilitiesaresubjecttocontinualreviewandperiodicinspectionsbytheFDAandotherregulatoryauthoritiesforcompliancewithGMPregulations.Ifweoraregulatoryagencydiscoverspreviouslyunknownproblemswithaproduct,suchasadverseeventsofunanticipatedseverityorfrequency,orproblemswithafacilitywheretheproductismanufactured,aregulatoryagencymayimposerestrictionsonthatproductorthemanufacturer,includingrequiringimplementationofariskevaluationandmitigationstrategyprogram,withdrawaloftheproductfromthemarketorsuspensionofmanufacturing.Ifwe,ourpartnersorthemanufacturingfacilitiesforlinaclotidefailtocomplywithapplicableregulatoryrequirements,aregulatoryagencymay:
• issuewarninglettersoruntitledletters;
• imposecivilorcriminalpenalties;
• suspendorwithdrawregulatoryapproval;
• suspendanyongoingclinicaltrials;
• refusetoapprovependingapplicationsorsupplementstoapplicationssubmittedbyus;
• imposerestrictionsonoperations,includingcostlynewmanufacturingrequirements;or
• seizeordetainproductsorrequireustoinitiateaproductrecall.
Even though linaclotide is approved for marketing in the U.S. as LINZESS and in the E.U. as CONSTELLA, and is approved for marketing in a number ofother countries, we or our collaborators may never receive approval to commercialize linaclotide in additional parts of the world.
Inordertomarketanyproductsoutsideofthecountrieswherelinaclotideisapproved,weorourpartnersmustcomplywithnumerousandvaryingregulatoryrequirementsofotherjurisdictionsregardingsafetyandefficacy.Approvalproceduresvaryamongjurisdictionsandcaninvolveproducttestingandadministrativereviewperiodsdifferentfrom,andgreaterthan,thoseintheU.S.,theE.U.andtheothercountrieswherelinaclotideisapproved.Potentialrisksincludethattheregulatoryauthorities:
• maynotdeemlinaclotidesafeandeffective;
• maynotfindthedatafromnonclinicalstudiesandclinicaltrialssufficienttosupportapproval;
• maynotapproveofmanufacturingprocessesandfacilities;
• maynotapprovelinaclotideforanyorallindicationsorpatientpopulationsforwhichapprovalissought;
• mayrequiresignificantwarningsorrestrictionsonusetotheproductlabelforlinaclotide;or
• maychangetheirapprovalpoliciesoradoptnewregulations.
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Ifanyoftheforegoingweretooccur,ourreceiptofregulatoryapprovalintheapplicablejurisdictioncouldbedelayedorwemayneverreceiveapprovalatall.Further,regulatoryapprovalinonejurisdictiondoesnotensureregulatoryapprovalinanother,butafailureordelayinobtainingregulatoryapprovalinonejurisdictionmayhaveanegativeeffectontheregulatoryprocessesinothers.Iflinaclotideisnotapprovedforallindicationsorpatientpopulationsorwiththelabelrequested,thiswouldlimittheusesoflinaclotideandhaveanadverseeffectonitscommercialpotentialorrequirecostlypost-marketingstudies.
We face potential product liability exposure, and, if claims brought against us are successful, we could incur substantial liabilities.
Theuseofourproductcandidatesinclinicaltrialsandthesaleofmarketedproductsexposeustoproductliabilityclaims.Ifwedonotsuccessfullydefendourselvesagainstproductliabilityclaims,wecouldincursubstantialliabilities.Inaddition,regardlessofmeritoreventualoutcome,productliabilityclaimsmayresultin:
• decreaseddemandforapprovedproducts;
• impairmentofourbusinessreputation;
• withdrawalofclinicaltrialparticipants;
• initiationofinvestigationsbyregulators;
• litigationcosts;
• distractionofmanagement'sattentionfromourprimarybusiness;
• substantialmonetaryawardstopatientsorotherclaimants;
• lossofrevenues;and
• theinabilitytocommercializeourproductcandidates.
Wecurrentlyhaveproductliabilityinsurancecoverageforthecommercialsaleoflinaclotideandfortheclinicaltrialsofourproductcandidateswhichissubjecttoindustry-standardterms,conditionsandexclusions.Ourinsurancecoveragemaynotbesufficienttoreimburseusforexpensesorlossesassociatedwithclaims.Moreover,insurancecoverageisbecomingincreasinglyexpensive,and,inthefuture,wemaynotbeabletomaintaininsurancecoverageatareasonablecostorinsufficientamountstoprotectusagainstlosses.Onoccasion,largejudgmentshavebeenawardedinlawsuitsbasedondrugsthathadunanticipatedsideeffects.Asuccessfulproductliabilityclaimorseriesofclaimscouldcauseourstockpricetodeclineand,ifjudgmentsexceedourinsurancecoverage,coulddecreaseourcashandadverselyaffectourbusiness.
We may face competition in the IBS-C and CIC marketplace, and new products may emerge that provide different or better alternatives for treatment of GIconditions.
Linaclotidecompetesgloballywithcertainprescriptiontherapiesandover-the-counterproductsforthetreatmentofIBS-CandCIC,ortheirassociatedsymptoms.Theavailabilityofprescriptioncompetitorsandover-the-counterproductsforGIconditionscouldlimitthedemand,andthepriceweareabletocharge,forlinaclotideunlessweareabletodifferentiatelinaclotideonthebasisofitsactualorperceivedbenefits.Newdevelopments,includingthedevelopmentofotherdrugtechnologiesandmethodsofpreventingtheincidenceofdisease,occurinthepharmaceuticalandmedicaltechnologyindustriesatarapidpace.Thesedevelopmentsmayrenderlinaclotideobsoleteornoncompetitive.
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Webelieveothercompaniesaredevelopingproductswhichcouldcompetewithlinaclotide,shouldtheybeapprovedbytheFDAorforeignregulatoryauthorities.Currently,therearecompoundsinlatestagedevelopmentandotherpotentialcompetitorsareinearlierstagesofdevelopmentforthetreatmentofpatientswitheitherIBS-CorCIC.IfourpotentialcompetitorsaresuccessfulincompletingdrugdevelopmentfortheirdrugcandidatesandobtainapprovalfromtheFDAorforeignregulatoryauthorities,theycouldlimitthedemandforlinaclotide.
Inaddition,certainofourcompetitorshavesubstantiallygreaterfinancial,technicalandhumanresourcesthanus.Mergersandacquisitionsinthepharmaceuticalindustrymayresultinevenmoreresourcesbeingconcentratedinourcompetitors.Competitionmayincreasefurtherasaresultofadvancesmadeinthecommercialapplicabilityoftechnologiesandgreateravailabilityofcapitalforinvestmentinthesefields.
We will incur significant liability if it is determined that we are promoting any "off-label" use of LINZESS or any other product.
Physiciansarepermittedtoprescribedrugproductsandmedicaldevicesforusesthatarenotdescribedintheproduct'slabelingandthatdifferfromthoseapprovedbytheFDAorotherapplicableregulatoryagencies.Such"off-label"usesarecommonacrossmedicalspecialties.AlthoughtheFDAandotherregulatoryagenciesdonotregulateaphysician'schoiceoftreatments,theFDAandotherregulatoryagenciesdorestrictcommunicationsonthesubjectofoff-labeluse.Companiesarenotpermittedtopromotedrugsormedicaldevicesforoff-labeluses.Accordingly,wedonotpermitpromotionofLINZESSintheU.S.foruseinanyindicationsotherthanIBS-CorCICorinanypatientpopulationsotherthanadultmenandwomen.Similarly,wedonotpermitpromotionofanyotherapprovedproductwedevelop,license,co-promoteorotherwisepartnerforanyindication,populationorusenotdescribedinsuchproduct'slabel.TheFDAandotherregulatoryandenforcementauthoritiesactivelyenforcelawsandregulationsprohibitingpromotionofoff-labelusesandthepromotionofproductsforwhichmarketingapprovalhasnotbeenobtained.Acompanythatisfoundtohavepromotedoff-labeluseswillbesubjecttosignificantliability,includingcivilandadministrativeremediesaswellascriminalsanctions.
Notwithstandingtheregulatoryrestrictionsonoff-labelpromotion,theFDAandotherregulatoryauthoritiesallowcompaniestoengageintruthful,non-misleading,andnon-promotionalscientificexchangeconcerningtheirproducts.Weintendtoengageinmedicaleducationactivitiesandcommunicatewithhealthcareprovidersincompliancewithallapplicablelaws,regulatoryguidanceandindustrybestpractices.Althoughwebelievewehaveputinplacearobustcomplianceprogram,whichisdesignedtoensurethatallsuchactivitiesareperformedinalegalandcompliantmanner,wecannotbecertainthatourprogramwilladdressallareasofpotentialexposureandtherisksinthisareacannotbeentirelyeliminated.
If we fail to comply with healthcare and other regulations, we could face substantial penalties and our business, operations and financial condition could beadversely affected.
LINZESSandtheotherproductsthatwepromotearemarketedintheU.S.and/orcoveredbyfederalhealthcareprograms,and,asaresult,certainfederalandstatehealthcarelawsandregulationspertainingtoproductpromotionandfraudandabuseareapplicableto,andmayaffect,ourbusiness.Theselawsandregulationsinclude:
• federalhealthcareprogramanti-kickbacklaws,whichprohibit,amongotherthings,personsfromsoliciting,receivingorprovidingremuneration,directlyorindirectly,toinduceeitherthereferralofanindividual,foranitemorserviceorthepurchasingororderingofagoodorservice,forwhichpaymentmaybemadeunderfederalhealthcareprogramssuchasMedicareandMedicaid;
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• federalfalseclaimslawswhichprohibit,amongotherthings,individualsorentitiesfromknowinglypresenting,orcausingtobepresented,informationorclaimsforpaymentfromMedicare,Medicaid,orotherthird-partypayersthatarefalseorfraudulent,andwhichmayapplytousforreasonsincludingprovidingcodingandbillingadvicetocustomers;
• thefederalHealthInsurancePortabilityandAccountabilityActof1996,whichprohibitsexecutingaschemetodefraudanyhealthcarebenefitprogramormakingfalsestatementsrelatingtohealthcaremattersandwhichalsoimposescertainrequirementsrelatingtotheprivacy,securityandtransmissionofindividuallyidentifiablehealthinformation;
• theFederalFood,Drug,andCosmeticAct,whichamongotherthings,strictlyregulatesdrugproductandmedicaldevicemarketing,prohibitsmanufacturersfrommarketingsuchproductsforoff-labeluseandregulatesthedistributionofsamples;
• federallawsthatrequirepharmaceuticalmanufacturerstoreportcertaincalculatedproductpricestothegovernmentorprovidecertaindiscountsorrebatestogovernmentauthoritiesorprivateentities,oftenasaconditionofreimbursementundergovernmenthealthcareprograms;
• theso-called"federalsunshine"law,whichrequirespharmaceuticalandmedicaldevicecompaniestomonitorandreportcertainfinancialinteractionswithphysiciansandotherhealthcareprofessionalsandhealthcareorganizationstothefederalgovernmentforre-disclosuretothepublic;and
• statelawequivalentsoftheabovefederallaws,suchasanti-kickbackandfalseclaimslawswhichmayapplytoitemsorservicesreimbursedbyanythird-partypayer,includingcommercialinsurers,statetransparencylawsandstatelawsgoverningtheprivacyandsecurityofhealthinformationincertaincircumstances,manyofwhichdifferfromeachotherinsignificantwaysandoftenarenotpreemptedbyfederallaws,thuscomplicatingcomplianceefforts.
OurglobalactivitiesaresubjecttotheU.S.ForeignCorruptPracticesActwhichprohibitscorporationsandindividualsfrompaying,offeringtopay,orauthorizingthepaymentofanythingofvaluetoanyforeigngovernmentofficial,governmentstaffmember,politicalparty,orpoliticalcandidateinanattempttoobtainorretainbusinessortootherwiseinfluenceapersonworkinginanofficialcapacity.Wearealsosubjecttosimilaranti-briberylawsintheothercountriesinwhichwedobusiness.
Ifouroperationsarefoundtobeinviolationofanyofthelawsdescribedaboveoranyotherlaws,rulesorregulationsthatapplytous,wewillbesubjecttopenalties,includingcivilandcriminalpenalties,damages,finesandthecurtailmentorrestructuringofouroperations.Anypenalties,damages,fines,curtailmentorrestructuringofouroperationscouldadverselyaffectourabilitytooperateourbusinessandourfinancialresults.Althoughcomplianceprogramscanmitigatetheriskofinvestigationandprosecutionforviolationsoftheselaws,rulesorregulations,wecannotbecertainthatourprogramwilladdressallareasofpotentialexposureandtherisksinthisareacannotbeentirelyeliminated,particularlybecausetherequirementsandgovernmentinterpretationsoftherequirementsinthisspaceareconstantlyevolving.Anyactionagainstusforviolationoftheselaws,rulesorregulations,evenifwesuccessfullydefendagainstit,couldcauseustoincursignificantlegalexpensesanddivertourmanagement'sattentionfromtheoperationofourbusiness,aswellasdamageourbusinessorreputation.Moreover,achievingandsustainingcompliancewithapplicablefederalandstateprivacy,security,fraudandreportinglawsmayprovecostly.
Healthcare reform and other governmental and private payer initiatives may have an adverse effect upon, and could prevent, our product's or productcandidates' commercial success.
TheU.S.governmentandindividualstatesareaggressivelypursuinghealthcarereform,asevidencedbythepassingofthePatientProtectionandAffordableCareAct,asmodifiedbytheHealth
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CareandEducationReconciliationActof2010.Thesehealthcarereformlawscontainseveralcostcontainmentmeasuresthatcouldadverselyaffectourfuturerevenue,including,forexample,increaseddrugrebatesunderMedicaidforbrandnameprescriptiondrugs,extensionofMedicaidrebatestoMedicaidmanagedcareplans,andextensionofso-called340Bdiscountedpricingonpharmaceuticalssoldtocertainhealthcareproviders.Additionalprovisionsofthehealthcarereformlawsthatmaynegativelyaffectourfuturerevenueandprospectsforprofitabilityincludetheassessmentofanannualfeebasedonourproportionateshareofsalesofbrandnameprescriptiondrugstocertaingovernmentprograms,includingMedicareandMedicaid,aswellasmandatorydiscountsonpharmaceuticalssoldtocertainMedicarePartDbeneficiaries.Otheraspectsofhealthcarereform,suchasexpandedgovernmentenforcementauthorityandheightenedstandardsthatcouldincreasecompliance-relatedcosts,couldalsoaffectourbusiness.
InadditiontogovernmentaleffortsintheU.S.,foreignjurisdictionsaswellasprivatehealthinsurersandmanagedcareplansarelikelytocontinuechallengingmanufacturers'abilitytoobtainreimbursement,aswellasthelevelofreimbursement,forpharmaceuticalsandotherhealthcare-relatedproductsandservices.Thesecost-controlinitiativescouldsignificantlydecreasetheavailablecoverageandthepricewemightestablishforlinaclotideandourotherpotentialproducts,whichwouldhaveanadverseeffectonourfinancialresults.
TheFoodandDrugAdministrationAmendmentsActof2007alsoprovidestheFDAenhancedpost-marketingauthority,includingtheauthoritytorequirepost-marketingstudiesandclinicaltrials,labelingchangesbasedonnewsafetyinformation,andcompliancewithriskevaluationsandmitigationstrategiesapprovedbytheFDA.WeandAllerganhaveestablishedanonclinicalandclinicalpost-marketingplanwiththeFDAtounderstandthesafetyandefficacyofLINZESSinpediatrics,whichisdiscussedabove.TheFDA'sexerciseofthisauthorityhasresulted(andisexpectedtocontinuetoresult)inincreaseddevelopment-relatedcostsfollowingthecommerciallaunchofLINZESSforthetreatmentofadultmenandwomensufferingfromIBS-CorCIC,andcouldresultinpotentialrestrictionsonthesaleand/ordistributionofLINZESS,eveninitsapprovedindicationsandpatientpopulations.
In pursuing our growth strategy, we will incur a variety of costs and may devote resources to potential opportunities that are never completed or for which wenever receive the benefit. Our failure to successfully discover, acquire, develop and market additional product candidates or approved products would impairour ability to grow and adversely affect our business.
Aspartofourgrowthstrategy,weintendtoexplorefurtherlinaclotidedevelopmentopportunities.WeandAllerganareexploringdevelopmentopportunitiestoenhancetheclinicalprofileofLINZESSbyseekingtoexpanditsutilityinitsindicatedpopulations,aswellasstudyinglinaclotideinadditionalindications,populationsandformulationstoassessitspotentialtotreatvariousGIconditions.ThesedevelopmenteffortsmayfailormaynotincreasetherevenuesthatwegeneratefromLINZESS.Furthermore,theymayresultinadverseevents,orperceivedadverseevents,incertainpatientpopulationsthatarethenattributedtothecurrentlyapprovedpatientpopulation,whichmayresultinadverseregulatoryactionattheFDAorinothercountriesorharmlinaclotide'sreputationinthemarketplace,eachofwhichcouldmateriallyharmourrevenuesfromlinaclotide.
Wearealsopursuingvariousotherprogramsinourpipeline.Wemayspendseveralyearsandmakesignificantinvestmentsindevelopinganycurrentorfutureinternalproductcandidate,andfailuremayoccuratanypoint.OurproductcandidatesareinvariousstagesofdevelopmentandmustsatisfyrigorousstandardsofsafetyandefficacybeforetheycanbeapprovedforsalebytheFDA.Tosatisfythesestandards,wemustallocateresourcesamongourvariousdevelopmentprogramsandwemustengageincostlyandlengthydiscoveryanddevelopmentefforts,whicharesubjecttounanticipateddelaysandothersignificantuncertainties.Despiteourefforts,ourproductcandidatesmaynotoffertherapeuticorotherimprovementoverexistingcompetitivedrugs,beprovensafeandeffectivein
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clinicaltrials,ormeetapplicableregulatorystandards.Itispossiblethatnoneoftheproductcandidateswearedevelopingwillbeapprovedforcommercialsale,whichwouldimpairourabilitytogrow.
Wehaveongoingorplannednonclinicalandclinicaltrialsforlinaclotideandanumberofourinternalproductcandidates,andthestrengthofourcompany'spipelinewilldependinlargepartontheoutcomesofthesestudies.Manycompaniesinthepharmaceuticalindustryhavesufferedsignificantsetbacksinclinicaltrialsevenafterachievingpromisingresultsinearliernonclinicalorclinicaltrials.Thefindingsfromourcompletednonclinicalstudiesmaynotbereplicatedinlaterclinicaltrials,andourclinicaltrialsmaynotbepredictiveoftheresultswemayobtaininlater-stageclinicaltrialsorofthelikelihoodofregulatoryapproval.Resultsfromourclinicaltrialsandfindingsfromournonclinicalstudiescouldleadtoabruptchangesinourdevelopmentactivities,includingthepossiblelimitationorcessationofdevelopmentactivitiesassociatedwithaparticularproductcandidateorprogram.Furthermore,ouranalysisofdataobtainedfromnonclinicalandclinicalactivitiesissubjecttoconfirmationandinterpretationbytheFDAandotherapplicableregulatoryauthorities,whichcoulddelay,limitorpreventregulatoryapproval.SatisfactionofFDAorotherapplicableregulatoryrequirementsiscostly,time-consuming,uncertainandsubjecttounanticipateddelays.
Inaddition,becauseourinternalresearchcapabilitiesarelimited,wemaybedependentuponpharmaceuticalandbiotechnologycompanies,academicscientistsandotherresearcherstosellorlicenseproductsortechnologytous.Thesuccessofthisstrategydependspartlyuponourabilitytoidentify,select,discoverandacquirepromisingpharmaceuticalproductcandidatesandproducts.Theprocessofproposing,negotiatingandimplementingalicenseoracquisitionofaproductcandidateorapprovedproductislengthyandcomplex.Othercompanies,includingsomewithsubstantiallygreaterfinancial,marketingandsalesresources,maycompetewithusforthelicenseoracquisitionofproductcandidatesandapprovedproducts.Wehavelimitedresourcestoidentifyandexecutetheacquisitionorin-licensingofthird-partyproducts,businessesandtechnologiesandintegratethemintoourcurrentinfrastructure.Moreover,wemaydevoteresourcestopotentialacquisitionsorin-licensingopportunitiesthatarenevercompleted,orwemayfailtorealizetheanticipatedbenefitsofsuchefforts.Wemaynotbeabletoacquiretherightstoadditionalproductsorproductcandidatesontermsthatwefindacceptable,oratall.
Inaddition,futureacquisitionsmayentailnumerousoperationalandfinancialrisks,including:
• exposuretounknownliabilities;
• disruptionofourbusinessanddiversionofourmanagement'stimeandattentiontodevelopacquiredproducts,productcandidatesortechnologies;
• incurrenceofsubstantialdebt,dilutiveissuancesofsecuritiesordepletionofcashtopayforacquisitions;
• higherthanexpectedacquisitionandintegrationcosts;
• difficultyincombiningtheoperationsandpersonnelofanyacquiredbusinesseswithouroperationsandpersonnel;
• increasedamortizationexpenses;
• impairmentofrelationshipswithkeysuppliersorcustomersofanyacquiredbusinessesduetochangesinmanagementandownership;and
• inabilitytomotivatekeyemployeesofanyacquiredbusinesses.
Further,anyproductcandidatethatweacquiremayrequireadditionaldevelopmenteffortspriortocommercialsale,includingextensiveclinicaltestingandapprovalbytheFDAandapplicableforeignregulatoryauthorities.Allproductcandidatesarepronetorisksoffailuretypicalofpharmaceutical
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productdevelopment,includingthepossibilitythataproductcandidatewillnotbeshowntobesufficientlysafeandeffectiveforapprovalbyregulatoryauthorities.
Delays in the completion of clinical testing of any of our product candidates could result in increased costs and delay or limit our ability to generate revenues.
Delaysinthecompletionofclinicaltestingcouldsignificantlyaffectourproductdevelopmentcosts.Wedonotknowwhetherplannedclinicaltrialswillbecompletedonschedule,ifatall.Thecommencementandcompletionofclinicaltrialscanbedelayedforanumberofreasons,includingdelaysrelatedto:
• obtainingregulatoryapprovaltocommenceaclinicaltrial;
• reachingagreementonacceptabletermswithprospectiveclinicalresearchorganizations,orCROs,andtrialsites,thetermsofwhichcanbesubjecttoextensivenegotiationandmayvarysignificantlyamongdifferentCROsandtrialsites;
• manufacturingsufficientquantitiesofaproductcandidateforuseinclinicaltrials;
• obtaininginstitutionalreviewboardapprovaltoconductaclinicaltrialataprospectivesite;
• recruitingandenrollingpatientstoparticipateinclinicaltrialsforavarietyofreasons,includingcompetitionfromotherclinicaltrialprogramsforthetreatmentofsimilarconditions;and
• maintainingpatientswhohaveinitiatedaclinicaltrialbutmaybepronetowithdrawduetosideeffectsfromthetherapy,lackofefficacyorpersonalissues,orwhoarelosttofurtherfollow-up.
Clinicaltrialsmayalsobedelayedasaresultofambiguousornegativeinterimresults.Inaddition,aclinicaltrialmaybesuspendedorterminatedbyus,aninstitutionalreviewboardoverseeingtheclinicaltrialataclinicaltrialsite(withrespecttothatsite),theFDA,orotherregulatoryauthoritiesduetoanumberoffactors,including:
• failuretoconducttheclinicaltrialinaccordancewithregulatoryrequirementsorthestudyprotocols;
• inspectionoftheclinicaltrialoperationsortrialsitesbytheFDAorotherregulatoryauthoritiesresultingintheimpositionofaclinicalhold;
• unforeseensafetyissues;or
• lackofadequateenrollmentorfundingtocontinuetheclinicaltrial.
Additionally,changesinregulatoryrequirementsandguidancemayoccur,andwemayneedtoamendclinicaltrialprotocolstoreflectthesechanges.Eachprotocolamendmentwouldrequireinstitutionalreviewboardreviewandapproval,whichmayadverselyimpactthecosts,timingorsuccessfulcompletionoftheassociatedclinicaltrials.Ifweexperiencedelaysincompletion,orifweterminateanyofourclinicaltrials,thecommercialprospectsforourproductcandidatemaybeharmed,andourabilitytogenerateproductrevenueswillbedelayed.Inaddition,manyofthefactorsthatcause,orleadto,adelayinthecommencementorcompletionofclinicaltrialsmayalsoultimatelyleadtothedenialofregulatoryapproval.
We may not be able to manage our business effectively if we lose any of our current management team or if we are unable to attract and motivate keypersonnel.
Wemaynotbeabletoattractormotivatequalifiedmanagementandscientific,clinical,operationsandcommercialpersonnelinthefutureduetotheintensecompetitionforqualifiedpersonnelamongbiotechnology,pharmaceuticalandotherbusinesses,particularlyinthegreater-Bostonarea.Ifweare
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notabletoattractandmotivatenecessarypersonneltoaccomplishourbusinessobjectives,wewillexperienceconstraintsthatwillsignificantlyimpedetheachievementofourobjectives.
Wearehighlydependentonthedrugdiscovery,development,regulatory,commercial,financialandotherexpertiseofourmanagement,particularlyPeterM.Hecht,Ph.D.,ourchiefexecutiveofficer;MarkG.Currie,Ph.D.,ourseniorvicepresident,chiefscientificofficerandpresidentofresearchanddevelopment;TomGraney,ourchieffinancialofficerandseniorvicepresident,financeandcorporatestrategy;ThomasA.McCourt,ourseniorvicepresident,marketingandsalesandchiefcommercialofficer;andHalleyE.Gilbert,ourseniorvicepresident,chieflegalofficer,andsecretary.Transitionsinourseniormanagementteammayresultinoperationaldisruptions,andourbusinessmaybeharmedasaresult.Inadditiontothecompetitionforpersonnel,theBostonareainparticularischaracterizedbyahighcostofliving.Assuch,wecouldhavedifficultyattractingexperiencedpersonneltoourcompanyandmayberequiredtoexpendsignificantfinancialresourcesinouremployeerecruitmentefforts.
Wealsohavescientificandclinicaladvisorswhoassistusinformulatingourproductdevelopment,clinicalstrategiesandourglobalsupplychainplans,aswellassalesandmarketingadvisorswhohaveassistedusinourcommercializationstrategyandbrandplanforlinaclotide.Theseadvisorsarenotouremployeesandmayhavecommitmentsto,orconsultingoradvisorycontractswith,otherentitiesthatmaylimittheiravailabilitytous,ormayhavearrangementswithothercompaniestoassistinthedevelopmentandcommercializationofproductsthatmaycompetewithours.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
Intheordinarycourseofourbusiness,wecollectandstoresensitivedata,includingintellectualproperty,ourproprietarybusinessinformationandthatofoursuppliersandbusinesspartners,aswellaspersonallyidentifiableinformationoflinaclotidepatients,clinicaltrialparticipantsandemployees.Wealsohaveoutsourcedelementsofourinformationtechnologystructure,andasaresult,wearemanagingindependentvendorrelationshipswiththirdpartieswhomayorcouldhaveaccesstoourconfidentialinformation.Similarly,ourbusinesspartnersandotherthirdpartyproviderspossesscertainofoursensitivedata.Thesecuremaintenanceofthisinformationiscriticaltoouroperationsandbusinessstrategy.Despiteoursecuritymeasures,ourinformationtechnologyandinfrastructuremaybevulnerabletoattacksbyhackersorbreachedduetoemployeeerror,malfeasanceorotherdisruptions.We,ourpartners,vendorsandotherthirdpartyproviderscouldbesusceptibletothirdpartyattacksonour,andtheir,informationsecuritysystems,whichattacksareofeverincreasinglevelsofsophisticationandaremadebygroupsandindividualswithawiderangeofmotivesandexpertise,includingcriminalgroups.Anysuchbreachcouldcompromiseour,andtheir,networksandtheinformationstoredtherecouldbeaccessed,publiclydisclosed,lostorstolen.Anysuchaccess,disclosureorotherlossofinformationcouldresultinlegalclaimsorproceedings,liabilityunderlawsthatprotecttheprivacyofpersonalinformation,disruptouroperations,anddamageourreputation,anyofwhichcouldadverselyaffectourbusiness.
Our business involves the use of hazardous materials, and we must comply with environmental laws and regulations, which can be expensive and restrict howwe do business.
Ouractivitiesinvolvethecontrolledstorage,useanddisposalofhazardousmaterials.Wearesubjecttofederal,state,cityandlocallawsandregulationsgoverningtheuse,manufacture,storage,handlinganddisposalofthesehazardousmaterials.Althoughwebelievethatthesafetyproceduresweuseforhandlinganddisposingofthesematerialscomplywiththestandardsprescribedbytheselawsandregulations,wecannoteliminatetheriskofaccidentalcontaminationorinjuryfromthesematerials.Intheeventofanaccident,local,city,stateorfederalauthoritiesmaycurtailtheuseofthesematerialsandinterruptourbusinessoperations.Wedonotcurrentlymaintainhazardousmaterialsinsurancecoverage.
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RisksRelatedtoIntellectualProperty
Limitations on our patent rights relating to our product candidates may limit our ability to prevent third parties from competing against us.
Oursuccessdependsonourabilitytoobtainandmaintainpatentprotectionforourproductcandidates,preserveourtradesecrets,preventthirdpartiesfrominfringinguponourproprietaryrightsandoperatewithoutinfringingupontheproprietaryrightsofothers.
Thestrengthofpatentsinthepharmaceuticalindustryinvolvescomplexlegalandscientificquestionsandcanbeuncertain.PatentapplicationsintheU.S.andmostothercountriesareconfidentialforaperiodoftimeuntiltheyarepublished,andpublicationofdiscoveriesinscientificorpatentliteraturetypicallylagsactualdiscoveriesbyseveralmonthsormore.Asaresult,wecannotbecertainthatwewerethefirsttoconceiveinventionscoveredbyourpatentsandpendingpatentapplicationsorthatwewerethefirsttofilepatentapplicationsforsuchinventions.Inaddition,wecannotbecertainthatourpatentapplicationswillbegranted,thatanyissuedpatentswilladequatelyprotectourintellectualproperty,orthatsuchpatentswillnotbechallenged,narrowed,invalidatedorcircumvented.
WehaveseveralissuedpatentsandpendingapplicationsintheU.S.relatedtoLINZESS,includingaLINZESScompositionofmatterandmethodsofusepatent(U.S.Patent7,304,036)andtwopatentsrelatingtoourcommercial,roomtemperaturestableformulationoflinaclotideandmethodsofusingthisformulation.WealsohaveadditionalU.S.patentsandapplicationscoveringprocessesformakingLINZESS,formulationsanddosingregimensthereof,andmoleculesrelatedtoLINZESS.Althoughnoneoftheseissuedpatentscurrentlyissubjecttoapatentreexaminationorreview,wecannotguaranteethattheywillnotbesubjecttoreexaminationorreviewbytheU.S.PatentandTrademarkOffice,ortheUSPTO,inthefuture.IfanyorallofourLINZESS-relatedpatentswereinvalidated,wewouldstillhaveatleastfiveyearsofmarketingexclusivityundertheHatch-WaxmanActfromFDAapprovalofLINZESS.Webelievethateachofthepatentsinourlinaclotidepatentportfoliowasrightfullyissuedandtheportfoliogivesussufficientfreedomtooperate;however,ifanyofourpresentorfuturepatentsisinvalidated,thiscouldhaveanadverseeffectonourbusinessandfinancialresults,particularlyfortheperiodbeyondfiveyearsfollowingmarketingapproval.
InMarch2013,anoppositiontooneofourgrantedpatentscoveringlinaclotidewasfiledinEurope.InApril2015,thepatentwasupheldinitsentiretybytheEuropeanPatentOffice,affirmingthestrengthofourintellectualpropertyandourbeliefthattheoppositionwaswithoutmerit.Webelievethatthispatentwasappropriatelygrantedbutwecannotbecertainofthisuntiltheoppositionproceedings,includingtheassociatedappealsprocess,arecomplete.Whiletheoppositionisongoing,wewillincuradditionalexpenseandberequiredtofocusadditionaleffortsontheproceedings.However,evenifthispatentwereultimatelyfoundtobeinvalid,wehaveothercompositionofmatter-anduse-relatedlinaclotidepatentsthataregrantedandinforce,andwebelievethesepatentsprovidestrongandsufficientpatentprotectioninEurope.
Furthermore,theAmericaInventsAct,whichwassignedintolawin2011,hasmadeseveralmajorchangesintheU.S.patentstatutes.ThesechangeswillpermitthirdpartiestochallengeourpatentsmoreeasilyandwillcreateuncertaintywithrespecttotheinterpretationandpracticeofU.S.patentlawfortheforeseeablefuture.
Wealsorelyuponunpatentedtradesecrets,unpatentedknow-howandcontinuingtechnologicalinnovationtodevelopandmaintainourcompetitiveposition,whichweseektoprotect,inpart,byconfidentialityagreementswithouremployeesandourcollaboratorsandconsultants.Wealsohaveagreementswithouremployeesandselectedconsultantsthatobligatethemtoassigntheirinventionstous.Itispossible,however,thattechnologyrelevanttoourbusinesswillbeindependentlydevelopedbyapersonthatisnotapartytosuchanagreement.Furthermore,iftheemployeesandconsultantsthat
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arepartiestotheseagreementsbreachorviolatethetermsoftheseagreements,wemaynothaveadequateremedies,andwecouldloseourtradesecretsthroughsuchbreachesorviolations.Further,ourtradesecretscouldotherwisebecomeknownorbeindependentlydiscoveredbyourcompetitors.
Inaddition,thelawsofcertainforeigncountriesdonotprotectproprietaryrightstothesameextentorinthesamemannerastheU.S.,and,therefore,wemayencounterproblemsinprotectinganddefendingourintellectualpropertyincertainforeignjurisdictions.
If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in such litigationcould have a material adverse effect on our business.
Ourcommercialsuccessdependsonourability,andtheabilityofourcollaborators,todevelop,manufacture,marketandsellourproductsanduseourproprietarytechnologieswithoutinfringingtheproprietaryrightsofthirdparties.NumerousU.S.andforeignissuedpatentsandpendingpatentapplications,whichareownedbythirdparties,existinthefieldsinwhichweandourcollaboratorsaredevelopingproducts.Asthebiotechnologyandpharmaceuticalindustryexpandsandmorepatentsareissued,theriskincreasesthatourpotentialproductsmaygiverisetoclaimsofinfringementofthepatentrightsofothers.Theremaybeissuedpatentsofthirdpartiesofwhichwearecurrentlyunawarethatmaybeinfringedbylinaclotideorourproductcandidates.Becausepatentapplicationscantakemanyyearstoissue,theremaybecurrentlypendingapplicationswhichmaylaterresultinissuedpatentsthatlinaclotideorourproductcandidatesmayinfringe.
Wemaybeexposedto,orthreatenedwith,litigationbythirdpartiesallegingthatlinaclotideorourproductcandidatesinfringetheirintellectualpropertyrights.Iflinaclotideoroneofourproductcandidatesisfoundtoinfringetheintellectualpropertyrightsofathirdparty,weorourcollaboratorscouldbeenjoinedbyacourtandrequiredtopaydamagesandcouldbeunabletocommercializelinaclotideortheapplicableproductcandidateunlessweobtainalicensetotheintellectualpropertyrights.Alicensemaynotbeavailabletousonacceptableterms,ifatall.Inaddition,duringlitigation,thecounter-partycouldobtainapreliminaryinjunctionorotherequitablereliefwhichcouldprohibitusfrommaking,usingorsellingourproducts,pendingatrialonthemerits,whichmaynotoccurforseveralyears.
Thereisasubstantialamountoflitigationinvolvingpatentandotherintellectualpropertyrightsinthebiotechnologyandpharmaceuticalindustriesgenerally.Ifathirdpartyclaimsthatweorourcollaboratorsinfringeitsintellectualpropertyrights,wemayfaceanumberofissues,including,butnotlimitedto:
• infringementandotherintellectualpropertyclaimswhich,regardlessofmerit,maybeexpensiveandtime-consumingtolitigateandmaydivertourmanagement'sattentionfromourcorebusiness;
• substantialdamagesforinfringement,whichwemayhavetopayifacourtdecidesthattheproductatissueinfringesonorviolatesthethirdparty'srights,and,ifthecourtfindsthattheinfringementwaswillful,wecouldbeorderedtopaytrebledamagesandthepatentowner'sattorneys'fees;
• acourtprohibitingusfromsellingourproductunlessthethirdpartylicensesitsrightstous,whichitisnotrequiredtodo;
• ifalicenseisavailablefromathirdparty,wemayhavetopaysubstantialroyalties,feesorgrantcross-licensestoourintellectualpropertyrights;and
• redesigningourproductssotheydonotinfringe,whichmaynotbepossibleormayrequiresubstantialmonetaryexpendituresandtime.
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We may become involved in legal proceedings to protect or enforce our patents, which could be expensive and time consuming, and unfavorable outcomes insuch proceedings could have a material adverse effect on our business.
Competitorsmayinfringeourpatentsormayassertourpatentsareinvalid.Tocounterongoingorpotentialinfringementorunauthorizeduse,wemayberequiredtofileinfringementclaims,whichcanbeexpensiveandtime-consuming.Litigationwithgenericmanufacturershasbecomeincreasinglycommoninthebiotechnologyandpharmaceuticalindustries.Inaddition,inaninfringementorinvalidityproceeding,acourtorpatentadministrativebodymaydeterminethatapatentofoursisnotvalidorisunenforceable,ormayrefusetostoptheotherpartyfromusingthetechnologyatissueonthegroundsthatourpatentsdonotcoverthetechnologyinquestion.Oneormoregenericdrugmanufacturersmayfileabbreviatednewdrugapplications,orANDAs,withtheFDAforgenericversionsofLINZESS.GenericdrugmanufacturerswillfirstbeabletofileANDAsinAugust2016,butwemaynotbecomeawareofthesefilingsforseveralmonthsafteranysuchsubmissionduetoproceduresspecifiedunderapplicableFDAregulations.WhenfilinganANDAforLINZESS,agenericdrugmanufacturermaychoosetochallengeoneormoreofthepatentsthatcoverLINZESS.Assuch,wemayneedtoprotectourintellectualpropertyrightsbybringinglegalproceedingsagainstthegenericdrugmanufacturer.
Additionally,thevalidityofourpatentsmaybechallengedbythirdpartiespursuanttoadministrativeproceduresintroducedbytheAmericanInventsAct,specificallyinterpartesreview,orIPR,and/orpostgrantreview,orPGR,beforetheUSPTO.GenericdrugmanufacturersmaychallengeourpatentsthroughIPRsorPGRsinsteadoforinadditiontoANDAlegalproceedings.Patentlitigation,IPRsandPGRsinvolvecomplexlegalandfactualquestionsandwemayneedtodevotesignificantresourcestosuchlegalproceedings.Wecanprovidenoassuranceconcerningthedurationortheoutcomeofanysuchpatent-relatedlawsuitsoradministrativeproceedings.Anadverseresultinanylitigationordefenseproceedingscouldputoneormoreofourpatentsatriskofbeinginvalidatedorinterpretednarrowlyandcouldputourpatentapplicationsatriskofnotissuing,whichwouldmateriallyharmourbusiness.
InterferenceorderivationproceedingsbroughtbytheUSPTOmaybenecessarytodeterminethepriorityofinventionswithrespecttoourpatentsandpatentapplicationsorthoseofourcollaborators.Anunfavorableoutcomecouldrequireustoceaseusingthetechnologyortoattempttolicenserightstoitfromtheprevailingparty.Ourbusinesscouldbeharmedifaprevailingpartydoesnotofferusalicenseontermsthatareacceptabletous.Litigationorinterferenceproceedingsmayfailand,evenifsuccessful,mayresultinsubstantialcostsanddistractionofourmanagementandotheremployees.Inaddition,wemaynotbeabletoprevent,aloneorwithourcollaborators,misappropriationofourproprietaryrights,particularlyincountrieswherethelawsmaynotprotectthoserightsasfullyasintheU.S.
Furthermore,becauseofthesubstantialamountofdiscoveryrequiredinconnectionwithintellectualpropertylitigation,aswellasthepotentialforpublicannouncementsoftheresultsofhearings,motionsorotherinterimproceedingordevelopments,thereisariskthatsomeofourconfidentialinformationcouldbecompromisedbydisclosureduringthistypeoflitigation.
RisksRelatedtoOurFinancesandCapitalRequirements
We have incurred significant losses since our inception and cannot guarantee when, if ever, we will become profitable.
Inrecentyears,wehavefocusedprimarilyondeveloping,manufacturingandcommercializinglinaclotide,aswellasdevelopingourotherproductcandidates.Wehavefinancedourbusinesstodateprimarilythroughtheissuanceofequity,ourcollaborationandlicensearrangements,ourJanuary2013issuanceofour11%PhaRMANotesdue2024,orthePhaRMANotes,relatedtothesalesof
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LINZESSintheU.S.andourJune2015issuanceofour2.25%ConvertibleSeniorNotesdueJune15,2022,orthe2022Notes,andwehaveincurredlossesineachyearsinceourinceptionin1998.WecurrentlyderivesubstantiallyallofourrevenuefromourLINZESScollaborationwithAllerganfortheU.S.andbelievethattherevenuesfromthiscollaborationwillcontinuetoconstituteasignificantportionofourtotalrevenuefortheforeseeablefuture.Weincurrednetlossesofapproximately$142.7million,$189.6millionand$272.8millionintheyearsendedDecember31,2015,2014and2013,respectively.AsofDecember31,2015,wehadanaccumulateddeficitofapproximately$1.1billion.WecannotbecertainthatsalesofLINZESSandtherevenuefromourothercommercialactivitieswillnotfallshortofourprojectionsorbedelayed.Further,weexpecttocontinuetoincursubstantialexpensesinconnectionwithoureffortstocommercializelinaclotideandourresearchanddevelopmentofourproductcandidates.Becauseofthenumerousrisksanduncertaintiesassociatedwithdevelopingandcommercializingpharmaceuticalproducts,aswellasthoserelatedtoourexpectationsforLINZESSandourothercommercialactivities,weareunabletopredicttheextentofanyfuturelossesorguaranteewhen,orif,ourcompanywillbecomeprofitableorcashflowpositive.Ifweneverachieveprofitabilityorpositivecashflows,orachieveeitherlaterthanweanticipate,thiswillhaveanadverseeffectonourstockholders'equityandworkingcapital.
We may need additional funding and may be unable to raise capital when needed, which could cause us to delay, reduce or eliminate our product developmentprograms or commercialization efforts.
InJune2015,weissuedapproximately$335.7millionaggregateprincipalamountofour2022Notesandwehavepreviouslyraisedadditionalfundsthroughothercapitalraisingactivities,includingthesaleofsharesofourClassAcommonstockinpublicofferingsandtheissuanceofourPhaRMANotesinJanuary2013.However,marketingandsellingaprimarycaredrug,purchasingcommercialquantitiesofpharmaceuticalproducts,anddevelopingproductcandidatesandconductingclinicaltrialsareexpensiveanduncertain.Circumstances,ourstrategicimperatives,oropportunitiestocreateoracquirenewprograms,aswellasmaturities,redemptionsorrepurchasesofouroutstandingdebtsecurities,couldrequireusto,orwemaychooseto,seektoraiseadditionalfunds.Theamountandtimingofourfuturefundingrequirementswilldependonmanyfactors,including,butnotlimitedto:
• thelevelofunderlyingdemandforlinaclotidebyprescribersandpatientsintheU.S.,theE.U.andtheothercountrieswhereitisapproved;
• thecostsassociatedwithcommercializingLINZESSintheU.S.;
• thecostsofmaintainingandexpandingsales,marketinganddistributioncapabilitiesforlinaclotide;
• theregulatoryapprovaloflinaclotideoutsideoftheU.S.,theE.U.andtheothercountrieswhereitisapproved,andthetimingofcommerciallaunchesinthosecountries,aswellastheassociateddevelopmentandcommercialmilestonesandroyalties;
• therateofprogress,thecostofourclinicaltrialsandtheothercostsassociatedwithourproductdevelopmentprograms,includingourpost-approvalnonclinicalandclinicalstudiesoflinaclotideinpediatricsandourinvestmenttoenhancetheclinicalprofileofLINZESSwithinitsindicatedpopulations,aswellastostudylinaclotideinadditionalindications,populationsandformulationstoassessitspotentialtotreatvariousGIconditions;
• thecostsandtimingofin-licensingadditionalproductsorproductcandidatesoracquiringothercomplementarycompanies;
• thestatus,termsandtimingofanycollaboration,licensing,co-commercializationorotherarrangements;
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• thetimingofanyregulatoryapprovalsofourproductcandidates;
• whethertheholdersofour2022NotesholdthenotestomaturitywithoutconversionintoourClassAcommonstockandwhetherwearerequiredtorepurchaseour2022Notespriortomaturityuponafundamentalchange,asdefinedintheindenturegoverningthe2022Notes;and
• whetherweseektoredeemorrepurchaseallorpartofouroutstandingdebtthroughcashpurchasesand/orexchanges,inopenmarketpurchases,privatelynegotiatedtransactions,bytenderofferorotherwise.
Additionalfundingmaynotbeavailableonacceptabletermsoratall.Ifadequatefundsarenotavailable,wemayberequiredtodelayorreducethescopeofourcommercializationefforts,delay,reduceoreliminateoneormoreofourdevelopmentprogramsordelayorabandonpotentialstrategicopportunities.
Our ability to pay principal of and interest on our outstanding debt securities will depend in part on the receipt of payments from Allergan under ourcollaboration agreement for North America.
InJanuary2013,weissued$175.0millionaggregateprincipalamountofourPhaRMANotesbearinganannualinterestrateof11%andinJune2015,weissuedapproximately$335.7millionaggregateprincipalamountofour2022Notesbearinganannualinterestrateof2.25%.QuarterlyinterestpaymentsonourPhaRMANotescommencedonJune15,2013andsemi-annualpaymentsonour2022NotescommencedonDecember15,2015.InMarch2014,webeganmakingquarterlypaymentsonthePhaRMANotesequaltothegreaterof(i)7.5%ofnetsalesofLINZESSintheU.S.fortheprecedingquarterand(ii)thequarterlyinterestamount.PrincipalonthePhaRMANotesisrepaidinanamountequaltothedifferencebetween(i)and(ii)above,whenthisisapositivenumber,untiltheprincipalhasbeenpaidinfull.Weexpectthatforthenextfewyears,ataminimum,thenetquarterlypaymentsfromAllerganwillbeourprimarysourceofcashflowfromoperations.IfthecashflowsderivedfromthenetquarterlypaymentsthatwereceivefromAllerganunderthecollaborationagreementforNorthAmericaareinsufficientonanyparticularpaymentdatetofundtheinterestpaymentonouroutstandingindebtedness,ataminimum,wewillbeobligatedtopaytheamountsofsuchshortfalloutofourgeneralfunds.ThedeterminationofwhetherAllerganwillbeobligatedtomakeanetquarterlypaymenttousinrespectofaparticularquarterlyperiodisafunctionoftherevenuegeneratedbyLINZESSintheU.S.aswellasthedevelopment,manufacturingandcommercializationexpensesincurredbyeachofusandAllerganunderthecollaborationagreementforNorthAmerica.Accordingly,sincewecannotguaranteewhen,orif,ourcompanywillbecomeprofitableorcashflowpositive,wecannotprovideassurancesthat(i)wewillhavetheavailablefundstofundtheinterestpaymentonouroutstandingindebtedness,ataminimum,intheeventthatthereisadeficiencyinthenetquarterlypaymentreceivedfromAllergan,(ii)therewillbeanetquarterlypaymentfromAllerganatallor(iii)wewillnotalsoberequiredtomakeatrue-uppaymenttoAllerganunderthecollaborationagreementforNorthAmerica,ineachcase,inrespectofaparticularquarterlyperiod.
Our indebtedness could adversely affect our financial condition or restrict our future operations.
AsofDecember31,2015,wehadtotalindebtednessofapproximately$496.8millionandavailablecash,cashequivalentsandavailableforsalesecuritiesof$439.4million.WechosetoissueourPhaRMANotesand2022Notesbasedontheadditionalstrategicoptionalitythattheycreateforus,andthelimitedrestrictionsthatthesedebtsecuritiesplaceonourabilitytorunourbusinesscomparedtootherpotentialavailablefinancingtransactions.However,ourindebtedness,combinedwithourother
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financialobligationsandcontractualcommitments,couldhaveotherimportantconsequencesonourbusiness,including:
• limitingourabilitytoobtainadditionalfinancingtofundfutureworkingcapital,capitalexpendituresorothergeneralcorporatepurposes,includingproductdevelopment,commercializationefforts,researchanddevelopmentactivities,strategicarrangements,acquisitionsandrefinancingofouroutstandingdebt;
• requiringasubstantialportionofourcashflowtobededicatedtodebtservicepaymentsinsteadofotherpurposes,therebyreducingtheamountofcashflowavailableforworkingcapital,capitalexpenditures,corporatetransactionsandothergeneralcorporatepurposes;
• increasingourvulnerabilitytoadversechangesingeneraleconomic,industryandcompetitiveconditions;
• limitingourflexibilityinplanningforandreactingtochangesintheindustryinwhichwecompete;
• placingusatadisadvantagecomparedtoother,lessleveragedcompetitorsorcompetitorswithcomparabledebtatmorefavorableinterestrates;and
• increasingourcostofborrowing.
Ifwedonotgeneratesufficientcashflowfromoperationsoriffutureborrowingsarenotavailabletousinanamountsufficienttopayourindebtedness,includingpaymentsofprincipalwhendueonouroutstandingindebtednessor,inthecaseofour2022Notes,inconnectionwithatransactioninvolvingusthatconstitutesafundamentalchangeundertheindenturegoverningthe2022Notes,ortofundourliquidityneeds,wemaybeforcedtorefinancealloraportionofourindebtednessonorbeforethematuritydatesthereof,sellassets,reduceordelaycurrentlyplannedactivitiesorcurtailoperations,seektoraiseadditionalcapitalortakeotheractions.Wemaynotbeabletoexecuteanyoftheseactionsoncommerciallyreasonabletermsoratall.This,togetherwithanyofthefactorsdescribedabove,couldmateriallyandadverselyaffectourbusiness,financialconditionandresultsofoperations.
Inaddition,whileour2022Notesdonotincludecovenantsrestrictingtheoperationofourbusinessexceptincertainlimitedcircumstances,intheeventofadefaultunderthe2022Notes,thenoteholdersorthetrusteeundertheindenturegoverningthe2022Notesmayaccelerateourpaymentobligationsunderthe2022Notes,whichcouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Wearealsorequiredtooffertorepurchasethe2022Notesupontheoccurrenceofafundamentalchange,whichcouldinclude,amongotherthings,anyacquisitionofourcompany(otherthananacquisitioninwhichatleast90%oftheconsiderationiscommonstocklistedonTheNASDAQGlobalorGlobalSelectMarketorTheNewYorkStockExchange),subjecttothetermsofthe2022Notesindenture.Therepurchasepricemustbepaidincash,andthisobligationmayhavetheeffectofdiscouraging,delayingorpreventinganacquisitionofourcompanythatwouldotherwisebebeneficialtooursecurityholders.
Further,althoughwearenotasrestrictedunderourPhaRMANotesaswemighthavebeenunderamoretraditionalsecuredcreditfacilityprovidedbyabank,theindenturegoverningourPhaRMANotescontainsanumberofrestrictivecovenantsthatimposerestrictionsonusandmaylimitourabilitytoengageincertainacts,includingrestrictionsonourabilityto:
• amendourcollaborationagreementwithAllerganforNorthAmericainawaythatwouldhaveamaterialadverseeffectonthenoteholders'rights,orterminatethiscollaborationagreementwithrespecttotheU.S.;
• transferourrightstocommercializetheproductunderourcollaborationagreementwithAllerganforNorthAmerica;and
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• incurcertainliens.
UponabreachofthecovenantsunderourPhaRMANotesindenture,orifcertainotherdefaultsthereunderoccur,theholdersofourPhaRMANotescouldelecttodeclareallamountsoutstandingunderourPhaRMANotestobeimmediatelydueandpayableandwecannotbecertainthatwewillhavesufficientassetstorepaythem.Ifweareunabletorepaythoseamounts,theholdersofourPhaRMANotescouldproceedagainstthecollateralgrantedtothemtosecurethedebtsecuritiesandwecouldbeforcedintobankruptcyorliquidation.IfwebreachourcovenantsunderourPhaRMANotesindentureandseekawaiver,wemaynotbeabletoobtainawaiverfromtherequirednoteholders.Ifthisoccurs,wewouldbeindefaultunderourPhaRMANotesindentureandtheholdersofourPhaRMANotescouldexercisetheirrights,asdescribedabove.
Eachofour2022NotesandthePhaRMANotesalsoincludecross-defaultfeaturesprovidingthatadefaultundertheindenturegoverningeitherthe2022NotesorthePhaRMANoteswouldlikelyresultinadefaultundertheindenturegoverningtheotherindebtedness.Intheeventofsuchdefault,thetrusteeornoteholderscouldelecttodeclareallamountsoutstandingtobeimmediatelydueandpayableundertheapplicableindenture,whichcouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
Convertible note hedge and warrant transactions entered into in connection with our 2022 Notes may affect the value of our Class A common stock.
Inconnectionwithour2022Notes,weenteredintoConvertibleNoteHedgesandseparateNoteHedgeWarranttransactionswithcertainfinancialinstitutions.Thesetransactionsareexpectedgenerallytoreducethepotentialdilutionuponanyconversionofour2022Notesoroffsetanycashpaymentswearerequiredtomakeinexcessoftheprincipalamountofconverted2022Notes,asthecasemaybe.
Inconnectionwiththesetransactions,thefinancialinstitutionspurchasedourClassAcommonstockinsecondarymarkettransactionsandenteredintovariousover-the-counterderivativetransactionswithrespecttoourClassAcommonstock.Theseentitiesortheiraffiliatesarelikelytomodifytheirhedgepositionsfromtimetotimepriortoconversionormaturityofthe2022NotesbypurchasingandsellingsharesofourClassAcommonstockorotherinstrumentstheymaywishtouseinconnectionwithsuchhedging.AnyoftheseactivitiescouldadverselyaffectthevalueofourClassAcommonstockand,asaresult,thenumberofsharesandthevalueoftheClassAcommonstocknoteholderswillreceiveuponconversionofthe2022Notes.Inaddition,undercertaincircumstancesthecounterpartieshavetherighttoterminatetheConvertibleNoteHedgesandsettletheNoteHedgeWarrantsatfairvalue(asdefinedintheapplicableconfirmations),whichmayresultinusnotreceivingalloranyportionoftheanticipatedbenefitoftheConvertibleNoteHedges.IfthepriceofourClassAcommonstockincreasessuchthatthehedgetransactionssettleinourfavor,wecouldalsobeexposedtocreditriskrelatedtothecounterpartiestotheConvertibleNoteHedges,whichwouldlimitoreliminatethebenefitofsuchtransactionstous.
Our quarterly and annual operating results may fluctuate significantly.
Weexpectouroperatingresultstobesubjecttofrequentfluctuations.Ournetlossandotheroperatingresultswillbeaffectedbynumerousfactors,including:
• thelevelofunderlyingdemandforlinaclotideintheU.S.,theE.U.andtheothercountrieswhereitisapproved,andwholesalers'buyingpatterns;
• thecostsassociatedwithcommercializingLINZESSintheU.S.;
• theachievementandtimingofmilestonepaymentsunderourexistingcollaborationandlicenseagreements;
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• ourexecutionofanycollaboration,partnership,licensingorotherstrategicarrangements,andthetimingofpaymentswemaymakeorreceiveunderthesearrangements;
• anyexcessorobsoleteinventoryorassetimpairmentsandassociatedwrite-downs;
• variationsinthelevelofexpensesrelatedtoourdevelopmentprograms;
• additionorterminationofclinicaltrials;
• regulatorydevelopmentsaffectinglinaclotideorourproductcandidates;and
• anymateriallawsuitinwhichwemaybecomeinvolved.
Ifouroperatingresultsfallbelowtheexpectationsofinvestorsorsecuritiesanalysts,thepriceofourClassAcommonstockcoulddeclinesubstantially.Furthermore,anyquarterlyorannualfluctuationsinouroperatingresultsmay,inturn,causethepriceofourstocktofluctuatesubstantially.
Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of theInternal Revenue Code, and it is possible that our net operating loss and tax credit carryforwards may expire before we generate sufficient taxable income touse such carryforwards, or that certain transactions or a combination of certain transactions may result in material additional limitations on our ability to useour net operating loss and tax credit carryforwards.
Wehaveincurredsignificantnetlossessinceourinceptionandcannotguaranteewhen,ifever,wewillbecomeprofitable.Totheextentthatwecontinuetogeneratefederalandstatetaxablelosses,unusednetoperatinglossandtaxcreditcarryforwardswillcarryforwardtooffsetfuturetaxableincome,ifany,untilsuchunusedcarryforwardsexpire.Sections382and383oftheInternalRevenueCodeof1986,asamended,containrulesthatlimittheabilityofacompanythatundergoesanownershipchange,whichisgenerallyanychangeinownershipofmorethan50%ofitsstockoverathree-yearperiod,toutilizeitsnetoperatinglossandtaxcreditcarryforwardsandcertainbuilt-inlossesrecognizedinyearsaftertheownershipchange.Theserulesgenerallyoperatebyfocusingonownershipchangesinvolvingstockholdersowningdirectlyorindirectly5%ormoreofthestockofacompanyandanychangeinownershiparisingfromanewissuanceofstockbythecompany.Generally,ifanownershipchangeoccurs,theyearlytaxableincomelimitationontheuseofnetoperatinglossandtaxcreditcarryforwardsandcertainbuilt-inlossesisequaltotheproductoftheapplicablelongtermtaxexemptrateandthevalueofthecompany'sstockimmediatelybeforetheownershipchange.
Ifwedonotgeneratesufficienttaxableincomepriortotheexpirationoftheapplicablecarryforwardsorifthecarryforwardsaresubjecttothelimitationsdescribedabove,wemaybeunabletooffsetourtaxableincomewithlosses,orourtaxliabilitywithcredits,beforesuchlossesandcreditsexpireandthereforewouldincurlargerfederalorstateincometaxliability.WehavecompletedseveralfinancingssinceourinceptionwhichmayhaveresultedinachangeincontrolasdefinedbySection382,orcouldresultinachangeincontrolinthefuture.
RisksRelatingtoSecuritiesMarketsandInvestmentinOurStock
Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could negatively impact the marketprice of our Class A common stock.
Provisionsinourcertificateofincorporationandbylawsmayhavetheeffectofdelayingorpreventingachangeofcontrol.Theseprovisionsincludethefollowing:
• Ourcertificateofincorporationprovidesforadualclasscommonstockstructure.Asaresultofthisstructure,holdersofourClassBcommonstockhavesignificantinfluenceovercertainmattersrequiringstockholderapproval,includingamergerinvolvingIronwood,asaleofsubstantiallyallIronwoodassetsandadissolutionorliquidationofIronwood.Thisconcentrated
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controlcoulddiscourageothersfrominitiatingachangeofcontroltransactionthatotherstockholdersmayviewasbeneficial.
• Ourboardofdirectorsisdividedintothreeclassesservingstaggeredthree-yearterms,suchthatnotallmembersoftheboardareelectedatonetime.Thisstaggeredboardstructurepreventsstockholdersfromreplacingtheentireboardatasinglestockholders'meeting.
• Ourboardofdirectorshastherighttoelectdirectorstofillavacancycreatedbytheexpansionoftheboardofdirectorsortheresignation,deathorremovalofadirector,whichpreventsstockholdersfrombeingabletofillvacanciesonourboardofdirectors.
• Ourboardofdirectorsmayissue,withoutstockholderapproval,sharesofpreferredstock.Theabilitytoauthorizepreferredstockmakesitpossibleforourboardofdirectorstoissuepreferredstockwithvotingorotherrightsorpreferencesthatcouldimpedethesuccessofanyattempttoacquireus.
• Stockholdersmustprovideadvancenoticetonominateindividualsforelectiontotheboardofdirectorsortoproposemattersthatcanbeacteduponatastockholders'meeting.Furthermore,stockholdersmayonlyremoveamemberofourboardofdirectorsforcause.Theseprovisionsmaydiscourageordeterapotentialacquirerfromconductingasolicitationofproxiestoelectsuchacquirer'sownslateofdirectorsorotherwiseattemptingtoobtaincontrolofourcompany.
• Ourstockholdersmaynotactbywrittenconsent.Asaresult,aholder,orholders,controllingamajorityofourcapitalstockarenotabletotakecertainactionsoutsideofastockholders'meeting.
• Specialmeetingsofstockholdersmaybecalledonlybythechairmanofourboardofdirectors,ourchiefexecutiveofficeroramajorityofourboardofdirectors.Asaresult,aholder,orholders,controllingamajorityofourcapitalstockarenotabletocallaspecialmeeting.
• AmajorityoftheoutstandingsharesofClassBcommonstockarerequiredtoamendourcertificateofincorporationandasuper-majority(80%)oftheoutstandingsharesofcommonstockarerequiredtoamendourbylaws,whichmakeitmoredifficulttochangetheprovisionsdescribedabove.
Inaddition,wearegovernedbytheprovisionsofSection203oftheDelawareGeneralCorporationLaw,whichmayprohibitcertainbusinesscombinationswithstockholdersowning15%ormoreofouroutstandingvotingstock.TheseandotherprovisionsinourcertificateofincorporationandourbylawsandintheDelawareGeneralCorporationLawcouldmakeitmoredifficultforstockholdersorpotentialacquirerstoobtaincontrolofourboardofdirectorsorinitiateactionsthatareopposedbythethen-currentboardofdirectors.
The concentration of voting control on certain corporate matters with our pre-IPO stockholders will limit the ability of the holders of our Class A commonstock to influence such matters.
Becauseofourdualclasscommonstockstructure,theholdersofourClassBcommonstock,whoconsistofourpre-IPOinvestors(andtheiraffiliates),founders,directors,executivesandcertainofouremployees,areabletocontrolcertaincorporatematterslistedbelowifanysuchmatterissubmittedtoourstockholdersforapprovaleventhoughsuchstockholdersownlessthan50%oftheoutstandingsharesofourcommonstock.AsofDecember31,2015,therewere127,371,478and15,870,356sharesofourClassAcommonstockandClassBcommonstockissuedandoutstanding,respectively,andanaggregateof16,012,732and4,554,128outstandingstockoptions(vestedandunvested)and900,051andzerounvestedrestrictedstockunitsforsharesofourClassAcommonstockandClassBcommonstock,respectively.AsofDecember31,2015,theholdersofourClassAcommonstockownapproximately89%andtheholdersofourClassBcommonstockownapproximately11%ofthe
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outstandingsharesofClassAcommonstockandClassBcommonstock,combined.However,becauseofourdualclasscommonstockstructuretheseholdersofourClassAcommonstockhaveapproximately45%andholdersofourClassBcommonstockhaveapproximately55%ofthetotalvotesoneachofthemattersidentifiedinthelistbelow.ThisconcentratedcontrolofourClassBcommonstockholderslimitstheabilityoftheClassAcommonstockholderstoinfluencethosecorporatemattersand,asaresult,wemaytakeactionsthatmanyofourstockholdersdonotviewasbeneficial,whichcouldadverselyaffectthemarketpriceofourClassAcommonstock.
EachshareofClassAcommonstockandeachshareofClassBcommonstockhasonevotepershareonallmattersexceptforthefollowingmatters,forwhicheachshareofourClassBcommonstockhastenvotespershareandeachshareofourClassAcommonstockhasonevotepershare:
• adoptionofamergerorconsolidationagreementinvolvingIronwood;
• asaleofallorsubstantiallyallofIronwood'sassets;
• adissolutionorliquidationofIronwood;and
• everymatter,ifandwhenanyindividual,entityor"group"(asthattermisusedinRegulation13DoftheExchangeAct)has,orhaspubliclydisclosed(throughapressreleaseorafilingwiththeSEC)anintenttohave,beneficialownershipof30%ormoreofthenumberofoutstandingsharesofClassAcommonstockandClassBcommonstock,combined.
If we identify a material weakness in our internal control over financial reporting, it could have an adverse effect on our business and financial results and ourability to meet our reporting obligations could be negatively affected, each of which could negatively affect the trading price of our Class A common stock.
Amaterialweaknessisadeficiency,oracombinationofdeficiencies,ininternalcontroloverfinancialreporting,suchthatthereisareasonablepossibilitythatamaterialmisstatementofourannualorinterimfinancialstatementswillnotbepreventedordetectedonatimelybasis.Accordingly,amaterialweaknessincreasestheriskthatthefinancialinformationwereportcontainsmaterialerrors.
Weregularlyreviewandupdateourinternalcontrols,disclosurecontrolsandprocedures,andcorporategovernancepolicies.Inaddition,wearerequiredundertheSarbanes-OxleyActof2002toreportannuallyonourinternalcontroloverfinancialreporting.Oursystemofinternalcontrols,howeverwelldesignedandoperated,isbasedinpartoncertainassumptionsandincludeselementsthatrelyoninformationfromthirdparties,includingourcollaborationpartners.Oursystemcanprovideonlyreasonable,notabsolute,assurancesthattheobjectivesofthesystemaremet.Ifwe,orourindependentregisteredpublicaccountingfirm,determinethatourinternalcontrolsoverfinancialreportingarenoteffective,orwediscoverareasthatneedimprovementinthefuture,theseshortcomingscouldhaveanadverseeffectonourbusinessandfinancialresults,andthepriceofourClassAcommonstockcouldbenegativelyaffected.
Further,wearedependentonourcollaborationpartnersforinformationrelatedtoourresultsofoperations.OurnetprofitornetlossgeneratedfromthesalesofLINZESSintheU.S.ispartiallydeterminedbasedonamountsprovidedbyAllerganandinvolvestheuseofestimatesandjudgments,whichcouldbemodifiedinthefuture.Wearealsohighlydependentonourpartnersfortimelyandaccurateinformationregardinganyrevenuesrealizedfromsalesoflinaclotideintheirrespectiveterritories,andinthecaseofAllerganfortheU.S.andAstraZenecaforChina,HongKongandMacau,thecostsincurredindevelopingandcommercializingitinordertoaccuratelyreportourresultsofoperations.Ourresultsofoperationsarealsodependentonthetimelinessandaccuracyofinformationfromanyotherlicensing,collaborationorotherpartnerswemayhave,aswellasourandourpartners'useofestimatesandjudgments.Ifwedonotreceivetimelyandaccurateinformationorifestimatedactivitylevelsassociatedwiththerelevantcollaborationatagivenpointintimeareincorrect,whethertheresultofamaterialweaknessornot,wecouldberequiredtorecordadjustments
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infutureperiods.Suchadjustments,ifsignificant,couldhaveanadverseeffectonourfinancialresults,whichcouldleadtoadeclineinourClassAcommonstockprice.
Ifwecannotconcludethatwehaveeffectiveinternalcontroloverourfinancialreporting,orifourindependentregisteredpublicaccountingfirmisunabletoprovideanunqualifiedopinionregardingtheeffectivenessofourinternalcontroloverfinancialreporting,investorscouldloseconfidenceinthereliabilityofourfinancialstatements,whichcouldleadtoadeclineinourstockprice.Failuretocomplywithreportingrequirementscouldalsosubjectustosanctionsand/orinvestigationsbytheSEC,TheNASDAQStockMarketorotherregulatoryauthorities.
We expect that the price of our Class A common stock will fluctuate substantially.
ThemarketpriceofourClassAcommonstockmaybehighlyvolatileduetomanyfactors,including:
• thecommercialperformanceoflinaclotideintheU.S.,theE.U.andtheothercountrieswhereitisapproved;
• anythird-partycoverageandreimbursementpoliciesforlinaclotide;
• marketconditionsinthepharmaceuticalandbiotechnologysectors;
• developments,litigationorpublicconcernaboutthesafetyoflinaclotideorourpotentialproducts;
• announcementsoftheintroductionofnewproductsbyusorourcompetitors;
• announcementsconcerningproductdevelopmentresults,includingclinicaltrialresults,orintellectualpropertyrightsofusorothers;
• actualandanticipatedfluctuationsinourquarterlyandannualoperatingresults;
• deviationsinouroperatingresultsfromanyguidancewemayprovideortheestimatesofsecuritiesanalysts;
• salesofadditionalsharesofourcommonstockorsalesofsecuritiesconvertibleintocommonstockortheperceptionthatthesesalesmightoccur;
• additionsordeparturesofkeypersonnel;
• developmentsconcerningcurrentorfuturecollaboration,partnership,licensingorotherstrategicarrangements;and
• discussionofusorourstockpriceinthefinancialorscientificpressorinonlineinvestorcommunities.
Therealizationofanyoftherisksdescribedinthese"RiskFactors"couldhaveadramaticandmaterialadverseimpactonthemarketpriceofourClassAcommonstock.Inaddition,classactionlitigationhasoftenbeeninstitutedagainstcompanieswhosesecuritieshaveexperiencedperiodsofvolatility.Anysuchlitigationbroughtagainstuscouldresultinsubstantialcostsandadiversionofmanagementattention,whichcouldhurtourbusiness,operatingresultsandfinancialcondition.
Item1B.Unresolved Staff Comments
None.
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Item2.Properties
OurcorporateheadquartersandoperationsarelocatedinCambridge,Massachusetts,where,asofDecember31,2015,weoccupyapproximately205,000squarefeetofofficeandlaboratoryspace.Weleaseapproximately312,000squarefeetofofficeandlaboratoryspaceatourCambridge,MassachusettsfacilityunderourleaseexpiringinJanuary2018.In2014,webegansubleasingapproximately107,000squarefeetofourtotalleasedspacetothirdpartiesundersubleasesexpiringin2016and2018.Webelievethatourfacilitiesaresuitableandadequateforourneedsfortheforeseeablefuture.
Item3.Legal Proceedings
None.
Item4.Mine Safety Disclosures
Notapplicable.
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PARTII
Item5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
SharesofourClassAcommonstockaretradedontheNASDAQGlobalSelectMarketunderthesymbol"IRWD."OurshareshavebeenpubliclytradedsinceFebruary3,2010.ThefollowingtablefurnishesthehighandlowsalespricesforourClassAcommonstockasreportedbyTheNASDAQGlobalSelectMarketforeachquarterintheyearsendedDecember31,2015and2014:
AsofFebruary12,2016,therewere51stockholdersofrecordofourClassAcommonstockand78stockholdersofrecordofourClassBcommonstock.Thenumberofrecordholdersisbasedupontheactualnumberofholdersregisteredonthebooksofthecompanyatsuchdateanddoesnotincludeholdersofsharesin"streetnames"orpersons,partnerships,associations,corporationsorotherentitiesidentifiedinsecuritypositionlistingsmaintainedbydepositories.
Subjecttopreferencesthatmayapplytoanysharesofpreferredstockoutstandingatthetime,theholdersofClassAcommonstockandClassBcommonstockareentitledtoshareequallyinanydividendsthatourboardofdirectorsmaydeterminetoissuefromtimetotime.Intheeventadividendispaidintheformofsharesofcommonstockorrightstoacquiresharesofcommonstock,theholdersofClassAcommonstockwillreceiveClassAcommonstock,orrightstoacquireClassAcommonstock,asthecasemaybe,andtheholdersofClassBcommonstockwillreceiveClassBcommonstock,orrightstoacquireClassBcommonstock,asthecasemaybe.
Wehaveneverdeclaredorpaidanycashdividendsonourcapitalstock,andwedonotcurrentlyanticipatedeclaringorpayingcashdividendsonourcapitalstockintheforeseeablefuture.Wecurrentlyintendtoretainallofourfutureearnings,ifany,tofinanceoperations.Anyfuturedeterminationrelatingtoourdividendpolicywillbemadeatthediscretionofourboardofdirectorsandwilldependonanumberoffactors,includingfutureearnings,capitalrequirements,financialconditions,futureprospects,contractualrestrictionsandcovenantsandotherfactorsthatourboardofdirectorsmaydeemrelevant.
TheinformationrequiredtobedisclosedbyItem201(d)ofRegulationS-K,"SecuritiesAuthorizedforIssuanceUnderEquityCompensationPlans,"isreferencedunderItem12ofPartIIIofthisAnnualReportonForm10-Kandincorporatedherein.
Corporate Performance Graph
Thefollowingperformancegraphandrelatedinformationshallnotbedeemedtobe"solicitingmaterial"ortobe"filed"withtheSEC,norshallsuchinformationbeincorporatedbyreferenceintoanyfuturefilingundertheSecuritiesActof1933,asamended,ortheSecuritiesAct,excepttotheextentthatwespecificallyincorporateitbyreferenceintosuchfiling.
ThefollowinggraphcomparestheperformanceofourClassAcommonstocktotheNASDAQBenchmarkTRIndex(U.S.)andtotheNASDAQPharmaceuticalBenchmarkTRIndex(U.S.)fromFebruary3,2010(thefirstdatethatsharesofourClassAcommonstockwerepubliclytraded)throughDecember31,2015.Thecomparisonassumes$100wasinvestedafterthemarketclosedonFebruary3,
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ClassACommonStock 2015 2014 High Low High Low FirstQuarter $ 17.11 $ 14.18 $ 15.47 $ 11.22SecondQuarter $ 16.17 $ 11.57 $ 15.83 $ 9.01ThirdQuarter $ 12.36 $ 9.77 $ 15.95 $ 11.97FourthQuarter $ 12.62 $ 10.05 $ 15.62 $ 11.65
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2010inourClassAcommonstockandineachofthepresentedindices,anditassumesreinvestmentofdividends,ifany.
COMPARISONOFQUARTERLYCUMULATIVETOTALRETURNAmongTheNASDAQBenchmarkTRIndex(U.S.),
theNASDAQPharmaceuticalBenchmarkTRIndex(U.S.)andIronwoodPharmaceuticals,Inc.
Item6.Selected Consolidated Financial Data
YoushouldreadthefollowingselectedfinancialdatatogetherwithourconsolidatedfinancialstatementsandtherelatednotesappearingelsewhereinthisAnnualReportonForm10-K.WehavederivedtheconsolidatedstatementsofoperationsdatafortheyearsendedDecember31,2015,2014and2013andtheconsolidatedbalancesheetdataasofDecember31,2015and2014fromourauditedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K.WehavederivedtheconsolidatedstatementsofoperationsdatafortheyearsendedDecember31,2012and2011andtheconsolidatedbalancesheetdataasofDecember31,2013,2012and2011fromourauditedfinancial
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statementsnotincludedinthisAnnualReportonForm10-K.Ourhistoricalresultsforanypriorperiodarenotnecessarilyindicativeofresultstobeexpectedinanyfutureperiod.
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YearsEndedDecember31, 2015 2014 2013 2012 2011 (inthousands,exceptpersharedata) ConsolidatedStatementofOperationsData: Collaborativearrangementsrevenue(1) $ 149,555 $ 76,436 $ 22,881 $ 150,245 $ 65,871Costandexpenses: Costofrevenue 12 5,291 7,203 965 —Write-downofinventorytonetrealizablevalueandlossonnon-cancellablepurchasecommitments(2) 17,638 20,292 — — —
Researchanddevelopment(3) 108,746 101,890 102,378 113,474 86,093Selling,generalandadministrative(3) 125,247 118,333 123,228 92,538 45,920Collaborationexpense(4) — — 42,074 16,030 —
Totalcostandexpenses 251,643 245,806 274,883 223,007 132,013Lossfromoperations (102,088) (169,370) (252,002) (72,762) (66,142)
Other(expense)income: Interestexpense (31,096) (21,166) (21,002) (59) (63)Interestandinvestmentincome 443 257 192 197 456Lossonderivatives(5) (9,928) — — — —Otherincome — 661 — — 900
Other(expense)income,net (40,581) (20,248) (20,810) 138 1,293Netlossbeforeincometaxexpense (142,669) (189,618) (272,812) (72,624) (64,849)Incometaxexpense — — — — 3Netloss $ (142,669) $ (189,618) $ (272,812) $ (72,624) $ (64,852)Netlosspershare—basicanddiluted $ (1.00) $ (1.39) $ (2.35) $ (0.68) $ (0.65)
Weightedaveragenumberofcommonsharesusedinnetlosspershare—basicanddiluted: 142,155 136,811 115,852 106,403 99,875
(1) CollaborativearrangementsrevenuefortheyearendedDecember31,2014includesapproximately$10.2millionrelatedtothereceiptofamilestonepaymentunderourlicenseagreementwithAstellasfortheenrollmentofthefirststudysubjectinaPhaseIIIstudyforlinaclotideinJapan,whichwasachievedinNovember2014,andalsoincludesapproximately$1.9millioninpaymentsfromAlmirallrelatedtotheachievementoftwocommercialmilestonesunderthelicenseagreementwithAlmirall.
CollaborativearrangementsrevenuefortheyearendedDecember31,2013includesapproximately$1.9millioninpaymentsfromAlmirallrelatedtotheachievementoftwomilestonesunderthelicenseagreementwithAlmirall.
CollaborativearrangementsrevenuefortheyearendedDecember31,2012includesan$85.0millionmilestonepaymentreceivedfromAllerganunderthecollaborationagreementforNorthAmericafortheachievementoftwodevelopmentmilestonesupontheFDA'sapprovalofthelinaclotideNDAforbothIBS-CandCIC.
CollaborativearrangementsrevenuefortheyearendedDecember31,2011includesa$20.0millionmilestonepaymentreceivedfromAllerganunderthecollaborationagreementfor
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NorthAmericafortheachievementoftwodevelopmentmilestonesupontheFDA'sacceptanceofthelinaclotideNDAforbothIBS-CandCIC.
(2) DuringtheyearendedDecember31,2015,werecordedexpensesofapproximately$17.6millionforthewrite-downofinventoryandanaccrualforexcessnon-cancelableinventorypurchasecommitmentsrelatedtolinaclotideAPI.ThesechargesprimarilyrelatedtoareductionintheneartermdemandforecastforCONSTELLAintheEuropeanterritorybyAlmirall,ourformerEuropeanpartner;recentregulatorychangesmadebytheChinaFoodandDrugAdministrationtothemarketingapprovalprocessinChina;andtheamendmenttothelicenseagreementwithAllerganpertainingtothedevelopmentandcommercializationoflinaclotideforEuropeexecutedinOctober2015.Pursuanttothetermsoftheamendment,AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEurope,aswellastheassociatedcosts,whichresultedinaccruingforalossonnon-cancelableinventorypurchasecommitmentsunderoneofourAPIsupplyagreementscoveringthecommercialsupplyoflinaclotideAPIfortheEuropeanmarket.
DuringtheyearendedDecember31,2014,werecordedapproximately$20.3millionasawrite-downofinventorytoanestimatednetrealizablevalueofapproximately$5.0million.Thiswrite-downwasprimarilyattributabletoAlmirall'sreducedinventorydemandforecastsfortheEuropeanterritory,mainlyduetothesuspensionofcommercializationofCONSTELLAinGermanyandachallengingcommercialenvironmentthroughoutEurope.
ThesechargesaremorefullydescribedinNote7,Inventory,toourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
(3) DuringtheyearendedDecember31,2014,werecordedapproximately$4.2millionofcostsrelatedtoareductioninworkforceinthethreemonthsendedMarch31,2014,includingemployeeseverance,benefitsandrelatedcostsandadjustments.ThesecostsarereflectedinourConsolidatedStatementofOperationsfortheyearendedDecember31,2014asapproximately$3.0millioninresearchanddevelopmentexpensesandapproximately$1.2millioninselling,generalandadministrativeexpenses.
(4) CollaborationexpensefortheyearendedDecember31,2011isincludedinselling,generalandadministrativeexpenseandwasnotmaterial.
(5) LossonderivativesconsistsofthechangeinfairvalueofourConvertibleNoteHedgesandNoteHedgeWarrants,whicharerecordedasderivativeassetsandliabilities.TheConvertibleNoteHedgesandtheNoteHedgeWarrantsarerecordedatfairvalueateachreportingperiodandchangesinfairvaluearerecordedinourconsolidatedstatementsofoperations.TheConvertibleNoteHedgesandNoteHedgeWarrantsaremorefullydescribedinNote5,FairValueofFinancialInstruments,andNote10,NotesPayable,toourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
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Item7.Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-LookingInformation
ThefollowingdiscussionofourfinancialconditionandresultsofoperationsshouldbereadinconjunctionwithourconsolidatedfinancialstatementsandthenotestothosefinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.Thisdiscussioncontainsforward-lookingstatementsthatinvolvesignificantrisksanduncertainties.Asaresultofmanyfactors,suchasthosesetforthunder"RiskFactors"inItem1AofthisAnnualReportonForm10-K,ouractualresultsmaydiffermateriallyfromthoseanticipatedintheseforward-lookingstatements.
Overview
Weareacommercialbiotechnologycompanyleveragingourprovendevelopmentandcommercialcapabilitiesasweseektobringmultiplemedicinestopatients.Weareadvancingtwotherapeuticplatforms,whichincludeproductopportunitiesinareasoflargeunmetneed,includingirritablebowelsyndromewithconstipation,orIBS-C,andchronicidiopathicconstipation,orCIC,vascularandfibroticdiseases,andrefractorygastroesophagealrefluxdisease,orGERD.
Ourfirstandto-dateonlycommercialproduct,linaclotide,isavailabletoadultmenandwomensufferingfromIBS-CorCICintheUnitedStates,ortheU.S.,underthetrademarkednameLINZESS®,andisavailabletoadultmenandwomensufferingfromIBS-CincertainEuropean
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YearsEndedDecember31, 2015 2014 2013 2012 2011 (inthousands) ConsolidatedBalanceSheetData: Cash,cashequivalentsandavailable-for-salesecurities $ 439,394 $ 248,334 $ 197,602 $ 168,228 $ 164,016Workingcapital(excludingdeferredrevenue)(1) 430,931 234,957 191,636 132,883 138,724Totalassets(1) 619,121 329,322 273,292 229,907 208,977Deferredrevenue,includingcurrentportion 8,989 16,180 16,490 21,405 57,421Debtfinancingandconvertiblenotes,includingcurrentportion(1) 378,548 169,405 169,002 — —
Capitalleaseobligations,includingcurrentportion 2,937 3,723 4,273 569 655Totalliabilities(1) 523,996 240,770 235,067 85,855 99,121Totalstockholders'equity 95,125 88,552 38,225 144,052 109,856
(1) InApril2015,theFinancialAccountingStandardsBoardissuedAccountingStandardsUpdateNo.2015-03,SimplifyingthePresentationofDebtIssuanceCosts,orASU2015-03.ASU2015-03requiresdebtissuancecoststobepresentedinanentity'sbalancesheetasadirectdeductionfromtheassociateddebtliability.
WeelectedearlyadoptionofASU2015-03inthethreemonthsendedJune30,2015,whichresultedinabalancesheetreclassificationofissuancecostsinconnectionwithour11%PhaRMANotesdue2024ofapproximately$1.4millionrecordedinprepaidexpensesandothercurrentassetsandapproximately$2.8millioninotherassetstoareductioninPhaRMANotespayableasofDecember31,2014,andapproximately$1.5millionrecordedinprepaidexpensesandothercurrentassetsandapproximately$4.1millioninotherassetstoareductioninPhaRMANotespayableasofDecember31,2013.Thefinancingcostsincurredinconnectionwiththeissuanceofour2.25%ConvertibleSeniorNotesdueJune15,2022,orthe2022Notes,wererecordedasareductioninthecarryingvalueofsuchdebtinaccordancewithASU2015-03.ASU2015-03ismorefullydescribedinNote2,SummaryofSignificantAccountingPolicies,toourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
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countriesunderthetrademarkednameCONSTELLA®.WeandourU.S.partnerAllerganplc(togetherwithitsaffiliates),orAllergan(formerlyActavisplc),begancommercializingLINZESSintheU.S.inDecember2012.UnderourcollaborationwithAllerganforNorthAmerica,totalnetsalesofLINZESSintheU.S.,asrecordedbyAllergan,arereducedbycommercialcostsincurredbyeachparty,andtheresultingamountissharedequallybetweenusandAllergan.
OurformerEuropeanpartner,Almirall,S.A.,orAlmirall,begancommercializingCONSTELLAinEuropeforthesymptomatictreatmentofmoderatetosevereIBS-Cinadultsinthesecondquarterof2013.InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan,andweandAllerganenteredintoanamendmenttotheEuropeanlicenseagreementtomodifytheremainingsales-basedmilestonesandroyaltiespayabletousandtoprovideforAllergan'sassumptionofresponsibilityfor,andcostof,themanufacturingoflinaclotideactivepharmaceuticalingredient,orAPI,forEuropefromus.Thisamendment,togetherwiththetransferoftheEuropeanlicenseforlinaclotidefromAlmiralltoAllergan,ismorefullydescribedinNote4,Collaboration,LicenseandCo-promotionAgreements,toourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.Currently,CONSTELLAiscommerciallyavailableincertainEuropeancountries,includingtheUnitedKingdom,ItalyandSpain.
Withinourgastrointestinal,orGI,platform,weandAllerganareexploringdevelopmentopportunitiestoenhancetheclinicalprofileofLINZESSbyseekingtoexpanditsutilitywithinIBS-CandCIC,aswellasstudyinglinaclotideinadditionalindicationsandpopulationstoassessitspotentialtotreatvariousGIconditions.InOctober2015,aspartofthisstrategy,wereportedpositivetop-linedatafromaPhaseIIIclinicaltrialintheU.S.withAllerganevaluatinga72mcgdoseoflinaclotideinadultpatientswithCIC.Webelievethesedatasupportthesubmissionofasupplementalnewdrugapplication,orsNDA,totheFDAforapprovaltomarketthe72mcgdoseoflinaclotideintheU.S.Ifapproved,the72mcgdosewouldprovideabroaderrangeoftreatmentoptionstophysiciansandadultCICpatientsintheU.S.Linaclotideisalsobeingdevelopedandcommercializedinotherpartsoftheworldbycertainofourpartners.
WeandAllerganarealsodevelopinglinaclotidecolonicrelease,atargetedoraldeliveryformulationoflinaclotidedesignedtopotentiallyimproveabdominalpainreliefinadultIBS-Cpatients.InadditiontoIBS-C,weareexploringlinaclotidecolonicreleaseforuseinadditionalGIdisorderswherelowerabdominalpainisapredominantsymptom,includingIBS-mixed,orIBS-M,ulcerativecolitisanddiverticulitis,amongothers.
WearealsoadvancingotherGIdevelopmentprogramsformultipleindications.Forexample,weareinvestigatingIW-3718,agastricretentiveformulationofabileacidsequestrantthatisbeingevaluatedforthepotentialtreatmentofrefractoryGERD.WearealsoinvestigatingIW-9179,aguanylatecyclasetype-C,orGC-C,agonistdesignedtotargetupperGIconditions,forthetreatmentofgastroparesisandfunctionaldyspepsia.
Withinourvascular/fibroticplatform,weareleveragingourpharmacologicalexpertiseinguanylatecyclase,orGC,pathwaysgainedthroughthediscoveryanddevelopmentoflinaclotidetoadvancedevelopmentprogramstargetingsolubleguanylatecyclase,orsGC.sGCisavalidatedmechanismwiththepotentialforbroadtherapeuticutilityandmultipleopportunitiesforproductdevelopmentinvascularandfibroticdiseases,aswellasothertherapeuticareas.Todate,wehaveidentifiedtwosGCdevelopmentcandidates,IW-1973andIW-1701,whichhavedistinctpharmacologicprofilesthatwebelievemaybedifferentiatingandenableopportunitiesinmultipleindications.
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Aspartofourstrategy,wehavealsoestablisheddevelopmentandcommercialcapabilitiesthatweplantoleverageasweseektobringmultiplemedicinestopatients.WeintendtoplayanactiveroleinthedevelopmentandcommercializationofourinternallydevelopedproductsintheU.S.,andtoestablishastrongglobalbrandbyout-licensingcommercializationrightsinotherterritoriestohigh-performingpartners.InadditiontotheU.S.andEurope,wehaveenteredintopartnershipstodevelopandcommercializelinaclotideinotherpartsoftheworld.
InDecember2013andFebruary2014,linaclotidewasapprovedinCanadaandMexico,respectively,asatreatmentforadultwomenandmensufferingfromIBS-CorCIC.AllerganhasexclusiverightstocommercializelinaclotideinCanadaasCONSTELLAand,throughasublicensefromAllergan,AlmirallhadexclusiverightstocommercializelinaclotideinMexicoasLINZESS.InMay2014,AllerganbegancommercializingCONSTELLAinCanadaandinJune2014,AlmirallbegancommercializingLINZESSinMexico.InOctober2015,AlmirallandAllerganterminatedthesublicensearrangementwithrespecttoMexico,returningtheexclusiverightstocommercializeCONSTELLAinMexicotoAllergan.CONSTELLAcontinuestobeavailabletoadultIBS-CpatientsinMexico.
AstellasPharmaInc.,orAstellas,ourpartnerinJapan,isdevelopinglinaclotideforthetreatmentofpatientswithIBS-Candchronicconstipationinitsterritory.InNovember2015,weandAstellasreportedpositivetop-linedatafromAstellas'PhaseIIIclinicaltrialoflinaclotideinadultpatientswithIBS-CforJapan.Webelievethesedatasupportthesubmissionofanewdrugapplication,orNDA,totheMinistryofHealth,LaborandWelfareforapprovaltomarketlinaclotideinJapan.InOctober2012,weenteredintoacollaborationagreementwithAstraZenecaAB,orAstraZeneca,toco-developandco-commercializelinaclotideinChina,HongKongandMacau,withAstraZenecahavingprimaryresponsibilityforthelocaloperationalexecution.InDecember2015,weandAstraZenecafiledforapprovalwiththeChinaFoodandDrugAdministration,orCFDA,tomarketlinaclotideinChina.WecontinuetoassessalternativestobringlinaclotidetoIBS-CandCICsufferersinthepartsoftheworldoutsideofourpartneredterritories.
InMarch2015,weandExactSciencesCorp,orExactSciences,enteredintoanagreementtoco-promoteCologuard®,thefirstandonlyFDA-approvednoninvasivestoolDNAscreeningtestforcolorectalcancer.Underthetermsoftheagreement,oursalesteamispromotingandeducatinghealthcarepractitionersregardingCologuard.Wearealsocollaboratingonmedicaleducationinitiativestosupportmorein-depthunderstandingofCologuardandtheimportanceofcolorectalcancerscreening.ExactSciencesmaintainsresponsibilityforallotheraspectsofthecommercializationofCologuardoutsideoftheco-promotion.Wearecompensatedviareimbursementsforsalesdetailing,promotionalsupportservicesandmedicaleducationinitiatives.WealsoearnroyaltiesonthenetsalesofCologuardgeneratedfromthehealthcarepractitionersonwhomwecalllessthesalespromotionreimbursementtous.
InAugust2015,weandAllerganenteredintoanagreementfortheco-promotionofVIBERZI™(eluxadoline)intheU.S.,Allergan'streatmentforadultssufferingfromIBSwithdiarrhea,orIBS-D.Underthetermsoftheagreement,ourclinicalsalesspecialistsaredetailingVIBERZItotheapproximately25,000healthcarepractitionerstowhomtheydetailLINZESS.AllerganisresponsibleforallcostsandactivitiesrelatingtothecommercializationofVIBERZIoutsidetheco-promotion.Ourpromotionaleffortsarecompensatedbasedonthevolumeofcallsdeliveredbyoursalesforce,withthetermsoftheagreementreducingoreliminatingcertainoftheunfavorableadjustmentstotheshareofnetprofitsstipulatedbythelinaclotidecollaborationagreementwithAllerganforNorthAmerica,providedthatwedeliveraminimumnumberofVIBERZIcallsonphysicians.Wearealsocompensatedviareimbursementformedicaleducationinitiatives.
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InNovember2015,AllerganandPfizerInc.enteredintoadefinitiveagreementprovidingforthecombinationofthetwocompanies.Ourcollaborationforthedevelopmentandcommercializationoflinaclotide,aswellasouragreementtoco-promoteVIBERZI,remainsineffect.
InJanuary2013,weclosedaprivateplacementof$175.0millioninaggregateprincipalamountof11%PhaRMANotesdue2024,orthePhaRMANotes.Asaresultofthedebtoffering,wereceivedaggregatenetproceeds,afterofferingexpenses,ofapproximately$167.3million.Duringthesecondquarterof2013,wesold11,204,948sharesofourClassAcommonstockthroughafirmcommitment,underwrittenpublicofferingatapricetothepublicof$13.00pershare.Asaresultoftheoffering,wereceivedaggregatenetproceeds,afterunderwritingdiscountsandcommissionsandotherofferingexpenses,ofapproximately$137.8million.InFebruary2014,wesold15,784,325sharesofourClassAcommonstockthroughafirmcommitment,underwrittenpublicofferingatapricetothepublicof$12.75pershare.Asaresultofthisoffering,wereceivedaggregatenetproceeds,afterunderwritingdiscountsandcommissionsandotherofferingexpenses,ofapproximately$190.4million.InJune2015,weissuedapproximately$335.7millioninaggregateprincipalamountof2.25%ConvertibleSeniorNotesdue2022,orthe2022Notes.Wereceivednetproceedsofapproximately$324.0millionfromthesaleofthe2022Notes,afterdeductingfeesandexpensesofapproximately$11.7million.ThenetproceedsfromthesefinancingsarebeingusedtosupportthecommercializationofLINZESSintheU.S.andtofundlinaclotideandotherdevelopmentopportunitiestoadvanceourstrategytogrowaleadingcommercialbiotechnologycompany,inadditiontoothergeneralcorporatepurposes.
WewereincorporatedinDelawareonJanuary5,1998asMicrobia,Inc.OnApril7,2008,wechangedournametoIronwoodPharmaceuticals,Inc.Wecurrentlyoperateinonereportablebusinesssegment—humantherapeutics.
Todate,wehavededicatedsubstantiallyallofouractivitiestotheresearch,developmentandcommercializationoflinaclotide,aswellastotheresearchanddevelopmentofourotherproductcandidates.Wehaveincurredsignificantoperatinglossessinceourinceptionin1998.AsofDecember31,2015,wehadanaccumulateddeficitofapproximately$1.1billion.Weareunabletopredicttheextentofanyfuturelossesorguaranteewhen,orif,ourcompanywillbecomecashflowpositive.
FinancialOverview
Revenue.RevenuetodatehasbeengeneratedprimarilythroughourcollaborationagreementsforthedevelopmentandcommercializationoflinaclotidewithAllerganforNorthAmericaandAstraZenecaforChina,HongKongandMacau,ourlicenseagreementsforthedevelopmentandcommercializationoflinaclotideinJapanwithAstellasandthedevelopmentandcommercializationoflinaclotideinEuropewithAllergan(formerlywithAlmirall),andourco-promotionagreementswithAllerganforVIBERZIandExactSciencesforCologuardintheU.S.Thetermsoftheseagreementscontainmultipledeliverableswhichmayinclude(i)licenses,(ii)researchanddevelopmentactivities,(iii)themanufactureoffinisheddrugproduct,APIordevelopmentmaterialsforapartnerwhicharereimbursedatacontractuallydeterminedrate,and(iv)co-promotionactivitiesbyourclinicalsalesspecialists.Paymentstousmayinclude(i)up-frontlicensefees,(ii)paymentsforresearchanddevelopmentactivities,(iii)paymentsforthemanufactureoffinisheddrugproduct,APIordevelopmentmaterials,(iv)paymentsbasedupontheachievementofcertainmilestones,(v)paymentsforsalesdetailing,promotionalsupportservicesandmedicaleducationinitiativesand(vi)royaltiesonproductsales.Additionally,wereceiveourshareofthenetprofitsorbearourshareofthenetlossesfromthesaleoflinaclotideintheU.S.andChina.LINZESSlaunchedintheU.S.inDecember2012andCONSTELLAbecamecommerciallyavailableincertainEuropeancountriesbeginninginthesecondquarterof2013.Linaclotideisalsoapprovedinanumberofothercountries.
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WerecordourshareofthenetprofitsandlossesfromthesalesofLINZESSintheU.S.onanetbasisandpresentthesettlementpaymentstoandfromAllerganascollaborationexpenseorcollaborativearrangementsrevenue,asapplicable.Netprofitsorlossesconsistofnetsalestothird-partycustomersandsublicenseincomeintheU.S.lessthecostofgoodssoldaswellasselling,generalandadministrativeexpenses.Althoughweexpectnetsalestoincreaseovertime,thesettlementpaymentsbetweenAllerganandus,resultingincollaborativearrangementsrevenueorcollaborationexpense,aresubjecttofluctuationbasedontheratioofselling,generalandadministrativeexpensesincurredbyeachparty.Inaddition,ourcollaborativearrangementsrevenuemayfluctuateasaresultofthetimingandamountoflicensefeesandclinicalandcommercialmilestonesreceivedandrecognizedunderourcurrentandfuturestrategicpartnershipsaswellastimingandamountofroyaltiesfromthesalesoflinaclotideintheEuropean,CanadianorMexicanmarketsoranyothermarketswherelinaclotidereceivesapproval.InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan.ConcurrentlywiththeEuropeanlicensetransfer,AlmirallandAllerganterminatedthesublicensearrangementwithrespecttoMexico,returningtheexclusiverightstocommercializeCONSTELLAinMexicotoAllergan.CONSTELLAcontinuestobeavailabletoadultIBS-CpatientsinMexico.Additionally,asdescribedabove,inOctober2015weandAllerganseparatelyenteredintoanamendmenttothelicenseagreementrelatingtothedevelopmentandcommercializationoflinaclotideinEurope.ThisamendmentismorefullydescribedinNote4,Collaboration,LicenseandCo-promotionAgreements,toourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
CostofRevenue.CostofrevenueisrecognizeduponshipmentoflinaclotideAPItocertainofourlicensingpartnersoutsideoftheU.S.OurcostofrevenueconsistsoftheinternalandexternalcostsofproducingsuchAPI.
Write-downofinventorytonetrealizablevalueandlossonnon-cancelablepurchasecommitments.DuringtheyearendedDecember31,2015,werecordedexpensesofapproximately$17.6millionforthewrite-downofinventoryandanaccrualforexcessnon-cancelableinventorypurchasecommitmentsrelatedtolinaclotideAPI.ThesechargesprimarilyrelatedtoareductionintheneartermdemandforecastforCONSTELLAintheEuropeanterritorybyAlmirall;recentregulatorychangesmadebytheCFDAtothemarketingapprovalprocessinChina;andtheamendmenttothelicenseagreementwithAllerganpertainingtothedevelopmentandcommercializationoflinaclotideforEuropeexecutedinOctober2015.Pursuanttothetermsoftheamendment,AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEurope,aswellastheassociatedcosts,whichresultedinaccruingforalossonnon-cancelableinventorypurchasecommitmentsduringthethreemonthsendedSeptember30,2015,underoneofourAPIsupplyagreementscoveringthecommercialsupplyoflinaclotideAPIfortheEuropeanmarket.WehaveevaluatedallremainingminimumpurchasecommitmentsunderourlinaclotideAPIsupplyagreementsthrough2023andconcludedthattheapproximately$22.3millionofpurchasecommitmentsfromthesecondAPIsupplyagreementcoveringtheJapan,China,HongKongandMacaumarketsarerealizablebasedonthecurrentforecastsreceivedfromourpartnersintheseterritoriesandourinternalforecasts.
DuringtheyearendedDecember31,2014,wewrotedownapproximately$20.3millionininventorytoanestimatednetrealizablevalueofapproximately$5.0million.ThiswritedownwasprimarilyattributabletoAlmirall'sreducedinventorydemandforecasts,mainlyduetothesuspensionofcommercializationofCONSTELLAinGermanyandachallengingcommercialenvironmentthroughoutEurope.
ThesechargesaremorefullydescribedinNote7,Inventory,toourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
ResearchandDevelopmentExpense.Researchanddevelopmentexpenseconsistsofexpensesincurredinconnectionwiththediscoveryanddevelopmentofourproductcandidates.Theseexpenses
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consistprimarilyofcompensation,benefitsandotheremployee-relatedexpenses,researchanddevelopmentrelatedfacilitycosts,third-partycontractcostsrelatingtononclinicalstudyandclinicaltrialactivities,developmentofmanufacturingprocesses,regulatoryregistrationofthird-partymanufacturingfacilities,aswellaslicensingfeesforourproductcandidates.Wechargeallresearchanddevelopmentexpensestooperationsasincurred.UnderourcollaborationagreementswithAllerganfortheU.S.andAstraZenecaforChina,HongKongandMacau,wearereimbursedforcertainresearchanddevelopmentexpenses,andwenetthesereimbursementsagainstourresearchanddevelopmentexpensesasincurred.PaymentstoAllerganorAstraZenecaforsuchterritoriesarerecordedasincrementalresearchanddevelopmentexpense.
ThecoreofourresearchanddevelopmentstrategyistoleverageourdevelopmentcapabilitiesinaddressingGIdisordersaswellasourpharmacologicexpertiseinGCpathwaystobringmultiplemedicinestopatients.Weareadvancingmultipleproductopportunitieswithintwocoretherapeuticplatforms:GIandvascular/fibroticdiseases.
Linaclotide.Ourleadproductislinaclotide,anditrepresentsthelargestportionofourresearchanddevelopmentexpenseforourproductcandidates.Linaclotideisthefirstand,todate,onlyFDA-approvedguanylatecyclasetype-C,orGC-C,agonist.LinaclotideisapprovedintheU.S.andinanumberofE.U.andothercountries.
WeandAllerganareexploringdevelopmentopportunitiesintheU.S.toenhancetheclinicalprofileofLINZESSbyseekingtoexpanditsutilityinitsindicatedpopulations,aswellasstudyinglinaclotideinadditionalindications,populationsandformulationstoassessitspotentialtotreatvariousGIconditions.InOctober2015,aspartofthisstrategy,wereportedpositivetop-linedatafromaPhaseIIIclinicaltrialintheU.S.withAllerganevaluatinga72mcgdoseoflinaclotideinadultpatientswithCIC.Additionally,inNovember2015,theFDAapprovedtheinclusionoflabelinginstructionsinthefullLINZESSPrescribingInformationallowingadultIBS-CandCICpatientswithswallowingdifficultiestheoptiontoadministerthecontentsofLINZESScapsulesinapplesauceorwater.
Ourlinaclotidedevelopmentopportunitiesalsoincludelinaclotidecolonicrelease,atargetedoraldeliveryformulationoflinaclotidedesignedtopotentiallyimproveabdominalpainreliefinadultIBS-Cpatients,aswellasinpatientswithadditionalGIdisorderswherelowerabdominalpainisapredominantsymptom,suchasIBS-M.Additionally,weandAllerganareevaluatinglinaclotideasapotentialtreatmentoftheGIdysfunctionassociatedwithopioid-inducedconstipation,orOIC,inadultpatientsandhaveestablishedaplanwiththeFDAforclinicalpediatricstudieswithlinaclotide,asdescribedbelow.
DevelopmentCandidates.WeareadvancingotherdevelopmentprogramswithinourGIplatformforindicationssuchasrefractoryGERDanddiabeticgastroparesis.ThisincludesIW-9179,aGC-CagonistdesignedtotargetupperGIconditions,whichisbeingexploredforthetreatmentofdiabeticgastroparesisandfunctionaldyspepsia.Additionally,IW-3718isagastricretentiveformulationofabileacidsequestrantthatisbeingevaluatedforthepotentialtreatmentofrefractoryGERD.
Withinourvascular/fibroticplatform,weareleveragingourpharmacologicalexpertiseinGCpathwaysgainedthroughthediscoveryanddevelopmentoflinaclotidetoadvancedevelopmentprogramstargetingsGC.Todate,wehaveidentifiedtwosGCdevelopmentcandidates,IW-1973andIW-1701,whichhavedistinctpharmacologicprofilesthatwebelievemaybedifferentiatingandenableopportunitiesinmultipleindications.Wehaveadditionalassetsinearlydevelopmentthatwecontinuetoadvance,andweareexploringstrategicoptionsforfurtherdevelopmentoftheseassets.
DiscoveryResearch.OurdiscoveryeffortsareprimarilyfocusedonidentifyingnovelclinicalcandidatesthatdrawonourproprietaryandexpandingexpertiseinGIdisordersandGC.
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ThefollowingtablesetsforthourresearchanddevelopmentexpensesrelatedtoourproductpipelinefortheyearsendedDecember31,2015,2014and2013.Theseexpensesrelateprimarilytoexternalcostsassociatedwithnonclinicalstudiesandclinicaltrialcosts,costsincurredtodevelopmanufacturingprocessesandregistermanufacturingfacilitieswiththeFDA,andlicensingfeesforourproductcandidates.Weallocatecostsrelatedtofacilities,depreciation,share-basedcompensation,researchanddevelopmentsupportservices,laboratorysuppliesandcertainothercostsdirectlytoprograms.
Since2004,thedatewebegantrackingcostsbyprogram,wehaveincurredapproximately$355.7millionofresearchanddevelopmentexpensesrelatedtolinaclotide.TheexpensesforlinaclotideincludebothourportionoftheresearchanddevelopmentcostsincurredbyAllerganfortheU.S.andAstraZenecaforChina,HongKongandMacauandinvoicedtousunderthecost-sharingprovisionsofourcollaborationagreements,aswellastheunreimbursedportionofresearchanddevelopmentcostsincurredbyusundersuchcost-sharingprovisions.
Thelengthyprocessofsecuringregulatoryapprovalsfornewdrugsrequirestheexpenditureofsubstantialresources.Anyfailurebyustoobtain,oranydelayinobtaining,regulatoryapprovalswouldmateriallyadverselyaffectourproductdevelopmenteffortsandourbusinessoverall.InAugust2012,theFDAapprovedourNewDrugApplicationsforLINZESSasaonce-dailytreatmentforadultmenandwomensufferingfromIBS-CorCIC.InconnectionwiththeFDAapproval,wearerequiredtoconductcertainnonclinicalandclinicalstudies,includingthoseaimedatunderstanding:(a)whetherorallyadministeredlinaclotidecanbedetectedinbreastmilk,(b)thepotentialforantibodiestobedevelopedtolinaclotide,andifso,(c)whetherantibodiesspecificforlinaclotidecouldhaveanytherapeuticorsafetyimplications.Inaddition,weandAllerganestablishedanonclinicalandclinicalpost-marketingplanwiththeFDAtounderstandtheefficacyandsafetyofLINZESSinpediatricpatients.Thefirststepinthisplanwastoundertakecertainadditionalnonclinicalstudies.WeandAllerganhavecompletedthesenonclinicalstudiesandhaveinitiatedtwoPhaseIIclinicalpediatricstudiesinIBS-Cpatientsagesevento17andfunctionalconstipationpatientsagesixto17.WeandAllerganarealsoexploringdevelopmentopportunitiestoenhancetheclinicalprofileofLINZESSbyseekingtoexpanditsutilitywithinIBS-CandCIC,aswellasstudyinglinaclotideinadditionalindications,populationsandformulationstoassessitspotentialtotreatvariousGIconditions.InOctober2012,weenteredintoacollaborationagreementwithAstraZenecatoco-developandco-commercializelinaclotideinChina,HongKongandMacau,withAstraZenecahavingprimaryresponsibilityforthelocaloperationalexecution.Wecannotcurrentlyestimatewithanydegreeof
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YearsEndedDecember31, 2015 2014 2013 (inthousands)
Linaclotide(1) $ 48,981 $ 48,340 $ 46,048Developmentcandidates: GIdisorders(threecompounds)(2) 19,152 15,992 11,068Vascularandfibroticdisorders(twocompounds)(2) 20,465 11,775 —Centralnervoussystemdisorders(onecompound)(2) 1,653 2,190 14,793Allergicdisorders — — 916
Totaldevelopmentcandidates 41,270 29,957 26,777Discoveryresearch 18,495 23,593 29,553
$ 108,746 $ 101,890 $ 102,378
(1) Includeslinaclotideinallindications,populationsandformulations.
(2) NumberofcompoundsisfortheyearendedDecember31,2015.
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certaintytheamountoftimeormoneythatwewillberequiredtoexpendinthefutureonlinaclotideforothergeographicmarkets,withinitsindicatedpopulationorinadditionalindications,populationsorformulations.WearealsoadvancingmultipleotherGIdevelopmentprogramstargetingdiseasessuchasrefractoryGERDanddiabeticgastroparesis,aswellasdevelopmentprogramswithinourvascular/fibroticplatformtargetingsGC.Giventheinherentuncertaintiesthatcomewiththedevelopmentofpharmaceuticalproducts,wecannotestimatewithanydegreeofcertaintyhowourprogramswillevolve,andthereforetheamountoftimeormoneythatwouldberequiredtoobtainregulatoryapprovaltomarketthem.Asaresultoftheseuncertaintiessurroundingthetimingandoutcomeofanyapprovals,wearecurrentlyunabletoestimatepreciselywhen,ifever,linaclotide'sutilitywillbeexpandedinitsindicatedpopulation;iforwhenlinaclotidewillbedevelopedoutsideofitscurrentmarkets,indications,populationsorformulations;orwhen,ifever,anyofourotherproductcandidateswillgeneraterevenuesandcashflows.
Weinvestcarefullyinourpipeline,andthecommitmentoffundingforeachsubsequentstageofourdevelopmentprogramsisdependentuponthereceiptofclear,supportivedata.Inaddition,weintendtoaccessexternallydiscovereddrugcandidatesthatfitwithinourcorestrategy.Inevaluatingthesepotentialassets,weapplythesameinvestmentcriteriaasthoseusedforinvestmentsininternallydiscoveredassets.
Thesuccessfuldevelopmentofourproductcandidatesishighlyuncertainandsubjecttoanumberofrisksincluding,butnotlimitedto:
• Thedurationofclinicaltrialsmayvarysubstantiallyaccordingtothetype,complexityandnoveltyoftheproductcandidate.
• TheFDAandcomparableagenciesinforeigncountriesimposesubstantialandvaryingrequirementsontheintroductionoftherapeuticpharmaceuticalproducts,typicallyrequiringlengthyanddetailedlaboratoryandclinicaltestingprocedures,samplingactivitiesandothercostlyandtime-consumingprocedures.
• Dataobtainedfromnonclinicalandclinicalactivitiesatanystepinthetestingprocessmaybeadverseandleadtodiscontinuationorredirectionofdevelopmentactivity.Dataobtainedfromtheseactivitiesalsoaresusceptibletovaryinginterpretations,whichcoulddelay,limitorpreventregulatoryapproval.
• Thedurationandcostofdiscovery,nonclinicalstudiesandclinicaltrialsmayvarysignificantlyoverthelifeofaproductcandidateandaredifficulttopredict.
• Thecosts,timingandoutcomeofregulatoryreviewofaproductcandidatemaynotbefavorable.
• Theemergenceofcompetingtechnologiesandproductsandotheradversemarketdevelopmentsmaynegativelyimpactus.
Asaresultofthefactorsdiscussedabove,includingthefactorsdiscussedunder"RiskFactors"inItem1AofthisAnnualReportonForm10-K,weareunabletodeterminethedurationandcoststocompletecurrentorfuturenonclinicalandclinicalstagesofourproductcandidatesorwhen,ortowhatextent,wewillgeneraterevenuesfromthecommercializationandsaleofourproductcandidates.Developmenttimelines,probabilityofsuccessanddevelopmentcostsvarywidely.Weanticipatethatwewillmakedeterminationsastowhichadditionalprogramstopursueandhowmuchfundingtodirecttoeachprogramonanongoingbasisinresponsetothedataofeachproductcandidate,thecompetitivelandscapeandongoingassessmentsofsuchproductcandidate'scommercialpotential.Asaresultoftheregulatoryapprovalsbeginningin2012,linaclotidehasbeengeneratingsalesinconnectionwithcommerciallaunchesintheU.S.andanumberofE.U.andothercountries.
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Weexpectourresearchanddevelopmentcostswillbesubstantialfortheforeseeablefuture.Wewillcontinuetoinvestinlinaclotideincludingtheinvestigationofwaystoenhancetheclinicalprofilewithinitsindicatedpopulationandtheexplorationofitsutilityinotherindications,populationsandformulations.Wewillalsoinvestinourotherproductcandidatesasweadvancethemthroughnonclinicalstudiesandclinicaltrials,inadditiontofundingfull-timeequivalentsforresearchanddevelopmentactivitiesunderourexternalcollaborationandlicenseagreements.
Selling,GeneralandAdministrativeExpense.Selling,generalandadministrativeexpenseconsistsprimarilyofcompensation,benefitsandotheremployee-relatedexpensesforpersonnelinouradministrative,finance,legal,informationtechnology,businessdevelopment,commercial,sales,marketing,communicationsandhumanresourcefunctions.Othercostsincludethelegalcostsofpursuingpatentprotectionofourintellectualproperty,generalandadministrativerelatedfacilitycosts,insurancecostsandprofessionalfeesforaccountingandlegalservices.AswecontinuetoinvestinthecommercializationofLINZESS,weexpectourselling,generalandadministrativeexpenseswillbesubstantialfortheforeseeablefuture.Wechargeallselling,generalandadministrativeexpensestooperationsasincurred.
UnderourAstraZenecacollaborationagreement,wearereimbursedforcertainselling,generalandadministrativeexpensesandwenetthesereimbursementsagainstourselling,generalandadministrativeexpensesasincurred.WeincludeAllergan'sselling,generalandadministrativecost-sharingpaymentsinthecalculationofthenetprofitsandnetlossesfromthesaleofLINZESSintheU.S.andpresentthenetpaymenttoorfromAllerganascollaborationexpenseorcollaborativearrangementsrevenue,respectively.
CollaborationExpense.CollaborationexpenserepresentssettlementpaymentsduetoAllerganon50%ofLINZESSnetsalesintheU.S.aswellascostofgoodssoldandselling,generalandadministrativecost-sharingsettlementbetweenusandAllergan.
Other(Expense)Income.Interestexpenseconsistsprimarilyofcashandnon-cashinterestcostsrelatedtoouroutstandingPhaRMANotesandthe2022Notes.Non-cashinterestexpenseconsistsofamortizationofthedebtdiscountandassociateddebtissuancecostsassociatedwiththePhaRMANotesand2022Notes.Weamortizethesecostsusingtheeffectiveinterestratemethodoverthelifeoftherespectivenoteagreementsasinterestexpenseinourstatementsofoperations.
Interestincomeconsistsofinterestearnedonourcash,cashequivalentsandmarketablesecurities.
InJune2015,inconnectionwiththeissuanceofthe2022Notes,weenteredintoconvertiblenotehedgetransactions,ortheConvertibleNoteHedges.ConcurrentlywithenteringintotheConvertibleNoteHedges,wealsoenteredintocertainwarranttransactionsinwhichwesoldnotehedgewarrants,ortheNoteHedgeWarrants,totheConvertibleNoteHedgecounterpartiestoacquire20,249,665sharesofourClassAcommonstock,subjecttocustomaryanti-dilutionadjustments.LossonderivativesconsistsofthechangeinfairvalueoftheConvertibleNoteHedgesandNoteHedgeWarrants,whicharerecordedasderivativeassetsandliabilities.TheConvertibleNoteHedgesandtheNoteHedgeWarrantsarerecordedatfairvalueateachreportingperiodandchangesinfairvaluearerecordedinourconsolidatedstatementsofoperations.
CriticalAccountingPoliciesandEstimates
OurdiscussionandanalysisofourfinancialconditionandresultsofoperationsisbaseduponourconsolidatedfinancialstatementspreparedinaccordancewithU.S.generallyacceptedaccountingprinciples.Thepreparationofthesefinancialstatementsrequiresustomakecertainestimatesandassumptionsthatmayaffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateoftheconsolidatedfinancialstatements,andtheamountsofrevenuesandexpensesduringthereportedperiods.Significantestimatesandassumptionsinourconsolidated
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financialstatementsincludethoserelatedtorevenuerecognition,available-for-salesecurities,inventoryvaluation,andrelatedreserves;impairmentoflong-livedassets;initialvaluationproceduresfortheissuanceofconvertiblenotes;fairvalueofderivatives;balancesheetclassificationofnotespayableandconvertiblenotes;incometaxes,includingthevaluationallowancefordeferredtaxassets;researchanddevelopmentexpenses;contingenciesandshare-basedcompensation.Webaseourestimatesonourhistoricalexperienceandonvariousotherassumptionsthatarebelievedtobereasonable,theresultsofwhichformthebasisformakingjudgmentsaboutthecarryingvaluesofassetsandliabilities.Actualresultsmaydiffermateriallyfromourestimatesunderdifferentassumptionsorconditions.Changesinestimatesarereflectedinreportedresultsintheperiodinwhichtheybecomeknown.
Webelievethatourapplicationofthefollowingaccountingpolicies,eachofwhichrequiresignificantjudgmentsandestimatesonthepartofmanagement,arethemostcriticaltoaidinfullyunderstandingandevaluatingourreportedfinancialresults.OursignificantaccountingpoliciesaremorefullydescribedinNote2,SummaryofSignificantAccountingPolicies,toourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
Revenue Recognition
Ourrevenueisgeneratedprimarilythroughcollaborativeresearchanddevelopment,licensingandco-promotionagreements.Thetermsoftheseagreementscontainmultipledeliverableswhichmayinclude(i)licenses,(ii)researchanddevelopmentactivities,includingparticipationonjointsteeringcommittees,(iii)themanufactureoffinisheddrugproduct,APIordevelopmentmaterialsforapartner,whicharereimbursedatacontractuallydeterminedrate,and(iv)co-promotionactivitiesbyourclinicalsalesspecialists.Non-refundablepaymentstousundertheseagreementsmayinclude(i)up-frontlicensefees,(ii)paymentsforresearchanddevelopmentactivities,(iii)paymentsforthemanufactureoffinisheddrugproduct,APIordevelopmentmaterials,(iv)paymentsbasedupontheachievementofcertainmilestones,(v)paymentsforsalesdetailing,promotionalsupportservicesandmedicaleducationinitiatives,and(vi)royaltiesonproductsales.Additionally,wemayreceiveourshareofthenetprofitsorbearourshareofthenetlossesfromthesaleoflinaclotideintheU.S.andChinathroughourcollaborationswithAllerganandAstraZeneca,respectively.
WeevaluaterevenuefromnewagreementsthathavemultipleelementsundertheguidanceofAccountingStandardsUpdate,orASU,No.2009-13,Multiple-DeliverableRevenueArrangements,orASU2009-13.WealsoevaluatewhetheramendmentstoourmultipleelementarrangementsareconsideredmaterialmodificationsthataresubjecttotheapplicationofASU2009-13.Thisevaluationrequiresustoassessallrelevantfactsandcircumstancesandtomakesubjectivedeterminationsandjudgments.Aspartofthisassessment,weconsiderwhetherthemodificationresultsinamaterialchangetothearrangement,includingwhetherthereisachangeintotalarrangementconsiderationthatismorethaninsignificant,whethertherearechangesinthedeliverablesincludedinthearrangement,whetherthereisachangeinthetermofthearrangementandwhetherthereisasignificantmodificationtothedeliveryscheduleforcontracteddeliverables.
Weidentifythedeliverablesincludedwithinmultipleelementagreementsandevaluatewhichdeliverablesrepresentseparateunitsofaccounting.Weaccountforthosecomponentsasseparateelementswhenthefollowingcriteriaaremet:
• thedelivereditemshavevaluetothecustomeronastand-alonebasis;and
• ifthereisageneralrightofreturnrelativetothedelivereditems,deliveryorperformanceoftheundelivereditemsisconsideredprobableandwithinourcontrol.
Thisevaluationrequiressubjectivedeterminationsandrequiresustomakejudgmentsabouttheindividualdeliverablesandwhethersuchdeliverablesareseparablefromtheotheraspectsofthecontractualrelationship.Indeterminingtheunitsofaccounting,weevaluatecertaincriteria,including
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whetherthedeliverableshavestandalonevalue,basedonconsiderationoftherelevantfactsandcircumstancesforeacharrangement.Factorsconsideredinthisdeterminationincludetheresearch,manufacturingandcommercializationcapabilitiesofthepartnerandtheavailabilityofpeptideresearchandmanufacturingexpertiseinthegeneralmarketplace.Inaddition,weconsiderwhetherthecollaboratorcanusethelicenseorotherdeliverablesfortheirintendedpurposewithoutthereceiptoftheremainingelements,andwhetherthevalueofthedeliverableisdependentontheundelivereditemsandwhetherthereareothervendorsthatcanprovidetheundelivereditems.
Theconsiderationreceivedisallocatedamongtheseparateunitsofaccountingusingtherelativesellingpricemethod,andtheapplicablerevenuerecognitioncriteriaareappliedtoeachoftheseparateunits.
Wedeterminetheestimatedsellingpricefordeliverablesusingvendor-specificobjectiveevidence,orVSOE,ofsellingprice,ifavailable,third-partyevidence,orTPE,ofsellingpriceifVSOEisnotavailable,orbestestimateofsellingprice,orBESP,ifneitherVSOEnorTPEisavailable.DeterminingtheBESPforadeliverablerequiressignificantjudgment.WeuseBESPtoestimatethesellingpriceforlicensestoourproprietarytechnology,sinceweoftendonothaveVSOEorTPEofsellingpriceforthesedeliverables.InthosecircumstanceswhereweutilizeBESPtodeterminetheestimatedsellingpriceofalicensetoourproprietarytechnology,weconsidermarketconditionsaswellasentity-specificfactors,includingthosefactorscontemplatedinnegotiatingtheagreementsaswellasinternallydevelopedmodelsthatincludeassumptionsrelatedtothemarketopportunity,estimateddevelopmentcosts,probabilityofsuccessandthetimeneededtocommercializeaproductcandidatepursuanttothelicense.InvalidatingourBESP,weevaluatewhetherchangesinthekeyassumptionsusedtodeterminetheBESPwillhaveasignificanteffectontheallocationofarrangementconsiderationbetweenmultipledeliverables.
Werecognizerevenuewhenthereispersuasiveevidencethatanarrangementexists,serviceshavebeenrenderedordeliveryhasoccurred,thepriceisfixedordeterminable,andcollectionisreasonablyassured.
Forcertainofourarrangements,particularlyourlicenseagreementwithAllerganfortheEuropeanterritory,itisrequiredthattaxesbewithheldonpaymentstous.Wehaveadoptedapolicytorecognizerevenuenetofthesetaxwithholdings.
NetProfitorNetLossSharing
Thedeterminationofwhetherweshouldrecognizerevenueonagrossornetbasisinvolvesjudgmentbasedontherelevantfactsandcircumstances.InaccordancewithAccountingStandardsCodification,orASC,Topic808,CollaborativeArrangements,andASC605-45,PrincipalAgentConsiderations,weconsiderthenatureandcontractualtermsofthearrangementandthenatureofourbusinessoperationstodeterminetheclassificationofthetransactionsunderourcollaborationagreements.Werecordrevenuetransactionsgrossintheconsolidatedstatementsofoperationsifwearedeemedtheprincipalinthetransaction,whichincludesbeingtheprimaryobligorandhavingtherisksandrewardsofownership.
Werecognizeourshareofthepre-taxcommercialnetprofitornetlossgeneratedfromthesalesofLINZESSintheU.S.intheperiodtheproductsalesarereportedbyAllerganandrelatedcostofgoodssoldandselling,generalandadministrativeexpensesareincurredbyusandourcollaborationpartner.TheseamountsarepartiallydeterminedbasedonamountsprovidedbyAllerganandinvolvetheuseofestimatesandjudgments,suchasproductsalesallowancesandaccrualsrelatedtopromptpaymentdiscounts,chargebacks,governmentalandcontractualrebates,wholesalerfees,productreturns,andco-paymentassistancecosts,whichcouldbeadjustedbasedonactualresultsinthefuture.WearehighlydependentonAllerganfortimelyandaccurateinformationregardinganynetrevenuesrealizedfromsalesofLINZESSintheU.S.andthecostsincurredinsellingit,inordertoaccurately
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reportourresultsofoperations.Fortheperiodscoveredintheconsolidatedfinancialstatementspresented,therehavebeennomaterialchangestopriorperiodestimatesofrevenues,costofgoodssoldorselling,generalandadministrativeexpensesassociatedwiththesalesofLINZESSintheU.S.However,ifwedonotreceivetimelyandaccurateinformationorincorrectlyestimateactivitylevelsassociatedwiththecollaborationatagivenpointintime,wecouldberequiredtorecordadjustmentsinfutureperiods.
WerecordourshareofthenetprofitsornetlossesfromthesalesofLINZESSintheU.S.onanetbasisandpresentthesettlementpaymentstoandfromAllerganascollaborationexpenseorcollaborativearrangementsrevenue,asapplicable,aswearenottheprimaryobligoranddonothavetherisksandrewardsofownershipinthecollaborationagreementwithAllerganforNorthAmerica.WeandAllergansettlethecostsharingquarterly,suchthatourstatementofoperationsreflects50%ofthepre-taxnetprofitorlossgeneratedfromsalesofLINZESSintheU.S.
Up-FrontLicenseFees
Werecognizerevenuesfromnonrefundable,up-frontlicensefeesrelatedtoarrangementsenteredintopriortotheadoptionofASU2009-13,includingthe$30.0millionup-frontlicensefeeundertheAstellaslicenseagreemententeredintoinNovember2009,onastraight-linebasisoverthecontractedorestimatedperiodofperformancesincethelicensedeliverableswerenotdeemedtohavevalueonastandalonebasisunderpre-ASU2009-13guidanceandwecouldnotdeterminethefairvalueoftheundeliveredelements.Theperiodofperformanceoverwhichtherevenuesarerecognizedistypicallytheperiodoverwhichtheresearchand/ordevelopmentisexpectedtooccur.Asaresult,wearerequiredtomakeestimatesregardingthedrugdevelopmentandcommercializationtimelinesforcompoundsbeingdevelopedpursuanttoanyapplicableagreement.Thedeterminationofthelengthoftheperiodoverwhichtorecognizetherevenueissubjecttojudgmentandestimationandcanhaveanimpactontheamountofrevenuerecognizedinagivenperiod.Quarterly,wereassessourperiodofsubstantialinvolvementoverwhichweamortizeourup-frontlicensefeesandmakeadjustmentsasappropriate.Ourestimatesregardingtheperiodofperformanceunderourcollaborativeresearchanddevelopmentandlicensingagreementshavechangedinthepastandmaychangeinthefuture.Anychangeinourestimatescouldresultinsubstantialchangestoourresultsfortheperiodoverwhichtherevenuesfromanup-frontlicensefeearerecognized.Intheeventthatanarrangementweretobeterminated,wewouldrecognizeasrevenueanyportionoftheup-frontfeethathadnotpreviouslybeenrecordedasrevenue,butwasclassifiedasdeferredrevenueatthedateofsuchtermination.AtDecember31,2015,ofourlinaclotidecollaborationandlicensearrangements,onlyaportionofAstellas'up-frontlicensefeeremaineddeferred.Theup-frontlicensefeesundertheAllergancollaborationforNorthAmericaandtheAllergancollaborationforEurope(previouslywithAlmirall)werefullyamortizedatDecember31,2015,astheperiodofperformanceunderthosearrangementsendedinthethreemonthsendedSeptember30,2012.
Werecognizerevenueallocatedtothelicenserelatedtocollaborationandlicenseagreementsenteredintoormateriallymodified,includingtheamountsallocatedtothelicenseundertheAstraZenecacollaborationagreemententeredintoinOctober2012,upondelivery,whenwebelievethelicensetoourintellectualpropertyhasstand-alonevalue.Whenwerecognizerevenueallocatedtothelicenseupondeliveryunderanyofourcollaborations,wemayexperiencesignificantfluctuationsinourcollaborativearrangementsrevenuesfromquartertoquarterandyeartoyeardependingonthetimingoftransactions.Whenwebelievethelicensetoourintellectualpropertydoesnothavestand-alonevaluefromtheotherdeliverablestobeprovidedinthearrangement,itiscombinedwithotherdeliverablesandtherevenueofthecombinedunitofaccountingisrecordedbasedonthemethodappropriateforthelastdelivereditem.
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Milestones
Attheinceptionofeacharrangementthatincludespre-commercialmilestonepayments,weevaluatewhethereachpre-commercialmilestoneissubstantive,inaccordancewithASUNo.2010-17,RevenueRecognition—MilestoneMethod,orASU2010-17.Thisevaluationincludesanassessmentofwhether(a)theconsiderationiscommensuratewitheither(1)theentity'sperformancetoachievethemilestone,or(2)theenhancementofthevalueofthedelivereditem(s)asaresultofaspecificoutcomeresultingfromtheentity'sperformancetoachievethemilestone,(b)theconsiderationrelatessolelytopastperformanceand(c)theconsiderationisreasonablerelativetoallofthedeliverablesandpaymenttermswithinthearrangement.Weevaluatefactorssuchasthescientific,clinical,regulatory,commercialandotherrisksthatmustbeovercometoachievetherespectivemilestone,thelevelofeffortandinvestmentrequiredandwhetherthemilestoneconsiderationisreasonablerelativetoalldeliverablesandpaymenttermsinthearrangementinmakingthisassessment.AtDecember31,2015,wehadnopre-commercialmilestonesthatweredeemedsubstantive.Ifasubstantivepre-commercialmilestonewereachievedandcollectionoftherelatedreceivablewasreasonablyassured,wewouldrecognizerevenuerelatedtothemilestoneinitsentiretyintheperiodinwhichthemilestonewasachieved.Ifweweretoachievemilestonesthatweconsidersubstantiveunderanyofourcollaborations,wemayexperiencesignificantfluctuationsinourcollaborativearrangementsrevenuefromquartertoquarterandyeartoyeardependingonthetimingofachievingsuchsubstantivemilestones.Inthosecircumstanceswhereapre-commercialmilestoneisnotsubstantive,werecognizeasrevenueonthedatethemilestoneisachievedanamountequaltotheapplicablepercentageoftheperformanceperiodthathadelapsedasofthedatethemilestonewasachieved,withthebalancebeingdeferredandrecognizedovertheremainingperiodofperformance.Pre-commercialmilestonepaymentsreceivedpriortotheadoptionofASU2010-17continuetoberecognizedovertheremainingperiodofperformance.
Commercialmilestonesareaccountedforasroyaltiesandarerecordedasrevenueuponachievementofthemilestone,assumingallotherrevenuerecognitioncriteriaaremet.
RoyaltiesonProductSales
Wereceive,orexpecttoreceiveinthefuture,royaltyrevenuesundercertainofourlicenseorcollaborationagreements.Ifwedonothaveanyfutureperformanceobligationsundertheselicenseorcollaborationsagreements,werecordtheserevenuesasearned.Totheextentwedonothaveaccesstotheroyaltyreportsfromourpartnersortheabilitytoaccuratelyestimatetheroyaltyrevenueintheperiodearned,werecordsuchroyaltyrevenuesonequarterinarrears.
Other
Weproducefinisheddrugproduct,APIanddevelopmentmaterialsforcertainofourpartners.
Werecognizerevenueonfinisheddrugproduct,APIanddevelopmentmaterialswhenthematerialhaspassedallqualitytestingrequiredforcollaboratoracceptance,deliveryhasoccurred,titleandriskoflosshavetransferredtothecollaborator,thepriceisfixedordeterminable,andcollectionisreasonablyassured.AsitrelatestodevelopmentmaterialsandAPIproducedforAstellas,wearereimbursedatacontractedrate.SuchreimbursementsareconsideredaspartofrevenuegeneratedpursuanttotheAstellaslicenseagreementandarepresentedascollaborativearrangementsrevenue.Anyfinisheddrugproduct,APIanddevelopmentmaterialscurrentlyproducedforAllerganfortheU.S.orAstraZenecaforChina,HongKongandMacauarerecognizedinaccordancewiththecost-sharingprovisionsoftheAllerganandAstraZenecacollaborationagreements,respectively.InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan,andweseparatelyenteredintoanamendmenttothelicenseagreementwithAllerganrelatingtothedevelopmentandcommercializationoflinaclotideinEurope.Pursuanttothe
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termsoftheamendment,AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEuropefromus,aswellastheassociatedcosts.Wemayexperiencefluctuationsinourcollaborativearrangementsrevenuefromquartertoquarterandyeartoyeardependingonthetimingofsuchtransactions.
TheagreementsabovearemorefullydescribedinNote4,Collaboration,LicenseandCo-promotionAgreements,intheaccompanyingnotestoourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
Fair Value Measurements
Wehavecertainassetsandliabilitiesthataremeasuredatfairvalueonarecurringbasis,andwhichhavebeenclassifiedasLevel1,2or3withinthefairvaluehierarchyasdescribedintheaccountingstandardsforfairvaluemeasurements.Ingeneral,fairvaluesdeterminedbyLevel1inputsutilizeobservableinputssuchasquotedpricesinactivemarketsforidenticalassetsorliabilities.FairvaluesdeterminedbyLevel2inputsutilizedatapointsthatareeitherdirectlyorindirectlyobservable,suchasquotedprices,interestratesandyieldcurves.FairvaluesdeterminedbyLevel3inputsutilizeunobservabledatapointsinwhichthereislittleornomarketdata,whichrequireustodevelopourownassumptionsfortheassetorliability.
Ourinvestmentportfolioincludesmainlyfixedincomesecuritiesthatdonotalwaystradeonadailybasis.Asaresult,thepricingservicesweuseapplyotheravailableinformationasapplicablethroughprocessessuchasbenchmarkyields,benchmarkingoflikesecurities,sectorgroupingsandmatrixpricingtopreparevaluations.Inaddition,modelprocessesareusedtoassessinterestrateimpactanddevelopprepaymentscenarios.Thesemodelstakeintoconsiderationrelevantcreditinformation,perceivedmarketmovements,sectornewsandeconomicevents.Theinputsintothesemodelsmayincludebenchmarkyields,reportedtrades,broker-dealerquotes,issuerspreadsandotherrelevantdata.Wevalidatethepricesprovidedbyourthirdpartypricingservicesbyobtainingmarketvaluesfromotherpricingsourcesandanalyzingpricingdataincertaininstances.
WeclassifyourderivativefinancialinstrumentsasLevel3underthefairvaluehierarchy.ThesederivativesarenotactivelytradedandarevaluedusingtheBlack-Scholesoption-pricingmodelwhichrequirestheuseofsubjectiveassumptions,primarilytheexpectedstockpricevolatilityassumption.
Inventory Valuation
Inventoryisstatedatthelowerofcostormarketwithcostdeterminedunderthefirst-in,first-outbasis.
Weevaluateinventorylevelsquarterlyandanyinventorythathasacostbasisinexcessofitsexpectednetrealizablevalue,inventorythatbecomesobsolete,inventoryinexcessofexpectedsalesrequirements,inventorythatfailstomeetcommercialsalespecificationsorisotherwiseimpairediswrittendownwithacorrespondingchargetothestatementofoperationsintheperiodthattheimpairmentisfirstidentified.Wealsoassess,onaquarterlybasis,whetherwehaveanyexcessnon-cancelablepurchasecommitmentsresultingfromourtwominimumsupplyagreementswithoursuppliersoflinaclotideAPIoutsideofNorthAmerica.Werelyondatafromseveralsourcestoestimatethenetrealizablevalueofinventoryandnon-cancelablepurchasecommitments,includingpartnerforecastsofprojectedinventorypurchasesthatarereceivedquarterly,ourinternalforecastsandrelatedprocess,historicalsalesbygeographicregion,andthestatusofandprogresstowardcommercializationoflinaclotideinpartneredterritories.
Wecapitalizeinventoriesmanufacturedinpreparationforinitiatingsalesofaproductcandidatewhentherelatedproductcandidateisconsideredtohaveahighlikelihoodofregulatoryapprovalandtherelatedcostsareexpectedtoberecoverablethroughsalesoftheinventories.Indetermining
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whetherornottocapitalizesuchinventories,weevaluate,amongotherfactors,informationregardingtheproductcandidate'ssafetyandefficacy,thestatusofregulatorysubmissionsandcommunicationswithregulatoryauthoritiesandtheoutlookforcommercialsales,includingtheexistenceofcurrentoranticipatedcompetitivedrugsandtheavailabilityofreimbursement.Inaddition,weevaluaterisksassociatedwithmanufacturingtheproductcandidate,includingtheabilityofourthird-partysupplierstocompletethevalidationbatches,andtheremainingshelflifeoftheinventories.
Costsassociatedwithdevelopmentalproductspriortosatisfyingtheinventorycapitalizationcriteriaarechargedtoresearchanddevelopmentexpenseasincurred.
Thereisariskinherentinthesejudgmentsandanychangesinthesejudgmentsmayhaveamaterialimpactonourfinancialresultsinfutureperiods.
Research and Development Expense
Allresearchanddevelopmentexpensesareexpensedasincurred.Wedeferandcapitalizenonrefundableadvancepaymentswemakeforresearchanddevelopmentactivitiesuntiltherelatedgoodsarereceivedortherelatedservicesareperformed.
Researchanddevelopmentexpensesarecomprisedofcostsincurredinperformingresearchanddevelopmentactivities,includingsalary,benefitsandotheremployee-relatedexpenses;share-basedcompensationexpense;laboratorysuppliesandotherdirectexpenses;facilitiesexpenses;overheadexpenses;third-partycontractualcostsrelatingtononclinicalstudiesandclinicaltrialactivitiesandrelatedcontractmanufacturingexpenses,developmentofmanufacturingprocessesandregulatoryregistrationofthird-partymanufacturingfacilities;licensingfeesforourproductcandidates;andotheroutsideexpenses.
Clinicaltrialexpensesincludeexpensesassociatedwithcontractresearchorganizations,orCROs.TheinvoicingfromCROsforservicesrenderedcanlagseveralmonths.WeaccruethecostofservicesrenderedinconnectionwithCROactivitiesbasedonourestimateofsitemanagement,monitoringcosts,projectmanagementcosts,andinvestigatorfees.WemaintainregularcommunicationwithourCROvendorstogaugethereasonablenessofourestimates.Differencesbetweenactualclinicaltrialexpensesandestimatedclinicaltrialexpensesrecordedhavenotbeenmaterialandareadjustedforintheperiodinwhichtheybecomeknown.However,ifweincorrectlyestimateactivitylevelsassociatedwiththeCROservicesatagivenpointintime,wecouldberequiredtorecordmaterialadjustmentsinfutureperiods.UnderourAllerganandAstraZenecacollaborationagreementsfortheU.S.andChina,HongKongandMacau,respectively,wearereimbursedforcertainresearchanddevelopmentexpensesandwenetthesereimbursementsagainstourresearchanddevelopmentexpensesasincurred.PaymentstoAllerganorAstraZenecaforsuchterritoriesarerecordedasincrementalresearchanddevelopmentexpense.Nonrefundableadvancepaymentsforresearchanddevelopmentactivitiesarecapitalizedandexpensedovertherelatedserviceperiodorasgoodsarereceived.
Share-based Compensation Expense
Wemakecertainassumptionsinordertovalueandrecordexpenseassociatedwithawardsmadeunderourshare-basedcompensationarrangements.Weestimatethefairvalueofthestockoptionawardsforemployeesandnon-employeesusingtheBlack-Scholesoption-pricingmodel.Thefairvalueofourrestrictedstockunit,orRSU,awardsisbasedonthemarketvalueofourClassAcommonstockonthedateofgrant.Determiningthefairvalueofshare-basedawardsrequirestheuseofhighlysubjectiveassumptions,includingexpectedtermoftheawardandexpectedstockpricevolatility.Forcertainoftheseawards,wedeterminetheappropriateamounttoexpensebasedontheanticipatedachievementofperformancetargets,whichrequiresjudgment,includingforecastingtheachievementoffuturespecifiedtargets.Changesintheseassumptionsmayleadtovariabilitywithrespecttotheamountofexpensewerecognizeinconnectionwithshare-basedpayments.
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Werecognizecompensationexpenseonastraight-linebasisovertherequisiteserviceperiodbaseduponstockoptionsthatareultimatelyexpectedtovest,andaccordingly,suchcompensationexpenseisadjustedbytheamountofestimatedforfeitures.Weestimateforfeituresovertherequisiteserviceperiodwhenrecognizingshare-basedcompensationexpensebasedonhistoricalratesandforward-lookingfactors;theseestimatesareadjustedtotheextentthatactualforfeituresdiffer,orareexpectedtomateriallydiffer,fromourestimates.
Wehavealsograntedtime-acceleratedstockoptionswithtermsthatallowtheaccelerationinvestingofthestockoptionsupontheachievementofperformance-basedmilestonesspecifiedinthegrants.Share-basedcompensationexpenseassociatedwiththesetime-acceleratedstockoptionsisrecognizedovertherequisiteserviceperiodoftheawardsortheimpliedserviceperiod,ifshorter.
Whiletheassumptionsusedtocalculateandaccountforshare-basedcompensationawardsrepresentmanagement'sbestestimates,theseestimatesinvolveinherentuncertaintiesandtheapplicationofmanagement'sjudgment.Asaresult,ifrevisionsaremadetoourunderlyingassumptionsandestimates,ourshare-basedcompensationexpensecouldvarysignificantlyfromperiodtoperiod.
Derivative Assets and Liabilities
InJune2015,inconnectionwiththeissuanceofthe2022Notes,weenteredintotheConvertibleNoteHedges.ConcurrentlywithenteringintotheConvertibleNoteHedges,wealsoenteredintocertainwarranttransactionsinwhichwesoldNoteHedgeWarrantstotheConvertibleNoteHedgecounterpartiestoacquire20,249,665sharesofourClassAcommonstock,subjecttocustomaryanti-dilutionadjustments.TheseinstrumentsarederivativefinancialinstrumentsunderASCTopic815,DerivativesandHedging.
ThesederivativesarerecordedasassetsorliabilitiesatfairvalueeachreportingperiodandthefairvalueisdeterminedusingtheBlack-Scholesoption-pricingmodel.Thechangesinfairvaluearerecordedasacomponentofother(expense)incomeintheconsolidatedstatementsofoperations.SignificantinputsusedtodeterminethefairvalueincludethepricepershareofourClassAcommonstockonthedateofvaluation,timetomaturityofthederivativeinstruments,thestrikepricesofthederivativeinstruments,therisk-freeinterestrate,andthevolatilityofourClassAcommonstock.ChangestotheseinputscouldmateriallyaffectthevaluationoftheConvertibleNoteHedgesandNoteHedgeWarrantsinfutureperiods.
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ResultsofOperations
Thefollowingdiscussionsummarizesthekeyfactorsourmanagementbelievesarenecessaryforanunderstandingofourconsolidatedfinancialstatements.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenue
CollaborativeArrangementsRevenue.Theincreaseinrevenuefromcollaborativearrangementsofapproximately$73.1millionfortheyearendedDecember31,2015comparedtotheyearendedDecember31,2014wasprimarilyrelatedtoanapproximately$85.8millionincreaseinourshareofthenetprofitsfromthesaleofLINZESSintheU.S.;anapproximately$4.4millionincreaseduetorevenuesfromourco-promotionagreementwithExactSciencesforCologuardintheU.S.enteredintoinMarch2015;anapproximately$0.8millionincreaseinroyaltyrevenuebasedonsalesoflinaclotideinourpartneredterritories;andanapproximately$0.2millionincreaseduetorevenuesfromourco-promotionagreementwithAllerganforVIBERZIintheU.S.enteredintoinAugust2015.Theincreaseswerepartiallyoffsetbyanapproximately$8.1milliondecreaseinrevenuerecognizedinconnectionwiththeachievementofadevelopmentmilestoneunderourAstellaslicenseagreementin2014;anapproximately$7.0milliondecreaseinrevenuefromtheshipmentsoflinaclotideAPItoourlicensingpartners;anapproximately$1.9milliondecreaseinrevenuerecognizedrelatedtotheachievementofcommerciallaunchmilestonesunderourlicenseagreementwithAlmirallin2014;and
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YearEndedDecember31, 2015 2014 2013 (inthousands) Collaborativearrangementsrevenue: $ 149,555 $ 76,436 $ 22,881Costandexpenses: Costofrevenue 12 5,291 7,203Write-downofinventorytonetrealizablevalueandlossonnon-cancellablepurchasecommitments 17,638 20,292 —
Researchanddevelopment 108,746 101,890 102,378Selling,generalandadministrative 125,247 118,333 123,228Collaborationexpense — — 42,074
Totalcostandexpenses 251,643 245,806 274,883Lossfromoperations (102,088) (169,370) (252,002)Other(expense)income: Interestexpense (31,096) (21,166) (21,002)Interestandinvestmentincome 443 257 192Lossonderivatives (9,928) — —Otherincome — 661 —
Otherexpense,net (40,581) (20,248) (20,810)Netloss $ (142,669) $ (189,618) $ (272,812)
YearEndedDecember31, Change
2015 2014 $ % (dollarsinthousands) Collaborativearrangementsrevenue $ 149,555 $ 76,436 $ 73,119 96%
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anapproximately$1.1milliondecreaseinrevenuerelatedtoourcollaborationagreementwithAstraZeneca.
CostandExpenses
CostofRevenue.Thedecreaseincostofrevenueofapproximately$5.3millionfortheyearendedDecember31,2015comparedtotheyearendedDecember31,2014wasprimarilyattributabletolowersalesoflinaclotideAPItoourlicensingpartners.
Write-downofinventorytonetrealizablevalueandlossonnon-cancelablepurchasecommitments.Thedecreaseinwrite-downofinventoryandlossonnon-cancelablepurchasecommitmentsofapproximately$2.7millionfortheyearendedDecember31,2015comparedtotheyearendedDecember31,2014wasprimarilyrelatedtoanaccrualforalossonnon-cancelableinventorypurchasecommitmentsrecordedintheyearendedDecember31,2015,partiallyoffsetbyadecreaseintheamountofinventorywrittendowntoestimatednetrealizablevalue.
InventoryrepresentslinaclotideAPIthatisavailableforcommercialsale.Weevaluateinventorylevelsquarterlyandanyinventorythathasacostbasisinexcessofitsexpectednetrealizablevalue,inventorythatbecomesobsolete,inventoryinexcessofexpectedsalesrequirements,inventorythatfailstomeetcommercialsalespecificationsorisotherwiseimpairediswrittendownwithacorrespondingchargetothestatementofoperationsintheperiodthattheimpairmentisfirstidentified.Aspartofournetrealizablevalueassessmentofourinventory,weassesswhetherwehaveanyexcessnon-cancelablepurchasecommitmentsresultingfromourtwominimumsupplyagreementswithoursuppliersoflinaclotideAPIoutsideofNorthAmerica.
WehaveenteredintomultiplecommercialsupplyagreementsforthepurchaseoflinaclotideAPI.TwoofourAPIsupplyagreementsforsupplyingAPItoourcollaborationpartnersoutsideofNorthAmericacontainminimumpurchasecommitments.PriortoOctober2015,wewerealsoresponsibleforthemanufacturingoflinaclotideAPIforEurope.Aspartofournetrealizablevalueassessmentofourinventory,weassesswhetherwehaveanyexcessnon-cancelablepurchasecommitmentsresultingfromourminimumsupplyagreementswithoursuppliersoflinaclotideAPI.
Thedeterminationofthenetrealizablevalueofinventoryandnon-cancelablepurchasecommitmentsisbasedondemandforecastsfromourpartnersthatarereceivedquarterly,toprojectthenext24monthsofdemandandourinternalforecastforprojecteddemandinsubsequentyears.DuringthethreemonthsendedJune30,2015,Almirall,ourformerEuropeanpartner,reduceditsforecastedpurchasesoflinaclotideAPIforitsterritoryforthesubsequent18months.Inaddition,recentregulatorychangesmadebytheCFDAtothemarketingapprovalprocessinChinaresultedinapotentiallylengthenedapprovaltimelineforthecommercializationoflinaclotide.ThereduceddemandfromAlmirall,andthepotentialextendedtimelineforcommercializationoflinaclotideinChina,resultedinlowerprojectedsalesoflinaclotideAPItoourpartnersinEuropeandChina.Asaresult,
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YearEndedDecember31, Change
2015 2014 $ % (dollarsinthousands) Costandexpenses: Costofrevenue $ 12 $ 5,291 $ (5,279) (100)%Write-downofinventorytonetrealizablevalueandlossonnon-cancellablepurchasecommitments 17,638 20,292 (2,654) (13)%
Researchanddevelopment 108,746 101,890 6,856 7%Selling,generalandadministrative 125,247 118,333 6,914 6%
Totalcostandexpenses $ 251,643 $ 245,806 $ 5,837 2%
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duringthethreemonthsendedJune30,2015,wewrote-downthebalanceofourinventoryofapproximately$5.0milliontozeroandaccruedapproximately$3.2millionforexcessnon-cancelableinventorypurchasecommitments.
InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan,andweseparatelyenteredintoanamendmenttothelicenseagreementwithAllerganrelatingtothedevelopmentandcommercializationoflinaclotideinEurope.Pursuanttothetermsoftheamendment,AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEurope,aswellastheassociatedcosts.Upontheexecutionoftheamendmenttothelicenseagreement,werecordedanincrementallossonnon-cancelableAPIpurchasecommitmentsofapproximately$6.9millionrelatedtooneofourAPIsupplyagreementscoveringthecommercialsupplyoflinaclotideAPIfortheEuropeanmarket.DuringthethreemonthsendedSeptember30,2015,wealsorecordedanincrementallossonnon-cancelableAPIpurchasecommitmentsrelatedtoin-processAPIbatches.WehaveevaluatedallremainingminimumpurchasecommitmentsunderourlinaclotideAPIsupplyagreementsthrough2023andconcludedthattheapproximately$22.3millionofpurchasecommitmentsfromthesecondAPIsupplyagreementcoveringtheJapan,China,HongKongandMacaumarketsarerealizablebasedonthecurrentforecastsreceivedfromourpartnersintheseterritoriesandourinternalforecasts.ThesechargesaremorefullydescribedinNote7,Inventory,toourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
DuringtheyearendedDecember31,2014,wewrotedownapproximately$20.3millionininventorytoanestimatednetrealizablevalueofapproximately$5.0million.ThiswritedownwasprimarilyattributabletoAlmirall'sreducedinventorydemandforecasts,mainlyduetothesuspensionofcommercializationofCONSTELLAinGermanyandachallengingcommercialenvironmentthroughoutEurope.
ResearchandDevelopmentExpense.Theincreaseinresearchanddevelopmentexpenseofapproximately$6.9millionfortheyearendedDecember31,2015comparedtotheyearendedDecember31,2014wasprimarilyrelatedtoanincreaseofapproximately$19.7millioninexternalcostsrelatedtothedevelopmentoflinaclotide;anincreaseofapproximately$4.2millionincompensation,benefitsandotheremployee-relatedexpensesprimarilyassociatedwithincreasedheadcount;andanincreaseofapproximately$3.2millioninresearchcostsrelatedtoourearlystagepipelinecandidates.Theincreaseswerepartiallyoffsetbyadecreaseofapproximately$12.6millionincostsrelatedtothecollaborationwithAllerganforNorthAmerica;adecreaseofapproximately$3.0millionrelatedtoourJanuary2014workforcereduction;adecreaseofapproximately$1.8millioninoperatingcosts,includinginformationtechnologyinfrastructurecostsandfacilitycostssuchasrentandamortizationofleaseholdimprovementsallocatedtoresearchanddevelopment;anapproximately$1.6milliondecreaseincostsassociatedwiththecollaborationwithAstraZeneca;andadecreaseofapproximately$1.2millionrelatedtothedevelopmentofmanufacturingprocessesandcostsassociatedwithlinaclotideAPIpriortomeetingourinventorycapitalizationpolicy.
Selling,GeneralandAdministrativeExpense.Selling,generalandadministrativeexpensesincreasedapproximately$6.9millionfortheyearendedDecember31,2015comparedtotheyearendedDecember31,2014primarilyasaresultofanapproximately$2.9millionincreaseincostsassociatedwithsellingexpensesandmarketingprograms;anapproximately$2.7millionincreaseinexternalconsultingcosts,patent-relatedlegalcostsandotherservicecostsprimarilyassociatedwithcommercialactivitiestosupportlinaclotide;anapproximately$2.1millionincreaseincompensation,benefitsandotheremployee-relatedexpenses;andanapproximately$0.4millionincreaseinselling,generalandadministrativeexpensesrelatedtofacilitiesandinformationtechnologyinfrastructurecosts,includingrentandamortizationofleaseholdimprovements.Theseincreaseswerepartiallyoffsetbyadecreaseincostsofapproximately$1.2millionrelatedtoourJanuary2014workforcereduction.
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Other(Expense)Income,Net
InterestExpense.Interestexpenseincreasedapproximately$9.9millionfortheyearendedDecember31,2015comparedtotheyearendedDecember31,2014,mainlyduetoanincreaseininterestexpenseofapproximately$10.9millionassociatedwithour2022Notes.Thisincreasewaspartiallyoffsetbyadecreaseofapproximately$0.9millionininterestexpenseassociatedwiththePhaRMANotesfortheyearendedDecember31,2015,andaninsignificantamountduetointerestassociatedwithcapitalleasesfortheautomobilesforourfield-basedsalesforceandmedicalscienceliaisons.
Lossonderivatives.Theapproximately$9.9millionincreaseinthenetlossonderivativesfortheyearendedDecember31,2015,comparedtotheyearendedDecember31,2014isduetoanapproximately$5.4milliondecreaseinthefairvalueoftheConvertibleNoteHedgesandanapproximately$4.5millionincreaseinthefairvalueoftheNoteHedgeWarrantssincetheirissuanceinJune2015.
OtherIncome.Thedecreaseinotherincomeofapproximately$0.7millionfortheyearendedDecember31,2015comparedtotheyearendedDecember31,2014isprimarilyrelatedtotimingoftherecognitionoftaxincentiveawardsthatwererecognizedintheyearendedDecember31,2014.IntheyearendedDecember31,2012,wewereawardedanapproximately$1.7milliontaxincentive,associatedwiththeLifeSciencesTaxIncentiveProgramfromtheMassachusettsLifeSciencesCenter.DuringtheyearendedDecember31,2014,werecognizedapproximately$0.7millionasotherincomeintheconsolidatedstatementofoperations,aswebelievedwehadsatisfiedourjobcreationcommitmentsrelatedtothisawardfor2012and2013.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenue
CollaborativeArrangementsRevenue.Theincreaseinrevenuefromcollaborativearrangementsofapproximately$53.6millionfortheyearendedDecember31,2014comparedtotheyearendedDecember31,2013wasprimarilyrelatedtoanapproximately$44.7millionincreaseinourshareofthenetprofitsfromthesaleofLINZESSintheU.S.;anapproximately$10.2millionincreaseinrevenuerecognizedinconnectionwiththeachievementofadevelopmentmilestoneunderourAstellaslicenseagreementinthefourthquarterof2014;anapproximately$2.6millionincreaseinlicenserevenuerelatedtoourcollaborationagreementwithAstraZenecarecognizedinconnectionwithamodification
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YearEndedDecember31, Change
2015 2014 $ % (dollarsinthousands) Other(expense)income: Interestexpense $ (31,096) $ (21,166) $ (9,930) 47%Interestandinvestmentincome 443 257 186 72%Lossonderivatives (9,928) — (9,928) 100%Otherincome — 661 (661) (100)%
Totalother(expense)income,net $ (40,581) $ (20,248) $ (20,333) 100%
YearEndedDecember31, Change
2014 2013 $ % (dollarsinthousands) Collaborativearrangementsrevenue $ 76,436 $ 22,881 $ 53,555 234%
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totheinitialdevelopmentplananddevelopmentbudgetinAugust2014,whichwasdeemedtobeamaterialmodification;anapproximately$0.5millionincreaseinroyaltyrevenuebasedonsalesofCONSTELLAintheEuropeanterritory;andanapproximately$0.4millionincreaseintheamortizationofdeferredrevenueassociatedwiththeAstellaslicenseagreementduetoachangeinestimateinthedevelopmentperiodinMarch2013.Theincreaseswerepartiallyoffsetbyanapproximately$4.7milliondecreaseinrevenuefromtheshipmentsoflinaclotideAPItoourlicensingpartners.
CostandExpenses
CostofRevenue.Thedecreaseincostofrevenueofapproximately$1.9millionfortheyearendedDecember31,2014comparedtotheyearendedDecember31,2013wasprimarilyattributabletolowersalesoflinaclotideAPItoourlicensingpartners.
Write-downofinventorytonetrealizablevalueandlossonnon-cancelablepurchasecommitments.Theincreaseinwrite-downofinventoryandlossonnon-cancelablepurchasecommitmentsofapproximately$20.3millionfortheyearendedDecember31,2014comparedtotheyearendedDecember31,2013wasrelatedtoawrite-downofapproximately$20.3millionininventorytoanestimatednetrealizablevalueofapproximately$5.0million.Thiswrite-downwasprimarilyattributabletoAlmirall'sreducedinventorydemandforecastsfortheEuropeanterritory,mainlyduetothesuspensionofcommercializationofCONSTELLAinGermanyandachallengingcommercialenvironmentthroughoutEurope.
ResearchandDevelopmentExpense.Thedecreaseinresearchanddevelopmentexpenseofapproximately$0.5millionfortheyearendedDecember31,2014comparedtotheyearendedDecember31,2013wasprimarilyrelatedtoadecreaseofapproximately$5.5millionincompensation,benefitsandotheremployee-relatedexpensesprimarilyassociatedwithdecreasedaverageheadcount;adecreaseofapproximately$5.0millionrelatedtothedevelopmentofmanufacturingprocessesandcostsassociatedwithlinaclotideAPIpriortomeetingourinventorycapitalizationpolicy;adecreaseofapproximately$3.6millionincostsrelatedtothecollaborationwithAllerganforNorthAmerica;andadecreaseofapproximately$1.0millioninresearchcostsrelatedtoourearlystagepipelinecandidates.Thedecreaseswerepartiallyoffsetbyanincreaseofapproximately$8.0millioninexternalcostsrelatedtothedevelopmentoflinaclotide;anincreaseofapproximately$3.2millioninoperatingcosts,includinginformationtechnologyinfrastructurecostsandfacilitycostssuchasrentandamortizationofleaseholdimprovementsallocatedtoresearchanddevelopment;anincreaseincostsofapproximately$3.0millionrelatedtoourJanuary2014workforcereduction;andanincreaseofapproximately$0.4millionincostsrelatedtothecollaborationwithAstraZeneca.
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YearEndedDecember31, Change
2014 2013 $ % (dollarsinthousands) Costandexpenses: Costofrevenue $ 5,291 $ 7,203 $ (1,912) (27)%Write-downofinventorytonetrealizablevalueandlossonnon-cancellablepurchasecommitments 20,292 — 20,292 100%
Researchanddevelopment 101,890 102,378 (488) (0)%Selling,generalandadministrative 118,333 123,228 (4,895) (4)%Collaborationexpense — 42,074 (42,074) (100)%
Totalcostandexpenses $ 245,806 $ 274,883 $ (29,077) (11)%
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Selling,GeneralandAdministrativeExpense.Selling,generalandadministrativeexpensesdecreasedapproximately$4.9millionfortheyearendedDecember31,2014comparedtotheyearendedDecember31,2013primarilyasaresultofanapproximately$6.5milliondecreaseinexternalconsultingandotherservicecostsprimarilyassociatedwithdevelopingandmaintainingtheinfrastructuretosupportlinaclotide;anapproximately$3.6milliondecreaseincostsassociatedwithsellingexpensesandmarketingprograms;anapproximately$1.5milliondecreaseincompensation,benefitsandotheremployee-relatedexpensesassociatedwithdecreasedaverageheadcount;andanapproximately$0.4milliondecreaseinselling,generalandadministrativeexpensesrelatedtofacilitiesandinformationtechnologyinfrastructurecostsassociatedwithoperatingourCambridge,Massachusettsfacility,includingrentandamortizationofleaseholdimprovements.Thedecreaseswerepartiallyoffsetbyanapproximately$5.9millionincreaseinshare-basedcompensationcosts,ofwhichapproximately$2.3millionisrelatedtothedepartureofanexecutiveofficer,andanincreaseincostsofapproximately$1.2millionrelatedtoourJanuary2014workforcereduction.
CollaborationExpense.Collaborationexpensedecreasedapproximately$42.1millionfortheyearendedDecember31,2014comparedtotheyearendedDecember31,2013,primarilyasaresultofourshareofhigherLINZESSnetsalesintheU.S.,whichgeneratedapaymentfromAllergantousratherthanapaymenttoAllergan.
Other(Expense)Income,Net
InterestExpense.Interestexpenseincreasedapproximately$0.2millionfortheyearendedDecember31,2014comparedtotheyearendedDecember31,2013,mainlyduetointerestassociatedwithcapitalleasesfortheautomobilesforourfield-basedsalesforceandmedicalscienceliaisons.
OtherIncome.Theincreaseinotherincomeofapproximately$0.7millionfortheyearendedDecember31,2014comparedtotheyearendedDecember31,2013wasprimarilyrelatedtotimingoftherecognitionoftaxincentiveawardsthatwerepreviouslyreceived.IntheyearendedDecember31,2012,wewereawardedanapproximately$1.7milliontaxincentive,associatedwiththeLifeSciencesTaxIncentiveProgramfromtheMassachusettsLifeSciencesCenter.DuringtheyearendedDecember31,2014,werecognizedapproximately$0.7millionasotherincomeintheconsolidatedstatementofoperations,aswebelievedwehadsatisfiedourjobcreationcommitmentsrelatedtothisawardfor2012and2013.
LiquidityandCapitalResources
Wehaveincurredlossessinceourinceptionin1998and,asofDecember31,2015,wehadanaccumulateddeficitofapproximately$1.1billion.Wehavefinancedouroperationstodateprimarilythroughboththeprivatesaleofourpreferredstockandthepublicsaleofourcommonstock,includingapproximately$203.2millionofnetproceedsfromourinitialpublicoffering,orIPO,inFebruary2010,andapproximately$413.4millionofnetproceedsfromourfollow-onpublicofferings;paymentsreceivedunderourstrategiccollaborativearrangements,includingupfrontandmilestonepayments,
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YearEndedDecember31, Change
2014 2013 $ % (dollarsinthousands) Other(expense)income: Interestexpense $ (21,166) $ (21,002) $ (164) 1%Interestandinvestmentincome 257 192 65 34%Otherincome 661 — 661 100%
Totalother(expense)income,net $ (20,248) $ (20,810) $ 562 (3)%
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royaltiesandourshareofnetprofits,aswellasreimbursementofcertainexpenses;anddebtfinancings,includingapproximately$167.3millionofnetproceedsfromtheprivateplacementofourPhaRMANotesinJanuary2013andapproximately$324.0millionofnetproceedsfromtheprivateplacementofour2022NotesinJune2015.AtDecember31,2015,wehadapproximately$439.4millionofunrestrictedcash,cashequivalentsandavailable-for-salesecurities.OurcashequivalentsincludeamountsheldinmoneymarketfundsandU.S.government-sponsoredsecurities.Ouravailable-for-salesecuritiesincludeamountsheldinU.S.TreasurysecuritiesandU.S.government-sponsoredsecurities.Weinvestcashinexcessofimmediaterequirementsinaccordancewithourinvestmentpolicy,whichlimitstheamountswemayinvestinanyonetypeofinvestmentandrequiresallinvestmentsheldbyustobeatleastA+rated,witharemainingmaturitywhenpurchasedoflessthantwelvemonths,soastoprimarilyachieveliquidityandcapitalpreservation.
DuringtheyearendedDecember31,2015,ourbalancesofcash,cashequivalentsandavailable-for-salesecuritiesincreasedapproximately$191.1million.Thisincreaseisprimarilyduetoapproximately$335.7millioningrossproceedsfromtheissuanceofour2022NotesinJune2015,approximately$70.8millioningrossproceedsfromtheissuanceofNoteHedgeWarrantsissuedinconnectionwiththe2022Notes,andapproximately$14.2millioninproceedsfromtheexerciseofstockoptionsandtheissuanceofsharespursuanttoouremployeestockpurchaseplan.ThesecashinflowswerepartiallyoffsetbythepurchaseofConvertibleNoteHedgesforapproximately$91.9millioninconnectionwithour2022Notesandthepaymentofapproximately$11.7millionofissuancecostsinconnectionwithour2022Notes,aswellasthecashusedtooperateourbusiness,includingpaymentsrelatedto,amongotherthings,researchanddevelopmentandselling,generalandadministrativeexpensesaswecontinuedtoinvestinourresearchpipelineandsupportthecontinuedcommercializationofLINZESSintheU.S.Wealsomadeprincipalpaymentsofapproximately$12.7milliononouroutstandingPhaRMANotes,investedapproximately$4.0millionincapitalexpenditures,andmadepaymentsofapproximately$1.3milliononcapitalleaseobligations.
CashFlowsFromOperatingActivities
Netcashusedinoperatingactivitiestotaledapproximately$106.9millionfortheyearendedDecember31,2015.Theprimaryusesofcashwereournetlossofapproximately$142.7millionandchangesinassetsandliabilitiesofapproximately$38.2millionresultingprimarilyfromanincreaseinrelatedpartyaccountsreceivableprincipallyattributabletohigheramountsduefromAllerganasaresultofincreasedprofitsonthesaleofLINZESSintheU.S.,anincreaseinrestrictedcashassociatedwithoursalesforcevehiclefleet,adecreaseinaccountspayable,relatedpartyaccountspayableandaccruedexpenses,adecreaseinprepaidexpensesandotherassets,adecreaseindeferredrevenue,adecreaseindeferredrentandanincreaseinaccruedresearchanddevelopmentcosts.Theseusesofcashwereprimarilyoffsetbynon-cashitemsofapproximately$74.0million,includingapproximately$25.5millioninshare-basedcompensationexpense,approximately$17.6millionduetothewrite-downofinventorytonetrealizablevalueandlossonnon-cancelablepurchasecommitments,approximately$11.6millionindepreciationandamortizationexpenseofpropertyandequipment,approximately$8.1millioninnon-cashinterestexpense,approximately$9.9millionduetothechangeinfairvalueoftheConvertibleNoteHedgesandNoteHedgeWarrants,andapproximately$1.1millioninaccretionofdiscountsandpremiumsonavailable-for-salesecurities.
Netcashusedinoperatingactivitiestotaledapproximately$155.6millionfortheyearendedDecember31,2014.Theprimaryusesofcashwereournetlossofapproximately$189.6millionandchangesinassetsandliabilitiesofapproximately$30.1millionresultingprimarilyfromanincreaseinrelatedpartyaccountsreceivableprincipallyduetohigheramountsduefromAllerganduetoincreasedprofitsonthesaleofLINZESSintheU.S.,anincreaseinpurchasesoflinaclotideAPI,anincreaseinprepaidexpensesandotherassets,andanincreaseindeferredrent.Theseusesofcashwerepartiallyoffsetbynon-cashitemsofapproximately$64.2million,includingapproximately$26.2millioninshare-
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basedcompensationexpense,approximately$20.3millionduetothewrite-downofinventorytonetrealizablevalue,approximately$12.3millionindepreciationandamortizationexpenseofpropertyandequipment,approximately$2.6millioninlossesonfacilitysubleases,approximately$1.6millioninnon-cashinterestexpenseandapproximately$1.1millioninaccretionofdiscountsandpremiumsonavailable-for-salesecurities.
Netcashusedinoperatingactivitiestotaledapproximately$273.4millionfortheyearendedDecember31,2013.Theprimaryusesofcashwereournetlossofapproximately$272.8millionandchangesinassetsandliabilitiesofapproximately$35.7millionresultingprimarilyfromadecreaseinaccountspayableandaccruedexpenses,includingaccruedresearchanddevelopmentcostsduetotimingofpayments,anincreaseininventoryforlinaclotideAPI,adecreaseindeferredrevenueassociatedwiththeAstellaslicenseagreement,adecreaseindeferredrentandanincreaseaccountsreceivable.Theseusesofcashwerepartiallyoffsetbynon-cashitemsofapproximately$35.1million,includingapproximately$19.8millioninshare-basedcompensationexpense,approximately$11.7millionindepreciationandamortizationexpenseofpropertyandequipment,approximately$1.7millioninnon-cashinterestexpense,approximately$1.3millioninaccretionofdiscountsandpremiumsonavailable-for-salesecuritiesandapproximately$0.6millioninlossesonthedisposalofpropertyandequipment.
CashFlowsFromInvestingActivities
CashusedininvestingactivitiesfortheyearendedDecember31,2015totaledapproximately$9.2millionandresultedprimarilyfromthepurchaseofapproximately$282.0millionofavailable-for-salesecuritiesandthepurchaseofapproximately$4.0millionofpropertyandequipment,primarilyleaseholdimprovementsandlaboratoryequipment.Thiswaspartiallyoffsetbythesalesandmaturitiesofapproximately$276.7millionofavailable-for-salesecuritiesandaninsignificantamountofproceedsfromthesaleofpropertyandequipment.
CashusedininvestingactivitiesfortheyearendedDecember31,2014totaledapproximately$56.6millionandresultedprimarilyfromthepurchaseofapproximately$254.0millionofavailable-for-salesecuritiesandthepurchaseofapproximately$3.5millionofpropertyandequipment,primarilymanufacturingandlaboratoryequipmentaswellassoftwaretoimproveourinformationtechnologyinfrastructure.Thiswaspartiallyoffsetbythematurityofapproximately$200.9millioninavailable-for-salesecurities.
CashusedininvestingactivitiesfortheyearendedDecember31,2013totaledapproximately$101.4millionandresultedprimarilyfromthepurchaseofapproximately$287.9millionofavailable-for-salesecuritiesandthepurchaseof$9.6millionofpropertyandequipment,primarilymanufacturingandlaboratoryequipmentaswellassoftwaretoimproveourinformationtechnologyinfrastructure.Thiswaspartiallyoffsetbythematurityofapproximately$196.1millioninavailable-for-salesecurities.
CashFlowsFromFinancingActivities
CashprovidedbyfinancingactivitiesfortheyearendedDecember31,2015totaledapproximately$303.1millionandresultedprimarilyfromapproximately$324.0millioninnetproceedsfromtheissuanceofour2022NotesinJune2015,approximately$70.8millioningrossproceedsfromtheissuanceoftheNoteHedgeWarrantsinconnectionwiththe2022Notes,approximately$14.2millionincashprovidedbystockoptionexercisesandtheissuanceofsharesunderouremployeestockpurchaseplan,partiallyoffsetbyapproximately$91.9millionrelatedtothepurchaseoftheConvertibleNoteHedgesinconnectionwithour2022Notes,approximately$12.7millionincashusedforprincipalpaymentsonouroutstandingPhaRMANotes,andapproximately$1.3millionincashusedforpaymentsonourcapitalleases.
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CashprovidedbyfinancingactivitiesfortheyearendedDecember31,2014totaledapproximately$210.9millionandresultedprimarilyfromapproximately$190.4millioninnetproceedsfromourfollow-onpublicstockofferinginthefirstquarterof2014andapproximately$22.7millionincashprovidedbystockoptionexercisesandtheissuanceofsharesunderouremployeestockpurchaseplan,partiallyoffsetbyapproximately$1.2millionincashusedforprincipalpaymentsondebtandapproximately$1.0millionincashusedforpaymentsonourcapitalleases.
CashprovidedbyfinancingactivitiesfortheyearendedDecember31,2013totaledapproximately$313.6millionandresultedprimarilyfromapproximately$167.3millioninnetproceedsfromourdebtfinancinginJanuary2013,approximately$137.8millioninnetproceedsfromourfollow-onpublicstockofferinginthesecondquarterof2013andapproximately$9.3millionincashprovidedbystockoptionexercisesandtheissuanceofsharesunderouremployeestockpurchaseplan,partiallyoffsetbyapproximately$0.8millionincashusedforpaymentsonourcapitalleases.
Funding Requirements
WebegancommercializingLINZESSintheU.S.withourcollaborationpartner,Allergan,inthefourthquarterof2012,andwecurrentlyderivesubstantiallyallofourrevenuefromthiscollaboration.WearealsodeployingsignificantresourcestoadvanceproductopportunitiesinGIandvascular/fibroticdiseases.OurgoalistobecomecashflowpositivedrivenbyincreasedrevenuegeneratedthroughsalesofLINZESSandfinancialdiscipline.However,wehavenotachievedpositivecashflowsfromoperationstodate.
UnderourcollaborationwithAllerganforNorthAmerica,totalnetsalesofLINZESSintheU.S.,asrecordedbyAllergan,arereducedbycommercialcostsincurredbyeachparty,andtheresultingamountissharedequallybetweenusandAllergan.Additionally,wereceiveroyaltiesbasedonsalesoflinaclotideintheEuropeanterritory,Canada,andMexicofromAllergan.WebelieverevenuesfromourLINZESSpartnershipfortheU.S.withAllerganwillcontinuetoconstituteasignificantportionofourtotalrevenuefortheforeseeablefutureandwecannotbecertainthatsuchrevenues,aswellastherevenuesfromourothercommercialactivities,willenableustobecomecashflowpositive,ortodosoonthetimeframesweexpect.WealsoanticipatethatwewillcontinuetoincursubstantialexpensesforthenextseveralyearsaswefurtherdevelopandcommercializelinaclotideintheU.S.,Chinaandothermarkets,andcontinuetoinvestinourpipelineandpotentiallyotherexternalopportunities.WebelievethatourcashonhandasofDecember31,2015willbesufficienttomeetourprojectedoperatingneedsatleastthroughthenexttwelvemonths.
Ourforecastoftheperiodoftimethroughwhichourfinancialresourceswillbeadequatetosupportouroperations,includingtheunderlyingestimatesregardingthecoststodevelopourproductcandidatesandobtainregulatoryapprovalsandthecoststocommercializelinaclotideintheU.S.,Chinaandothermarkets,aswellasourgoaltobecomecashflowpositive,areforward-lookingstatementsthatinvolverisksanduncertainties.Ouractualresultscouldvarymateriallyandnegativelyfromtheseandotherforward-lookingstatementsasaresultofanumberoffactors,includingthefactorsdiscussedinthe"RiskFactors"sectionofthisAnnualReportonForm10-K.Wehavebasedourestimatesonassumptionsthatmayprovetobewrong,andwecouldutilizeouravailablecapitalresourcessoonerthanwecurrentlyexpect.
Duetothenumerousrisksanduncertaintiesassociatedwiththedevelopmentandcommercializationofourproductcandidates,weareunabletoestimatepreciselytheamountsofcapitaloutlaysandoperatingexpendituresnecessarytocompletethedevelopmentof,andtoobtainregulatoryapprovalfor,linaclotide(otherthaninthecountrieswhereitisalreadyapproved)andourotherproductcandidates,ortocommercializelinaclotideandourotherproductcandidates,ineachcase,forallofthemarkets,indications,populationsandformulationsforwhichwebelieveeach
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productcandidateissuited.Ourfundingrequirementswilldependonmanyfactors,including,butnotlimitedto,thefollowing:
• therevenuegeneratedbysalesofLINZESS,CONSTELLAandanyotherproducts;
• therateofprogressandcostofourcommercializationactivities,includingtheexpenseweincurinmarketingandsellingLINZESSandanyotherproducts;
• thesuccessofourthird-partymanufacturingactivities;
• thetimeandcostsinvolvedindeveloping,andobtainingregulatoryapprovalsfor,ourproductcandidates;
• thesuccessofourresearchanddevelopmentefforts;
• theemergenceofcompetingorcomplementarydevelopments;
• thecostsoffiling,prosecuting,defendingandenforcinganypatentclaimsandotherintellectualpropertyrights;
• thetermsandtimingofanyadditionalcollaborative,licensingorotherarrangementsthatwemayestablish;and
• theacquisitionofbusinesses,productsandtechnologiesandtheimpactofotherstrategictransactions.
Financing Strategy
Wemay,fromtimetotime,consideradditionalfundingthroughacombinationofnewcollaborativearrangements,strategicalliances,andadditionalequityanddebtfinancingsorfromothersources.Wewillcontinuetomanageourcapitalstructureandtoconsiderallfinancingopportunities,whenevertheymayoccur,thatcouldstrengthenourlong-termliquidityprofile.Anysuchcapitaltransactionsmayormaynotbesimilartotransactionsinwhichwehaveengagedinthepast.Therecanbenoassurancethatanysuchfinancingopportunitieswillalsobeavailableonacceptableterms,ifatall.
ContractualCommitmentsandObligations
Lease and Commercial Supply Obligations
ThefollowingtablesummarizesourleaseandcommercialsupplyobligationsatDecember31,2015(excludinginterest):
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PaymentsDuebyPeriod
Total LessThan1Year 1-3Years 3-5Years
MoreThan5Years
(inthousands)
Commercialsupplyobligations(1) $ 32,440 $ 2,259 $ 9,641 $ 11,252 $ 9,288Capitalleaseobligations(2) 3,094 2,756 338 — —Operatingleaseobligations(3) 32,422 15,617 16,805 — —Convertibleseniornotesdue2022(includinginterest)(4) 384,795 7,553 15,106 15,106 347,030Totalcontractualobligations $ 452,751 $ 28,185 $ 41,890 $ 26,358 $ 356,318
(1) WehavemultiplecommercialsupplyagreementswithcontractmanufacturingorganizationsforthepurchaseoflinaclotidefinisheddrugproductandAPI.TwoofourAPIsupplyagreementsforsupplyingAPItoourcollaborationpartnersoutsideofNorthAmericacontainminimumpurchase
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Notes Payable
InJanuary2013,weclosedaprivateplacementof$175.0millioninaggregateprincipalamountof11%PhaRMANotesdue2024.Thenotesbearanannualinterestrateof11%,withinterestpayableMarch15,June15,September15andDecember15ofeachyear,eachaPaymentDate,whichbeganonJune15,2013.OnMarch15,2014,webeganmakingquarterlypaymentsonthenotesequaltothegreaterof(i)7.5%ofnetsalesofLINZESSintheU.S.fortheprecedingquarter,ortheSyntheticRoyaltyAmount,and(ii)accruedandunpaidinterestonthenotes,ortheRequiredInterestAmount.PrincipalonthenoteswillberepaidinanamountequaltotheSyntheticRoyaltyAmountminustheRequiredInterestAmount,whenthisisapositivenumber,untiltheprincipalhasbeenpaidinfull.GiventheprincipalpaymentsonthenotesarebasedonthenetsalesofLINZESSintheU.S.,whichwillvaryfromquartertoquarter,thenotesmayberepaidpriortoJune15,2024,thefinallegalmaturitydate.Wemadeprincipalpaymentsof$13.9millionthroughDecember31,2015.Sinceweareunabletoreliablyestimatetheexacttimingandamountsoftheprincipalpayments,asdiscussedunder"RiskFactors"inItem1AofthisAnnualReportonForm10-K,thenotes-relatedcommitmentsarenotincludedinthetableabove.
InJune2015,weissuedapproximately$335.7millionof2.25%ConvertibleSeniorNotesdueJune15,2022.The2022NotesaregovernedbyanindenturebetweenusandU.S.BankNationalAssociation,asthetrustee,ortheIndenture.The2022Notesareseniorunsecuredobligationsandbearinterestatarateof2.25%peryear,payableonJune15andDecember15ofeachyear,whichbeganonDecember15,2015.The2022NoteswillmatureonJune15,2022,unlessearlierconvertedorrepurchased.Theinitialconversionrateforthe2022Notesis60.3209sharesofClassAcommonstock(subjecttoadjustmentasprovidedforintheIndenture)per$1,000principalamountofthe2022Notes,whichisequaltoaninitialconversionpriceofapproximately$16.58pershare.Inaddition,tominimizetheimpactofpotentialdilutiontoourcommonstockuponconversionofthe2022Notes,weenteredintotheConvertibleNoteHedgescovering20,249,665sharesofourClassAcommonstockinconnectionwiththe2022Notes.ConcurrentlywithenteringintotheConvertibleNoteHedges,wesoldNoteHedgeWarrantstoacquire20,249,665sharesofourClassAcommonstockataninitialstrikepriceofapproximately$21.50pershare,subjecttocustomaryanti-dilutionadjustments.The2022Notes,ConvertibleNoteHedgesandNoteHedgeWarrantsaremorefullydescribedinNote10,Notes
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commitments,whicharereflectedinthetableabove.DuringtheyearendedDecember31,2015,werecognizedapproximately$10.1millionofthecommitmentsincludedinthetableabove,asanaccrualforexcesspurchasecommitmentsthatisrecordedinotherliabilitiesinourconsolidatedbalancesheet.Inaddition,weandAllerganarejointlyobligatedtomakeminimumpurchasesoflinaclotideAPIfortheterritoriescoveredbyourcollaborationwithAllerganforNorthAmerica.Currently,Allerganfulfillsallsuchminimumpurchasecommitmentsand,asaresult,theyareexcludedfromthetableabove.
(2) Ourcommitmentforcapitalleaseobligationsprincipallyrelatestoleasedautomobilesforourfield-basedsalesforceandmedicalscienceliaisons,andcomputerandofficeequipment.
(3) OurcommitmentsforoperatingleasesrelatetoourleaseofofficeandlaboratoryspaceinCambridge,MassachusettsandourdatastoragespaceinBoston,Massachusetts.Inthethirdquarterof2014,weenteredintotwoarrangements,withthelandlord'sconsent,tosubleaseaportionofourCambridge,Massachusettscorporateheadquarters.Thefutureminimumleasepaymentsincludedinthistabledonotreflectthe$0.8millionofsubleaserentalincomethatweareentitledtoreceivethrough2016underthefirstsubleaseorthe$11.1millionofsubleaserentalincomethatweareentitledtoreceivethrough2018underthesecondsublease.
(4) Convertibleseniornotesincludesapproximately$335.7millionofour2022Noteswhichcanpotentiallybesettledinourcommonstockunderthetermsoftheassociatedindenture.
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Payable,intheaccompanyingnotestoourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-Kforadditionalinformation.
Commitments Related to Our Collaboration and License Agreements
UnderourcollaborativeagreementswithAllerganforNorthAmericaandAstraZenecaforChina,HongKongandMacau,wesharewithAllerganandAstraZenecaalldevelopmentandcommercializationcostsrelatedtolinaclotideintheU.S.andforChina,HongKongandMacau,respectively.Theactualamountsthatwepayourpartnersorthatpartnerspaytouswilldependonnumerousfactorsoutsideofourcontrol,includingthesuccessofourclinicaldevelopmenteffortswithrespecttolinaclotide,thecontentandtimingofdecisionsmadebytheregulators,thereimbursementandcompetitivelandscapearoundlinaclotideandourotherproductcandidates,andotherfactorsdescribedunder"RiskFactors"inItem1AofthisAnnualReportonForm10-K.
Inaddition,wehavecommitmentstomakepotentialfuturemilestonepaymentsunderoneofourlicenseandcollaborationarrangementstotaling$23.0million,whichincludes$5.0millionfordevelopmentmilestonesand$18.0millionforregulatorymilestones.Wearealsocommittedtomakepotentialfuturemilestonepaymentsofupto$114.5millionperproducttooneofourcollaborationpartners,including$21.5millionfordevelopmentmilestones,$58.0millionforregulatorymilestonesand$35.0millionforsales-basedmilestones.Thesemilestonesprimarilyincludethecommencementandresultsofclinicaltrials,obtainingregulatoryapprovalinvariousjurisdictionsandthefuturecommercialsuccessofdevelopmentprograms,theoutcomeandtimingofwhicharedifficulttopredictandsubjecttosignificantuncertainty.Inadditiontothemilestonesdiscussedabove,weareobligatedtopayroyaltiesonfuturesales,whicharecontingentongeneratinglevelsofsalesoffutureproductsthathavenotbeenachievedandmayneverbeachieved.Sinceweareunabletoreliablyestimatethetimingandamountsofsuchmilestoneandroyaltypayments,orwhethertheywilloccuratall,thesecontingentpaymentshavebeenexcludedfromthetableabove.OurlicenseandcollaborationagreementsaremorefullydescribedinNote4,Collaboration,LicenseandCo-promotionAgreements,intheaccompanyingnotestoourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
Tax-related Obligations
Weexcludeliabilitiesorobligationspertainingtouncertaintaxpositionsfromoursummaryofcontractualcommitmentsandobligationsaswecannotmakeareliableestimateoftheperiodofcashsettlementwiththerespectivetaxingauthorities.AsofDecember31,2015,wehaveapproximately$17.6millionofuncertaintaxpositions,andwecannotreasonablyestimatethepotentialadjustmenttoournetoperatinglosscarryforward.TheseuncertaintaxpositionsaremorefullydescribedinNote14,IncomeTaxes,intheaccompanyingnotestoourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-Kforadditionalinformation.
Other Funding Commitments
AsofDecember31,2015,wehaveseveralon-goingstudiesinvariousclinicaltrialstages.OurmostsignificantclinicaltrialexpendituresaretoCROs.ThecontractswithCROsgenerallyarecancellable,withnotice,atouroptionanddonothaveanysignificantcancellationpenalties.Theseitemsarenotincludedinthetableabove.
Off-BalanceSheetArrangements
Wedonothaveanyrelationshipswithunconsolidatedentitiesorfinancialpartnerships,suchasentitiesoftenreferredtoasstructuredfinanceorspecialpurposeentities,thatwouldhavebeenestablishedforthepurposeoffacilitatingoff-balancesheetarrangements(asthattermisdefinedin
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Item303(a)(4)(ii)ofRegulationS-K)orothercontractuallynarroworlimitedpurposes.Assuch,wearenotexposedtoanyfinancing,liquidity,marketorcreditriskthatcouldariseifwehadengagedinthosetypesofrelationships.Weenterintoguaranteesintheordinarycourseofbusinessrelatedtotheguaranteeofourownperformanceandtheperformanceofoursubsidiaries.
NewAccountingPronouncements
ForadiscussionofnewaccountingpronouncementsrefertoNote2,SummaryofSignificantAccountingPolicies,toourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-K.
Item7A.Quantitative and Qualitative Disclosures about Market Risk
InterestRateRisk
Weareexposedtomarketriskrelatedtochangesininterestrates.Weinvestourcashinavarietyoffinancialinstruments,principallysecuritiesissuedbytheU.S.governmentanditsagenciesandmoneymarketinstruments.Thegoalsofourinvestmentpolicyarepreservationofcapital,fulfillmentofliquidityneedsandfiduciarycontrolofcashandinvestments.Wealsoseektomaximizeincomefromourinvestmentswithoutassumingsignificantrisk.
Ourprimaryexposuretomarketriskisinterestincomesensitivity,whichisaffectedbychangesinthegenerallevelofinterestrates,particularlybecauseourinvestmentsareinshort-termmarketablesecurities.Duetotheshort-termdurationofourinvestmentportfolioandthelowriskprofileofourinvestments,animmediate1%changeininterestrateswouldnothaveamaterialeffectonthefairmarketvalueofourportfolio.Accordingly,wewouldnotexpectouroperatingresultsorcashflowstobeaffectedtoanysignificantdegreebytheeffectofasuddenchangeinmarketinterestratesonourinvestmentportfolio.
Wedonotbelieveourcash,cashequivalentsandavailable-for-salesecuritieshavesignificantriskofdefaultorilliquidity.Whilewebelieveourcash,cashequivalentsandavailable-for-salesecuritiesdonotcontainexcessiverisk,wecannotprovideabsoluteassurancethatinthefutureourinvestmentswillnotbesubjecttoadversechangesinmarketvalue.Inaddition,wemaintainsignificantamountsofcash,cashequivalentsandavailable-for-salesecuritiesatoneormorefinancialinstitutionsthatareinexcessoffederallyinsuredlimits.Giventhepotentialinstabilityoffinancialinstitutions,wecannotprovideassurancethatwewillnotexperiencelossesonthesedeposits.
Ourcapitalleaseobligations,PhaRMANotesand2022Notesbearinterestatafixedrateandthereforehaveminimalexposuretochangesininterestrates;however,becausetheseinterestratesarefixed,wemaybepayingahigherinterestrate,relativetomarket,inthefutureifourcreditratingimprovesorothercircumstanceschange.
EquityPriceRisk
2022Notes
Our2022NotesincludeconversionandsettlementprovisionsthatarebasedonthepriceofourClassAcommonstockatconversionoratmaturityofthe2022Notes.TheamountofcashwemayberequiredtopayisdeterminedbythepriceofourClassAcommonstock.Thefairvalueofour2022NotesisdependentonthepriceandvolatilityofourClassAcommonstockandwillgenerallyincreaseordecreaseasthemarketpriceofourClassAcommonstockchanges.
The2022NotesareconvertibleintoClassAcommonstockataninitialconversionrateof60.3209sharesofClassAcommonstock(subjecttoadjustmentasprovidedforintheIndenture)per$1,000principalamountofthe2022Notes,whichisequaltoaninitialconversionpriceofapproximately
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$16.58pershare.The2022NoteswillmatureonJune15,2022unlessearlierconvertedorrepurchased.The2022Notesbearcashinterestatanannualrateof2.25%,payableonJune15andDecember15ofeachyear,whichbeganonDecember15,2015.AsofDecember31,2015,thefairvalueofthe2022Noteswasestimatedbyustobe$311.6million.The2022NotesaremorefullydescribedinNote5,FairValueofFinancialInstruments,andNote10,NotesPayable,intheaccompanyingnotestoourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-Kforadditionalinformation.
ConvertibleNoteHedgeandWarrantTransactionswithRespectto2022Notes
Tominimizetheimpactofpotentialdilutiontoourcommonstockuponconversionofthe2022Notes,weenteredintoConvertibleNoteHedges.ConcurrentlywithenteringintotheConvertibleNoteHedges,weenteredintowarranttransactionswherebywesoldNoteHedgeWarrantstoacquire,subjecttocustomaryadjustments,20,249,665sharesofourClassAcommonstockataninitialstrikepriceofapproximately$21.50pershare,subjecttoadjustment.TheConvertibleNoteHedgesandNoteHedgeWarrantsaremorefullydescribedinNote10,NotesPayable,intheaccompanyingnotestoourconsolidatedfinancialstatementsappearingelsewhereinthisAnnualReportonForm10-Kforadditionalinformation.
ForeignCurrencyRisk
WehavenosignificantoperationsoutsidetheU.S.andwedonotexpecttobeimpactedsignificantlybyforeigncurrencyfluctuations.
EffectsofInflation
WedonotbelievethatinflationandchangingpricesovertheyearsendedDecember31,2015,2014and2013hadasignificantimpactonourresultsofoperations.
Item8.Consolidated Financial Statements and Supplementary Data
Ourconsolidatedfinancialstatements,togetherwiththeindependentregisteredpublicaccountingfirmreportthereon,appearatpagesF-1throughF-66,ofthisAnnualReportonForm10-K.
Item9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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Item9A.Controls and Procedures
EvaluationofDisclosureControlsandProcedures
AsrequiredbyRule13a-15(b)oftheExchangeAct,ourmanagement,includingourprincipalexecutiveofficerandourprincipalfinancialofficer,conductedanevaluationasoftheendoftheperiodcoveredbythisAnnualReportonForm10-Koftheeffectivenessofthedesignandoperationofourdisclosurecontrolsandprocedures.Basedonthatevaluation,ourprincipalexecutiveofficerandprincipalfinancialofficerconcludedthatourdisclosurecontrolsandproceduresareeffectiveatthereasonableassurancelevelinensuringthatinformationrequiredtobedisclosedbyusinthereportsthatwefileorsubmitundertheExchangeActisrecorded,processed,summarizedandreportedwithinthetimeperiodsspecifiedintheSEC'srulesandforms.Disclosurecontrolsandproceduresinclude,withoutlimitation,controlsandproceduresdesignedtoensurethatinformationrequiredtobedisclosedbyusinthereportswefileundertheExchangeActisaccumulatedandcommunicatedtoourmanagement,includingourprincipalexecutiveofficerandprincipalfinancialofficer,asappropriatetoallowtimelydecisionsregardingrequireddisclosure.
Management'sReportonInternalControlOverFinancialReporting
Ourmanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverourfinancialreporting.InternalcontroloverfinancialreportingisdefinedinRules13a-15(f)and15d-15(f)undertheExchangeActastheprocessdesignedby,orunderthesupervisionof,ourChiefExecutiveOfficerandChiefFinancialOfficer,andeffectedbyourboardofdirectors,managementandotherpersonnel,toprovidereasonableassuranceregardingthereliabilityofourfinancialreportingandthepreparationofourfinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples,andincludesthosepoliciesandproceduresthat:
(1) pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsofassets;
(2) providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresarebeingmadeonlyinaccordancewiththeauthorizationsofmanagementanddirectors;and
(3) providereasonableassuranceregardingthepreventionortimelydetectionofunauthorizedacquisition,useordispositionofassetsthatcouldhaveamaterialeffectonourfinancialstatements.
Underthesupervisionandwiththeparticipationofourmanagement,includingourChiefExecutiveOfficerandChiefFinancialOfficer,weconductedanevaluationoftheeffectivenessofourinternalcontroloverfinancialreportingbasedontheframeworkprovidedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(2013framework).Basedonthisevaluation,ourmanagementconcludedthatourinternalcontroloverfinancialreportingwaseffectiveasofDecember31,2015.
TheeffectivenessofourinternalcontroloverfinancialreportingasofDecember31,2015hasbeenauditedbyErnstandYoungLLP,anindependentregisteredpublicaccountingfirm,asstatedintheirreport,whichisincludedherein.
ChangesinInternalControl
AsrequiredbyRule13a-15(d)oftheExchangeAct,ourmanagement,includingourprincipalexecutiveofficerandourprincipalfinancialofficer,conductedanevaluationoftheinternalcontroloverfinancialreportingtodeterminewhetheranychangesoccurredduringthequarterended
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December31,2015thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.Basedonthatevaluation,ourprincipalexecutiveofficerandprincipalfinancialofficerconcludednosuchchangesduringthequarterendedDecember31,2015materiallyaffected,orwerereasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.
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ReportofIndependentRegisteredPublicAccountingFirm
TheBoardofDirectorsandShareholdersofIronwoodPharmaceuticals,Inc.
WehaveauditedIronwoodPharmaceuticals,Inc.'sinternalcontroloverfinancialreportingasofDecember31,2015,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(2013framework)(theCOSOcriteria).IronwoodPharmaceuticals,Inc.'smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreporting,andforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreportingincludedintheaccompanyingManagement'sReportonInternalControlOverFinancialReporting.Ourresponsibilityistoexpressanopiniononthecompany'sinternalcontroloverfinancialreportingbasedonouraudit.
WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.
Acompany'sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany'sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany'sassetsthatcouldhaveamaterialeffectonthefinancialstatements.
Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.
Inouropinion,IronwoodPharmaceuticals,Inc.maintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2015,basedontheCOSOcriteria.
Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theconsolidatedbalancesheetsofIronwoodPharmaceuticals,Inc.asofDecember31,2015and2014,andtherelatedconsolidatedstatementsofoperations,comprehensiveloss,stockholders'equity,andcashflowsforeachofthethreeyearsintheperiodendedDecember31,2015ofIronwoodPharmaceuticals,Inc.andourreportdatedFebruary19,2016expressedanunqualifiedopinionthereon.
Boston,MassachusettsFebruary19,2016
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PARTIII
Item10.Directors, Executive Officers and Corporate Governance
Wehaveadoptedacodeofbusinessconductandethicsapplicabletoourdirectors,executiveofficersandallotheremployees.Acopyofthatcodeisavailableonourcorporatewebsiteathttp://www.ironwoodpharma.com.Anyamendmentstothecodeofbusinessconductandethics,andanywaiverstheretoinvolvingourexecutiveofficers,alsowillbeavailableonourcorporatewebsite.Aprintedcopyofthesedocumentswillbemadeavailableuponrequest.ThecontentonourwebsiteisnotincorporatedbyreferenceintothisAnnualReportonForm10-K.
CertaininformationregardingourexecutiveofficersissetforthattheendofPartI,Item1ofthisForm10-Kundertheheading,"ExecutiveOfficersoftheRegistrant."Theotherinformationrequiredbythisitemisincorporatedbyreferencefromourproxystatementforour2016AnnualMeetingofStockholders.
Item11.Executive Compensation
Theinformationrequiredbythisitemisincorporatedbyreferencefromourproxystatementforour2016AnnualMeetingofStockholders.
Item12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Theinformationrequiredbythisitemisincorporatedbyreferencefromourproxystatementforour2016AnnualMeetingofStockholders.
Item13.Certain Relationships and Related Transactions, and Director Independence
Theinformationrequiredbythisitemisincorporatedbyreferencefromourproxystatementforour2016AnnualMeetingofStockholders.
Item14.Principal Accountant Fees and Services
Theinformationrequiredbythisitemisincorporatedbyreferencefromourproxystatementforour2016AnnualMeetingofStockholders.
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PARTIV
Item15.Exhibits and Financial Statement Schedules
(a)Listofdocumentsfiledaspartofthisreport
(1) ConsolidatedFinancialStatementslistedunderPartII,Item8andincludedhereinbyreference.
(2) ConsolidatedFinancialStatementSchedules
Noschedulesaresubmittedbecausetheyarenotapplicable,notrequiredorbecausetheinformationisincludedintheConsolidatedFinancialStatementsorNotestoConsolidatedFinancialStatements.
(3) Exhibits
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IncorporatedbyreferencehereinNumber Description Form Date
3.1 EleventhAmendedandRestatedCertificateofIncorporation
AnnualReportonForm10-K(FileNo.001-34620)
March30,2010
3.2 FifthAmendedandRestatedBylaws AnnualReportonForm10-K(File
No.001-34620) March30,2010
4.1 SpecimenClassAcommonstock
certificate RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
January20,2010
4.2 EighthAmendedandRestatedInvestors'
RightsAgreement,datedasofSeptember1,2009,byandamongIronwoodPharmaceuticals,Inc.,theFoundersandtheInvestorsnamedtherein
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
November20,2009
4.3 Indenture,datedasofJanuary4,2013,
byandbetweenIronwoodPharmaceuticals,Inc.,asissueroftheNotes,andU.S.BankNationalAssociation,asinitialtrusteeoftheNotesandasOperatingBank(includingtheformoftheLinaclotidePhaRMASM11%Notesdue2024)
Form8-K(FileNo.001-34620) January8,2013
4.4 Indenture,datedasofJune15,2015,by
andbetweenIronwoodPharmaceuticals,Inc.andU.S.BankNationalAssociation(includingtheformofthe2.25%ConvertibleSeniorNotedue2022)
Form8-K(FileNo.001-34620) June15,2015
TableofContents
91
IncorporatedbyreferencehereinNumber Description Form Date
10.1# AmendedandRestated2002StockIncentivePlanandformagreementsthereunder
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
December23,2009
10.2# AmendedandRestated2005Stock
IncentivePlanandformagreementsthereunder
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
January29,2010
10.3# AmendedandRestated2010Employee,
DirectorandConsultantEquityIncentivePlan
RegistrationStatementonFormS-8,asamended(FileNo.333-184396)
October12,2012
10.3.1# FormofStockOptionAgreementunder
theAmendedandRestated2010Employee,DirectorandConsultantEquityIncentivePlan
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.3.2# FormofNon-employeeDirector
RestrictedStockAgreementundertheAmendedandRestated2010Employee,DirectorandConsultantEquityIncentivePlan
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.3.3# FormofRestrictedStockUnit
AgreementundertheAmendedandRestated2010Employee,DirectorandConsultantEquityIncentivePlan
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.4# AmendedandRestated2010Employee
StockPurchasePlan AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.5# ChangeofControlSeveranceBenefit
Plan,asamendedandrestated QuarterlyReportonForm10-Q(FileNo.001-34620)
April29,2014
10.6# FormofExecutiveSeverance
Agreement AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.7# DirectorCompensationPlaneffective
January1,2014 AnnualReportonForm10-K(FileNo.001-34620)
February7,2014
10.8# FormofIndemnificationAgreement
withDirectorsandOfficers RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
December23,2009
10.9# ConsultingAgreement,datedasof
December16,2014,byandbetweenChristopherWalshandIronwoodPharmaceuticals,Inc.
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
TableofContents
92
IncorporatedbyreferencehereinNumber Description Form Date
10.10# ConsultingAgreement,datedDecember3,2014,byandbetweenLawrenceS.OlanoffandIronwoodPharmaceuticals,Inc.
QuarterlyReportonForm10-Q(FileNo.001-34620)
May6,2015
10.11+ CollaborationAgreement,datedasof
September12,2007,asamendedonNovember3,2009,byandbetweenForestLaboratories,Inc.andIronwoodPharmaceuticals,Inc.
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
February2,2010
10.11.1 AmendmentNo.2totheCollaboration
Agreement,datedasofJanuary8,2013,byandbetweenForestLaboratories,Inc.andIronwoodPharmaceuticals,Inc.
AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.12+ LicenseAgreement,datedasof
April30,2009,byandbetweenAllerganPharmaceuticalsInternationalLtd.(formerlywithAlmirall,S.A.)andIronwoodPharmaceuticals,Inc.
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
February2,2010
10.12.1+ AmendmentNo.1toLicense
Agreement,datedasofJune11,2013,byandbetweenAllerganPharmaceuticalsInternationalLtd.(formerlywithAlmirall,S.A.)andIronwoodPharmaceuticals,Inc.
QuarterlyReportonForm10-Q(FileNo.001-34620)
August8,2013
10.12.2++* AmendmenttotheLicenseAgreement,
datedasofOctober26,2015,byandbetweenAllerganPharmaceuticalsInternationalLtd.andIronwoodPharmaceuticals,Inc.
10.13++* NovationAgreement,datedasof
October26,2015,byandamongAlmirall,S.A.,AllerganPharmaceuticalsInternationalLtd.andIronwoodPharmaceuticals,Inc.
10.14+ LicenseAgreement,datedasof
November10,2009,byandamongAstellasPharmaInc.andIronwoodPharmaceuticals,Inc.
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
February2,2010
TableofContents
93
IncorporatedbyreferencehereinNumber Description Form Date
10.15+ CollaborationAgreement,datedasofOctober23,2012,byandbetweenAstraZenecaABandIronwoodPharmaceuticals,Inc.
AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.16+ CommercialSupplyAgreement,dated
asofJune23,2010,byandamongPolyPeptideLaboratories,Inc.andPolypeptideLaboratories(SWEDEN)AB,ForestLaboratories,Inc.andIronwoodPharmaceuticals,Inc.
QuarterlyReportonForm10-Q(FileNo.001-34620)
August10,2010
10.17+ CommercialSupplyAgreement,dated
asofMarch28,2011,byandamongCordenPharmaColorado,Inc.(f/k/aRocheColoradoCorporation),IronwoodPharmaceuticals,Inc.andForestLaboratories,Inc.
QuarterlyReportonForm10-Q(FileNo.001-34620)
May13,2011
10.17.1+ AmendmentNo.3toCommercial
SupplyAgreement,datedasofNovember26,2013,byandbetweenCordenPharmaColorado,Inc.(f/k/aRocheColoradoCorporation),IronwoodPharmaceuticals,Inc.andForestLaboratories,Inc.
AnnualReportonForm10-K(FileNo.001-34620)
February7,2014
10.18 Leaseforfacilitiesat301BinneySt.,
Cambridge,MA,datedasofJanuary12,2007,asamendedonApril9,2009,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
December23,2009
10.18.1 SecondAmendmenttoLeasefor
facilitiesat301BinneySt.,Cambridge,MA,datedasofFebruary9,2010,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
March30,2010
10.18.2 ThirdAmendmenttoLeaseforfacilities
at301BinneySt.,Cambridge,MA,datedasofJuly1,2010,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
March30,2011
TableofContents
94
IncorporatedbyreferencehereinNumber Description Form Date
10.18.3 FourthAmendmenttoLeaseforfacilitiesat301BinneySt.,Cambridge,MA,datedasofFebruary3,2011,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
March30,2011
10.18.4 FifthAmendmenttoLeaseforfacilities
at301BinneySt.,Cambridge,MA,datedasofOctober18,2011,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February29,2012
10.18.5 SixthAmendmenttoLeaseforfacilities
at301BinneySt.,Cambridge,MA,datedasofJuly19,2012,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.18.6 SeventhAmendmenttoLeasefor
facilitiesat301BinneySt.,Cambridge,MA,datedasofOctober30,2012,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.18.7 EighthAmendmenttoLeasefor
facilitiesat301BinneySt.,Cambridge,MA,datedasofJuly8,2014,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.18.8 NinthAmendmenttoLeaseforfacilities
at301BinneySt.,Cambridge,MA,datedasofOctober27,2014,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.18.9 TenthAmendmenttoLeaseforfacilities
at301BinneySt.,Cambridge,MA,datedasofJanuary21,2015,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
TableofContents
95
IncorporatedbyreferencehereinNumber Description Form Date
10.18.10 Sublease,datedasofJuly1,2014,byandbetweenBiogenIdecMAInc.andIronwoodPharmaceuticals,Inc.toLeaseforfacilitiesat301BinneySt.,Cambridge,MA,asamended,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.19 BaseCallOptionTransaction
Confirmation,datedasofJune10,2015,betweenIronwoodPharmaceuticals,Inc.andJPMorganChaseBank,NationalAssociation,LondonBranch
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.20 BaseCallOptionTransaction
Confirmation,datedasofJune10,2015,betweenIronwoodPharmaceuticals,Inc.andCreditSuisseCapitalLLC,throughitsagentCreditSuisseSecurities(USA)LLC
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.21 BaseWarrantsConfirmation,datedas
ofJune10,2015,betweenIronwoodPharmaceuticals,Inc.andJPMorganChaseBank,NationalAssociation,LondonBranch
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.22 BaseWarrantsConfirmation,datedas
ofJune10,2015,betweenIronwoodPharmaceuticals,Inc.andCreditSuisseCapitalLLC,throughitsagentCreditSuisseSecurities(USA)LLC
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.23 AdditionalCallOptionTransaction
Confirmation,datedasofJune22,2015,betweenIronwoodPharmaceuticals,Inc.andJPMorganChaseBank,NationalAssociation,LondonBranch
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
TableofContents
96
IncorporatedbyreferencehereinNumber Description Form Date
10.24 AdditionalCallOptionTransactionConfirmation,datedasofJune22,2015,betweenIronwoodPharmaceuticals,Inc.andCreditSuisseCapitalLLC,throughitsagentCreditSuisseSecurities(USA)LLC
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.25 AdditionalWarrantsConfirmation,
datedasofJune22,2015,betweenIronwoodPharmaceuticals,Inc.andJPMorganChaseBank,NationalAssociation,LondonBranch
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.26 AdditionalWarrantsConfirmation,
datedasofJune22,2015,betweenIronwoodPharmaceuticals,Inc.andCreditSuisseCapitalLLC,throughitsagentCreditSuisseSecurities(USA)LLC
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
21.1* SubsidiariesofIronwood
Pharmaceuticals,Inc.
23.1* ConsentofIndependentRegistered
PublicAccountingFirm
31.1* CertificationofChiefExecutiveOfficer
pursuanttoRules13a-14or15d-14oftheExchangeAct
31.2* CertificationofChiefFinancialOfficer
pursuanttoRules13a-14or15d-14oftheExchangeAct
32.1‡ CertificationofChiefExecutiveOfficer
pursuanttoRules13a-14(b)or15d-14(b)oftheExchangeActand18U.S.C.Section1350
32.2‡ CertificationofChiefFinancialOfficer
pursuanttoRules13a-14(b)or15d-14(b)oftheExchangeActand18U.S.C.Section1350
101.INS* XBRLInstanceDocument 101.SCH* XBRLTaxonomyExtensionSchema
Document
101.CAL* XBRLTaxonomyExtension
CalculationLinkbaseDocument
TableofContents
(b)Exhibits.
TheexhibitsrequiredbythisItemarelistedunderItem15(a)(3).
(c)FinancialStatementSchedules.
ThefinancialstatementschedulesrequiredbythisItemarelistedunderItem15(a)(2).
97
IncorporatedbyreferencehereinNumber Description Form Date
101.LAB* XBRLTaxonomyExtensionLabelLinkbaseDatabase
101.PRE* XBRLTaxonomyExtension
PresentationLinkbaseDocument
101.DEF* XBRLTaxonomyExtensionDefinition
LinkbaseDocument
* Filedherewith.
‡ Furnishedherewith.
+ Confidentialtreatmentgrantedunder17C.F.R.§§200.80(b)(4)and230.406.Theconfidentialportionsofthisexhibithavebeenomittedandaremarkedaccordingly.TheconfidentialportionshavebeenprovidedseparatelytotheSECpursuanttotheconfidentialtreatmentrequest.
++ Confidentialtreatmentrequestedunder17C.F.R.§§200.80(b)(4)andRule24b-2.Theconfidentialportionsofthisexhibithavebeenomittedandaremarkedaccordingly.TheconfidentialportionshavebeenprovidedseparatelytotheSECpursuanttotheconfidentialtreatmentrequest.
# Managementcontractorcompensatoryplan,contract,orarrangement.
TableofContents
SIGNATURES
PursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized,intheCityofCambridge,CommonwealthofMassachusetts,onthe19thdayofFebruary2016.
PursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedateindicated.
98
IronwoodPharmaceuticals,Inc.By:
/s/PETERM.HECHT
PeterM.HechtChiefExecutiveOfficer
Signature Title Date
/s/PETERM.HECHT
PeterM.Hecht
ChiefExecutiveOfficerandDirector(PrincipalExecutiveOfficer)
February19,2016
/s/THOMASGRANEY
ThomasGraney
ChiefFinancialOfficer(PrincipalFinancialOfficer)
February19,2016
/s/GINACONSYLMAN
GinaConsylman
VicePresident,FinanceandChiefAccountingOfficer(PrincipalAccountingOfficer)
February19,2016
/s/TERRANCEG.MCGUIRE
TerranceG.McGuire ChairmanoftheBoard February19,2016
/s/GEORGEH.CONRADES
GeorgeH.Conrades Director February19,2016
/s/MARSHAH.FANUCCI
MarshaH.Fanucci Director February19,2016
/s/JULIEH.MCHUGH
JulieH.McHugh Director February19,2016
TableofContents
99
Signature Title Date
/s/LAWRENCES.OLANOFF
LawrenceS.Olanoff Director February19,2016
/s/EDWARDP.OWENS
EdwardP.Owens Director February19,2016
/s/BRYANE.ROBERTS
BryanE.Roberts Director February19,2016
/s/CHRISTOPHERT.WALSH
ChristopherT.Walsh Director February19,2016
/s/DOUGLASE.WILLIAMS
DouglasE.Williams Director February19,2016
TableofContents
IndextoConsolidatedFinancialStatementsofIronwoodPharmaceuticals,Inc.
F-1
Page ReportofIndependentRegisteredPublicAccountingFirm F-2ConsolidatedBalanceSheetsasofDecember31,2015and2014 F-3ConsolidatedStatementsofOperationsfortheYearsEndedDecember31,2015,2014and2013 F-4ConsolidatedStatementsofComprehensiveLossfortheYearsEndedDecember31,2015,2014and2013 F-5ConsolidatedStatementsofStockholders'EquityfortheYearsEndedDecember31,2015,2014and2013 F-6ConsolidatedStatementsofCashFlowsfortheYearsEndedDecember31,2015,2014and2013 F-8NotestoConsolidatedFinancialStatements F-9
TableofContents
REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM
TotheBoardofDirectorsandShareholdersofIronwoodPharmaceuticals,Inc.
WehaveauditedtheaccompanyingconsolidatedbalancesheetsofIronwoodPharmaceuticals,Inc.asofDecember31,2015and2014,andtherelatedconsolidatedstatementsofoperations,comprehensiveloss,stockholders'equity,andcashflowsforeachofthethreeyearsintheperiodendedDecember31,2015.ThesefinancialstatementsaretheresponsibilityoftheCompany'smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.
WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.
Inouropinion,thefinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,theconsolidatedfinancialpositionofIronwoodPharmaceuticals,Inc.atDecember31,2015and2014,andtheconsolidatedresultsofitsoperationsanditscashflowsforeachofthethreeyearsintheperiodendedDecember31,2015,inconformitywithU.S.generallyacceptedaccountingprinciples.
Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),IronwoodPharmaceuticals,Inc.'sinternalcontroloverfinancialreportingasofDecember31,2015,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(2013framework)andourreportdatedFebruary19,2016expressedanunqualifiedopinionthereon.
Boston,MassachusettsFebruary19,2016
F-2
/s/Ernst&YoungLLP
TableofContents
IronwoodPharmaceuticals,Inc.
ConsolidatedBalanceSheets
(Inthousands,exceptshareandpershareamounts)
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-3
December31,
2015 December31,
2014 ASSETS
Currentassets: Cashandcashequivalents $ 261,287 $ 74,297Available-for-salesecurities 178,107 174,037Accountsreceivable 2,884 10Relatedpartyaccountsreceivable,net 51,634 25,829Inventory — 4,954Prepaidexpensesandothercurrentassets 6,293 9,180
Totalcurrentassets 500,205 288,307Restrictedcash 8,747 8,147Propertyandequipment,net 21,075 29,826Convertiblenotehedges 86,466 —Otherassets 2,628 3,042Totalassets $ 619,121 $ 329,322
LIABILITIESANDSTOCKHOLDERS'EQUITY Currentliabilities: Accountspayable $ 8,586 $ 9,754Relatedpartyaccountspayable,net 3 8Accruedresearchanddevelopmentcosts 4,245 3,574Accruedexpensesandothercurrentliabilities 23,301 22,612Currentportionofcapitalleaseobligations 2,631 1,152Currentportionofdeferredrent 5,544 4,992Currentportionofdeferredrevenue 7,191 7,191CurrentportionofPhaRMAnotespayable 24,964 11,258
Totalcurrentliabilities 76,465 60,541Capitalleaseobligations,netofcurrentportion 306 2,571Deferredrent,netofcurrentportion 6,395 10,522Deferredrevenue,netofcurrentportion 1,798 8,989Notehedgewarrants 75,328 —Convertibleseniornotes 220,620 —PhaRMANotespayable,netofcurrentportion 132,964 158,147Otherliabilities 10,120 —Commitmentsandcontingencies Stockholders'equity: Preferredstock,$0.001parvalue,75,000,000sharesauthorized,nosharesissuedandoutstanding — —
ClassAcommonstock,$0.001parvalue,500,000,000sharesauthorizedand127,371,478and124,915,658sharesissuedandoutstandingatDecember31,2015and2014,respectively 127 125
ClassBcommonstock,$0.001parvalue,100,000,000sharesauthorizedand15,870,356and15,907,272sharesissuedandoutstandingatDecember31,2015and2014,respectively 16 16
Additionalpaid-incapital 1,205,183 1,055,876Accumulateddeficit (1,110,115) (967,446)Accumulatedothercomprehensiveloss (86) (19)
Totalstockholders'equity 95,125 88,552Totalliabilitiesandstockholders'equity $ 619,121 $ 329,322
TableofContents
IronwoodPharmaceuticals,Inc.
ConsolidatedStatementsofOperations
(Inthousands,exceptpershareamounts)
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-4
YearsEndedDecember31, 2015 2014 2013 Collaborativearrangementsrevenue $ 149,555 $ 76,436 $ 22,881Costandexpenses: Costofrevenue 12 5,291 7,203Write-downofinventorytonetrealizablevalueandlossonnon-cancellablepurchasecommitments 17,638 20,292 —
Researchanddevelopment 108,746 101,890 102,378Selling,generalandadministrative 125,247 118,333 123,228Collaborationexpense — — 42,074
Totalcostandexpenses 251,643 245,806 274,883Lossfromoperations (102,088) (169,370) (252,002)
Other(expense)income: Interestexpense (31,096) (21,166) (21,002)Interestandinvestmentincome 443 257 192Lossonderivatives (9,928) — —Otherincome — 661 —
Otherexpense,net (40,581) (20,248) (20,810)Netloss $ (142,669) $ (189,618) $ (272,812)Netlosspershare—basicanddiluted $ (1.00) $ (1.39) $ (2.35)Weightedaveragenumberofcommonsharesusedinnetlosspershare—basicanddiluted: 142,155 136,811 115,852
TableofContents
IronwoodPharmaceuticals,Inc.
ConsolidatedStatementsofComprehensiveLoss
(Inthousands)
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-5
YearsEndedDecember31, 2015 2014 2013 Netloss $ (142,669) $ (189,618) $ (272,812)
Othercomprehensiveloss: Unrealizedlossesonavailable-for-salesecurities (67) (21) (3)
Totalothercomprehensiveloss (67) (21) (3)Comprehensiveloss $ (142,736) $ (189,639) $ (272,815)
TableofContents
IronwoodPharmaceuticals,Inc.
ConsolidatedStatementsofStockholders'Equity
(Inthousands,exceptshareamounts)
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-6
ClassA
commonstock ClassB
commonstock
Accumulatedother
comprehensiveincome(loss)
Additionalpaid-incapital
Accumulateddeficit
TotalStockholders'
equity
Shares Amount Shares Amount BalanceatDecember31,2012 78,253,074 $ 78 29,512,253 $ 30 $ 648,955 $ (505,016) $ 5 $ 144,052Issuanceofcommonstockuponexerciseofstockoptionsandemployeestockpurchaseplan 645,196 1 1,538,887 1 9,295 — — 9,297
Issuanceofcommonstockawards 10,772 — — — 28 — — 28
Issuanceofcommonstockuponpublicoffering,netofofferingcostsof$7.9million 11,204,948 11 — — 137,755 — — 137,766
ConversionofClassBcommonstocktoClassAcommonstock 12,689,103 13 (12,689,103) (13) — — — —
Share-basedcompensationexpenserelatedtoissuanceofstockoptionstonon-employees — — — — 272 — — 272
Share-basedcompensationexpenserelatedtoshare-basedawardstoemployeesandemployeestockpurchaseplan — — — — 19,624 — — 19,624
Restrictedcommonstocknolongersubjecttorepurchase — — — — 1 — — 1
Unrealizedlossesonshort-terminvestments — — — — — — (3) (3)
Netloss — — — — — (272,812) — (272,812)BalanceatDecember31,2013 102,803,093 103 18,362,037 18 815,930 (777,828) 2 38,225Issuanceofcommonstockuponexerciseofstockoptionsandemployeestockpurchaseplan 1,705,752 2 1,876,880 2 23,328 — — 23,332
Issuanceofcommonstockawards 290,843 — — — 22 — — 22
Issuanceofcommonstockuponpublicoffering,netofofferingcostsof$10.8million 15,784,325 16 — — 190,412 — — 190,428
ConversionofClassBcommonstocktoClassAcommonstock 4,331,645 4 (4,331,645) (4) — — — —
Share-basedcompensationexpenserelatedtoissuanceofstockoptionstonon-employees — — — — 2,618 — — 2,618
Share-basedcompensationexpenserelatedtoshare-basedawardstoemployeesandemployeestockpurchaseplan — — — — 23,566 — — 23,566
Unrealizedlossesonshort-terminvestments — — — — — — (21) (21)
Netloss — — — — — (189,618) — (189,618)
TableofContents
IronwoodPharmaceuticals,Inc.
ConsolidatedStatementsofStockholders'Equity(Continued)
(Inthousands,exceptshareamounts)
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-7
ClassA
commonstock ClassB
commonstock
Accumulatedother
comprehensiveincome(loss)
Additionalpaid-incapital
Accumulateddeficit
TotalStockholders'
equity
Shares Amount Shares Amount BalanceatDecember31,2014 124,915,658 125 15,907,272 16 1,055,876 (967,446) (19) 88,552Issuanceofcommonstockuponexerciseofstockoptionsandemployeestockpurchaseplan 972,325 1 1,293,032 1 13,619 — — 13,621
Issuanceofcommonstockawards 153,547 — — — 24 — — 24
ConversionofClassBcommonstocktoClassAcommonstock 1,329,948 1 (1,329,948) (1) — — — —
Share-basedcompensationexpenserelatedtoshare-basedawardstoemployeesandemployeestockpurchaseplan — — — — 25,448 — — 25,448
Equitycomponentofconvertibledebt — — — — 114,199 — — 114,199
Equitycomponentofdeferredfinancingcostsforconvertibledebt — — — — (3,983) — — (3,983)
Unrealizedlossesonshort-terminvestments — — — — — — (67) (67)
Netloss — — — — — (142,669) — (142,669)BalanceatDecember31,2015 127,371,478 $ 127 15,870,356 $ 16 $ 1,205,183 $ (1,110,115) $ (86) $ 95,125
TableofContents
IronwoodPharmaceuticals,Inc.
ConsolidatedStatementsofCashFlows
(Inthousands)
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-8
YearEndedDecember31, 2015 2014 2013 Cashflowsfromoperatingactivities: Netloss $ (142,669) $ (189,618) $ (272,812)Adjustmentstoreconcilenetlosstonetcashusedinoperatingactivities: Depreciationandamortization 11,630 12,331 11,729(Gain)lossondisposalofpropertyandequipment (196) 119 610Share-basedcompensationexpense 25,469 26,184 19,829Changeinfairvalueofnotehedgewarrants 4,479 — —Changeinfairvalueofconvertiblenotehedges 5,449 — —Write-downofinventorytonetrealizablevalueandlossonnon-cancellablepurchasecommitments 17,638 20,292 —Lossonfacilitysubleases 296 2,573 —Accretionofdiscount/premiumoninvestmentsecurities 1,114 1,085 1,254Non-cashinterestexpense 8,102 1,566 1,719Changesinassetsandliabilities: Accountsreceivableandrelatedpartyaccountsreceivable (28,679) (23,680) (1,726)Restrictedcash (600) — (500)Prepaidexpensesandothercurrentassets 2,568 (3,947) (52)Inventory — (3,078) (11,915)Otherassets 414 (2,876) 116Accountspayable,relatedpartyaccountspayableandaccruedexpenses (1,551) 1,425 (11,724)Accruedresearchanddevelopmentcosts 671 162 (2,252)Deferredrevenue (7,191) 744 (4,915)Deferredrent (3,871) 1,811 (2,716)Otherliabilities — (661) —Netcashusedinoperatingactivities (106,927) (155,568) (273,355)
Cashflowsfrominvestingactivities: Purchasesofavailable-for-salesecurities (281,958) (253,995) (287,943)Salesandmaturitiesofavailable-for-salesecurities 276,707 200,964 196,102Purchasesofpropertyandequipment (4,049) (3,538) (9,592)Proceedsfromsaleofpropertyandequipment 147 — —
Netcashusedininvestingactivities (9,153) (56,569) (101,433)Cashflowsfromfinancingactivities: Proceedsfromissuanceofconvertibleseniornotes 335,699 — —Costsassociatedwithissuanceofconvertibleseniornotes (11,730) — —Proceedsfromissuanceofcommonstock — 190,428 137,766ProceedsfromissuanceofPhaRMAnotespayable — — 175,000CostsassociatedwithissuanceofPhaRMAnotespayable — — (7,717)Proceedsfromissuanceofnotehedgewarrants 70,849 — —Purchaseofconvertiblenotehedges (91,915) — —Proceedsfromexerciseofstockoptions,andsharesissuedunderemployeestockpurchaseplan 14,196 22,741 9,297Paymentsoncapitalleaseobligations (1,317) (1,062) (768)PrincipalpaymentsonPhaRMAnotespayable (12,712) (1,163) —
Netcashprovidedbyfinancingactivities 303,070 210,944 313,578Netincrease(decrease)incashandcashequivalents 186,990 (1,193) (61,210)Cashandcashequivalents,beginningofperiod 74,297 75,490 136,700Cashandcashequivalents,endofperiod $ 261,287 $ 74,297 $ 75,490
Supplementalcashflowdisclosure: Cashpaidforinterest $ 22,742 $ 19,606 $ 18,428
Non-cashinvestingactivities Purchasesundercapitalleases $ 2,957 $ 766 $ 4,472Disposalsundercapitalleases $ (2,529) $ — $ —Fixedassetpurchasesinaccountspayableandaccruedexpenses $ 98 $ 1,592 $ 261
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements
1.NatureofBusiness
IronwoodPharmaceuticals,Inc.(the"Company")isacommercialbiotechnologycompanyleveragingitsprovendevelopmentandcommercialcapabilitiesasitseekstobringmultiplemedicinestopatients.TheCompanyisadvancingtwotherapeuticplatforms,whichincludeproductopportunitiesinareasoflargeunmetneed,includingirritablebowelsyndromewithconstipation("IBS-C)andchronicidiopathicconstipation("CIC"),vascularandfibroticdiseases,andrefractorygastroesophagealrefluxdisease("GERD").
TheCompany'sfirstandto-dateonlycommercialproduct,linaclotide,isavailabletoadultmenandwomensufferingfromIBS-CorCICintheUnitedStates("U.S.")underthetrademarkednameLINZESS®,andisavailabletoadultmenandwomensufferingfromIBS-CincertainEuropeancountriesunderthetrademarkednameCONSTELLA®.TheCompanyanditsU.S.partnerAllerganplc(togetherwithitsaffiliates,"Allergan"),formerlyActavisplc,begancommercializingLINZESSintheU.S.inDecember2012.UndertheCompany'scollaborationwithAllerganforNorthAmerica,totalnetsalesofLINZESSintheU.S.,asrecordedbyAllergan,arereducedbycommercialcostsincurredbyeachparty,andtheresultingamountissharedequallybetweentheCompanyandAllergan.
TheCompany'sformerEuropeanpartner,Almirall,S.A.("Almirall"),begancommercializingCONSTELLAinEuropeforthesymptomatictreatmentofmoderatetosevereIBS-Cinadultsinthesecondquarterof2013.InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan,andtheCompanyandAllerganenteredintoanamendmenttotheEuropeanlicenseagreement(Note4).Currently,CONSTELLAiscommerciallyavailableincertainEuropeancountries,includingtheUnitedKingdom,ItalyandSpain.
WithintheCompany'sgastrointestinal("GI")platform,theCompanyandAllerganareexploringdevelopmentopportunitiestoenhancetheclinicalprofileofLINZESSbyseekingtoexpanditsutilitywithinIBS-CandCIC,aswellasstudyinglinaclotideinadditionalindicationsandpopulationstoassessitspotentialtotreatvariousGIconditions.TheCompanyandAllerganarealsodevelopinglinaclotidecolonicrelease,atargetedoraldeliveryformulationoflinaclotidedesignedtopotentiallyimproveabdominalpainreliefinadultIBS-Cpatients.TheCompanyisalsoexploringlinaclotidecolonicreleaseforuseinadditionalGIdisorderswherelowerabdominalpainisapredominantsymptomsuchasIBS-mixed("IBS-M"),ulcerativecolitisanddiverticulitis,amongothers.LinaclotideisalsobeingdevelopedandcommercializedinotherpartsoftheworldbycertainoftheCompany'spartners.Inaddition,theCompanyisadvancingotherGIdevelopmentprogramsforindicationssuchasrefractoryGERDanddiabeticgastroparesis.
WithintheCompany'svascular/fibroticplatform,itisleveragingitspharmacologicalexpertiseinguanylatecyclase("GC")pathwaysgainedthroughthediscoveryanddevelopmentoflinaclotidetoadvancedevelopmentprogramstargetingsolubleguanylatecyclase("sGC").sGCisavalidatedmechanismwiththepotentialforbroadtherapeuticutilityandmultipleopportunitiesforproductdevelopmentinvascularandfibroticdiseases,aswellasothertherapeuticareas.
InadditiontotheU.S.andEurope,theCompanyhasenteredintopartnershipstodevelopandcommercializelinaclotideinotherpartsoftheworld.InDecember2013andFebruary2014,linaclotidewasapprovedinCanadaandMexico,respectively,asatreatmentforadultwomenandmensufferingfromIBS-CorCIC.AllerganhasexclusiverightstocommercializelinaclotideinCanadaasCONSTELLAand,throughasublicensefromAllergan,AlmirallhadexclusiverightstocommercializelinaclotideinMexicoasLINZESS.InMay2014,AllerganbegancommercializingCONSTELLAin
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
1.NatureofBusiness(Continued)
CanadaandinJune2014,AlmirallbegancommercializingLINZESSinMexico.InOctober2015,AlmirallandAllerganterminatedthesublicensearrangementwithrespecttoMexico,returningtheexclusiverightstocommercializeCONSTELLAinMexicotoAllergan.CONSTELLAcontinuestobeavailabletoadultIBS-CpatientsinMexico.
AstellasPharmaInc.("Astellas"),theCompany'spartnerinJapan,isdevelopinglinaclotideforthetreatmentofpatientswithIBS-Candchronicconstipationinitsterritory.InNovember2015,theCompanyandAstellasreportedpositivetop-linedatafromAstellas'PhaseIIIclinicaltrialoflinaclotideinadultpatientswithIBS-CforJapan.InOctober2012,theCompanyenteredintoacollaborationagreementwithAstraZenecaAB("AstraZeneca")toco-developandco-commercializelinaclotideinChina,HongKongandMacau,withAstraZenecahavingprimaryresponsibilityforthelocaloperationalexecution.InDecember2015,theCompanyandAstraZenecafiledforapprovalwiththeChinaFoodandDrugAdministration("CFDA")tomarketlinaclotideinChina.TheCompanycontinuestoassessalternativestobringlinaclotidetoIBS-CandCICsufferersinthepartsoftheworldoutsideofitspartneredterritories.
InMarch2015,theCompanyandExactSciencesCorp,("ExactSciences"),enteredintoanagreementtoco-promoteCologuard®,thefirstandonlyFDA-approvednoninvasivestoolDNAscreeningtestforcolorectalcancer,andinAugust2015,theCompanyandAllerganenteredintoanagreementfortheco-promotionofVIBERZI™(eluxadoline)intheU.S.,Allergan'streatmentforadultssufferingfromIBSwithdiarrhea("IBS-D").
InNovember2015,AllerganandPfizerInc.enteredintoadefinitiveagreementprovidingforthecombinationofthetwocompanies.TheCompany'scollaborationforthedevelopmentandcommercializationoflinaclotide,aswellastheCompany'sagreementtoco-promoteVIBERZI,remainsineffect.
TheseagreementsaremorefullydescribedinNote4,Collaboration,LicenseandCo-promotionAgreements,totheseconsolidatedfinancialstatements.
InJune2015,theCompanyissuedapproximately$335.7millioninaggregateprincipalamountof2.25%ConvertibleSeniorNotesdue2022(the"2022Notes").TheCompanyreceivednetproceedsofapproximately$324.0millionfromthesaleofthe2022Notes,afterdeductingfeesandexpensesofapproximately$11.7million(Note10).
TheCompanywasincorporatedinDelawareonJanuary5,1998asMicrobia,Inc.OnApril7,2008,theCompanychangeditsnametoIronwoodPharmaceuticals,Inc.Todate,theCompanyhasdedicatedsubstantiallyallofitsactivitiestotheresearch,developmentandcommercializationoflinaclotide,aswellastotheresearchanddevelopmentofitsotherproductcandidates.TheCompanyhasincurredsignificantoperatinglossessinceitsinceptionin1998.AsofDecember31,2015,theCompanyhadanaccumulateddeficitofapproximately$1.1billion.
2.SummaryofSignificantAccountingPolicies
PrinciplesofConsolidation
TheaccompanyingconsolidatedfinancialstatementsincludetheaccountsofIronwoodPharmaceuticals,Inc.anditswhollyownedsubsidiaries,IronwoodPharmaceuticalsSecurities
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
CorporationandIronwoodPharmaceuticalsGmbH.Allintercompanytransactionsandbalancesareeliminatedinconsolidation.
UseofEstimates
ThepreparationofconsolidatedfinancialstatementsinaccordancewithU.S.generallyacceptedaccountingprinciplesrequirestheCompany'smanagementtomakeestimatesandjudgmentsthatmayaffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateoftheconsolidatedfinancialstatements,andtheamountsofrevenuesandexpensesduringthereportedperiods.Onanon-goingbasis,theCompany'smanagementevaluatesitsestimates,judgmentsandmethodologies.Significantestimatesandassumptionsintheconsolidatedfinancialstatementsincludethoserelatedtorevenuerecognition,available-for-salesecurities,inventoryvaluation,andrelatedreserves;impairmentoflong-livedassets;initialvaluationproceduresfortheissuanceofconvertiblenotes;fairvalueofderivatives;balancesheetclassificationofnotespayableandconvertiblenotes;incometaxes,includingthevaluationallowancefordeferredtaxassets;researchanddevelopmentexpenses;contingenciesandshare-basedcompensation.TheCompanybasesitsestimatesonhistoricalexperienceandonvariousotherassumptionsthatarebelievedtobereasonable,theresultsofwhichformthebasisformakingjudgmentsaboutthecarryingvaluesofassetsandliabilities.Actualresultsmaydiffermateriallyfromtheseestimatesunderdifferentassumptionsorconditions.Changesinestimatesarereflectedinreportedresultsintheperiodinwhichtheybecomeknown.
CashandCashEquivalents
TheCompanyconsidersallhighlyliquidinvestmentinstrumentswitharemainingmaturitywhenpurchasedofthreemonthsorlesstobecashequivalents.InvestmentsqualifyingascashequivalentsprimarilyconsistofmoneymarketfundsandU.S.government-sponsoredsecurities.Thecarryingamountofcashequivalentsapproximatesfairvalue.Theamountofcashequivalentsincludedincashandcashequivalentswasapproximately$258.2millionandapproximately$61.0millionatDecember31,2015and2014,respectively.
RestrictedCash
TheCompanyiscontingentlyliableunderunusedlettersofcreditwithabank,relatedtotheCompany'sfacilityleaseandautomobileleaseagreements,intheamountofapproximately$8.7millionandapproximately$8.1millionasofDecember31,2015and2014,respectively.Asaresult,theCompanyhasrestrictedcashofapproximately$8.7millionandapproximately$8.1millionasofDecember31,2015and2014,respectively,securingtheselettersofcredit.Thecashwillberestricteduntiltheterminationoftheleasearrangements.
Available-for-SaleSecurities
TheCompanyclassifiesallshort-terminvestmentswitharemainingmaturitywhenpurchasedofgreaterthanthreemonthsasavailable-for-sale.Available-for-salesecuritiesarerecordedatfairvalue,withtheunrealizedgainsandlossesreportedinothercomprehensiveincome(loss).Theamortizedcostofdebtsecuritiesinthiscategoryisadjustedfortheamortizationofpremiumsandaccretionofdiscountstomaturity.Suchamortizationisincludedininterestandinvestmentincome.Realizedgains
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
andlosses,interest,dividends,anddeclinesinvaluejudgedtobeotherthantemporaryonavailable-for-salesecuritiesareincludedininterestandinvestmentincome.
Thecostofsecuritiessoldisbasedonthespecificidentificationmethodforpurposesofrecordingrealizedgainsandlosses.Todeterminewhetheranother-than-temporaryimpairmentexists,theCompanyconsiderswhetherithastheabilityandintenttoholdtheinvestmentuntilamarketpricerecovery,andwhetherevidenceindicatingtherecoverabilityofthecostoftheinvestmentoutweighsevidencetothecontrary.Therewerenoother-than-temporaryimpairmentsfortheyearsendedDecember31,2015,2014or2013.
Inventory
Inventoryisstatedatthelowerofcostormarketwithcostdeterminedunderthefirst-in,first-outbasis.
TheCompanyevaluatesinventorylevelsquarterlyandanyinventorythathasacostbasisinexcessofitsexpectednetrealizablevalue,inventorythatbecomesobsolete,inventoryinexcessofexpectedsalesrequirements,inventorythatfailstomeetcommercialsalespecificationsorisotherwiseimpairediswrittendownwithacorrespondingchargetothestatementofoperationsintheperiodthattheimpairmentisfirstidentified.TheCompanyalsoassesses,onaquarterlybasis,whetherithasanyexcessnon-cancelablepurchasecommitmentsresultingfromitsminimumsupplyagreementswithitssuppliersoflinaclotideactivepharmaceuticalingredient("API").TheCompanyreliesondatafromseveralsourcestoestimatethenetrealizablevalueofinventoryandnon-cancelablepurchasecommitments,includingpartnerforecastsofprojectedinventorypurchasesthatarereceivedquarterly,theCompany'sinternalforecastsandrelatedprocess,historicalsalesbygeographicregion,andthestatusofandprogresstowardcommercializationoflinaclotideinpartneredterritories.
TheCompanycapitalizesinventoriesmanufacturedinpreparationforinitiatingsalesofaproductcandidatewhentherelatedproductcandidateisconsideredtohaveahighlikelihoodofregulatoryapprovalandtherelatedcostsareexpectedtoberecoverablethroughsalesoftheinventories.Indeterminingwhetherornottocapitalizesuchinventories,theCompanyevaluates,amongotherfactors,informationregardingtheproductcandidate'ssafetyandefficacy,thestatusofregulatorysubmissionsandcommunicationswithregulatoryauthoritiesandtheoutlookforcommercialsales,includingtheexistenceofcurrentoranticipatedcompetitivedrugsandtheavailabilityofreimbursement.Inaddition,theCompanyevaluatesrisksassociatedwithmanufacturingtheproductcandidate,includingtheabilityoftheCompany'sthird-partysupplierstocompletethevalidationbatches,andtheremainingshelflifeoftheinventories.
Costsassociatedwithdevelopmentalproductspriortosatisfyingtheinventorycapitalizationcriteriaarechargedtoresearchanddevelopmentexpenseasincurred.
ConcentrationsofSuppliers
TheCompanyreliesonthird-partymanufacturersanditscollaborationpartnerstomanufacturethelinaclotideAPIandfinallinaclotidedrugproduct.Currently,therearetwothird-partymanufacturersapprovedfortheproductionofthelinaclotideAPIinthreefacilities.EachofAllerganandAstellasisresponsiblefordrugproductmanufacturingoflinaclotideintofinishedproductforitsrespectiveterritory.UndertheCompany'scollaborationwithAstraZeneca,theCompanyisresponsible
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
fordrugproductandfinishedgoodsmanufacturingforChina,HongKongandMacau.TheCompanyalsohasanagreementwithanotherindependentthirdpartytoserveasasecondsourceofdrugproductmanufacturingoflinaclotideforitspartneredterritories.IfanyoftheCompany'ssuppliersweretolimitorterminateproductionorotherwisefailtomeetthequalityordeliveryrequirementsneededtosatisfythesupplycommitments,theprocessoflocatingandqualifyingalternatesourcescouldrequireuptoseveralmonths,duringwhichtimetheCompany'sproductioncouldbedelayed.SuchdelayscouldhaveamaterialadverseeffectontheCompany'sbusiness,financialpositionandresultsofoperations.
AccountsReceivableandRelatedValuationAccount
TheCompanymakesjudgmentsastoitsabilitytocollectoutstandingreceivablesandprovidesanallowanceforreceivableswhencollectionbecomesdoubtful.Provisionsaremadebaseduponaspecificreviewofallsignificantoutstandinginvoicesandtheoverallqualityandageofthoseinvoicesnotspecificallyreviewed.TheCompany'sreceivablesprimarilyrelatetoamountsreimbursedunderitscollaboration,licenseandco-promotionagreements.TheCompanybelievesthatcreditrisksassociatedwiththesepartnersarenotsignificant.Todate,theCompanyhasnothadanywrite-offsofbaddebt,andtheCompanydidnothaveanallowancefordoubtfulaccountsasofDecember31,2015and2014.
ConcentrationsofCreditRisk
FinancialinstrumentsthatsubjecttheCompanytocreditriskprimarilyconsistofcashandcashequivalents,restrictedcash,available-for-salesecurities,andaccountsreceivable.TheCompanymaintainsitscashandcashequivalentbalanceswithhigh-qualityfinancialinstitutionsand,consequently,theCompanybelievesthatsuchfundsaresubjecttominimalcreditrisk.TheCompany'savailable-for-saleinvestmentsprimarilyconsistofU.S.TreasurysecuritiesandcertainU.S.government-sponsoredsecuritiesandpotentiallysubjecttheCompanytoconcentrationsofcreditrisk.TheCompanyhasadoptedaninvestmentpolicywhichlimitstheamountstheCompanymayinvestinanyonetypeofinvestment,andrequiresallinvestmentsheldbytheCompanytobeatleastA+rated,therebyreducingcreditriskexposure.
Accountsreceivable,includingrelatedpartyaccountsreceivable,primarilyconsistofamountsdueunderthelinaclotidecollaborationagreementwithAllerganforNorthAmerica,thelinaclotidelicenseagreementwithAstellasforJapanandtheco-promotionagreementwithExactSciencesforitsCologuardproduct(Note4)forwhichtheCompanydoesnotobtaincollateral.AccountsreceivableorpayabletoorfromAllerganandAlmirallarepresentedasrelatedpartytransactionsontheconsolidatedbalancesheetsasbothentitiesowncommonstockoftheCompany.
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
ThepercentagesofrevenuerecognizedfromsignificantcustomersoftheCompanyintheyearsendedDecember31,2015,2014and2013aswellastheaccountreceivablebalances,netofanypayablesdue,atDecember31,2015and2014areincludedinthefollowingtable:
FortheyearsendedDecember31,2015,2014and2013,noadditionalcustomersaccountedformorethan10%oftheCompany'srevenue.
DeferredFinancingCosts
DeferredfinancingcostsincludecostsdirectlyattributabletotheCompany'sofferingsofitsequitysecuritiesanditsdebtfinancings.Costsattributabletoequityofferingsarechargedagainsttheproceedsoftheofferingoncetheofferingiscompleted.Costsattributabletodebtfinancingsaredeferredandamortizedoverthetermofthedebtusingtheeffectiveinterestratemethod.Aportionofthedeferredfinancingcostincurredinconnectionwiththe2022Noteswasdeemedtorelatetotheequitycomponentandwasallocatedtoadditionalpaidincapital.
InApril2015,theFinancialAccountingStandardsBoard("FASB")issuedAccountingStandardsUpdate("ASU")No.2015-03,SimplifyingthePresentationofDebtIssuanceCosts("ASU2015-03").ASU2015-03requiresdebtissuancecoststobepresentedinanentity'sbalancesheetasadirectdeductionfromtheassociateddebtliability.WhilethestandardisretrospectivelyeffectiveforannualreportingperiodsbeginningafterDecember15,2015,earlyadoptionispermittedforanyannualreportingperiodorinterimperiodforwhichtheentity'sfinancialstatementshavenotyetbeenissued.
TheCompanyelectedearlyadoptionofASU2015-03inthethreemonthsendedJune30,2015,whichresultedinabalancesheetreclassificationofissuancecostsinconnectionwiththe11%PhaRMANotesdue2024(the"PhaRMANotes")ofapproximately$1.4millionrecordedinprepaidexpensesandothercurrentassetsandapproximately$2.8millioninotherassetstoareductioninPhaRMANotespayableasofDecember31,2014.Thefinancingcostsincurredinconnectionwiththe
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AccountsReceivable Revenue December31, YearsEndedDecember31, 2015 2014 2015 2014 2013 CollaborativePartner: LinaclotideAgreements: Allergan(NorthAmerica) 95% 100% 90% 62% 13%Almirall(Europe)(1) —% —% —% 10% 57%Astellas(Japan) 2% —% 5% 23% 25%AstraZeneca(China,HongKongandMacau)(2) 1% —% 2% 5% 5%
Co-promotionAgreements: ExactSciences(Cologuard) 2% —% 3% —% —%
(1) InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan.TherewerenoaccountsreceivableduefromAlmirallasofDecember31,2015.
(2) AtDecember31,2014,theCompanywasinanetpayablepositionwithAstraZeneca;assuch,therewasnoaccountsreceivableduefromAstraZenecaasofDecember31,2014.
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
issuanceoftheCompany's2022NoteswererecordedasareductioninthecarryingvalueofsuchdebtinaccordancewithASU2015-03.TheCompany'sadoptionofthisstandarddidnothaveasignificantimpactonitsresultsofoperationsorcashflowsfortheyearendedDecember31,2015.
The2022NotesandPhaRMANotesaremorefullydescribedinNote10,NotesPayable,totheseconsolidatedfinancialstatements.
DerivativeAssetsandLiabilities
InJune2015,inconnectionwiththeissuanceofthe2022Notes,theCompanyenteredintoconvertiblenotehedgetransactions(the"ConvertibleNoteHedges").ConcurrentlywithenteringintotheConvertibleNoteHedges,theCompanyalsoenteredintocertainwarranttransactionsinwhichitsoldnotehedgewarrants(the"NoteHedgeWarrants")totheConvertibleNoteHedgecounterpartiestoacquire20,249,665sharesoftheCompany'sClassAcommonstock,subjecttocustomaryanti-dilutionadjustments(Note10).TheseinstrumentsarederivativefinancialinstrumentsunderAccountingStandardsCodification("ASC")Topic815,DerivativesandHedging("ASC815").
ThesederivativesarerecordedasassetsorliabilitiesatfairvalueeachreportingperiodandthefairvalueisdeterminedusingtheBlack-Scholesoption-pricingmodel.Thechangesinfairvaluearerecordedasacomponentofother(expense)incomeintheconsolidatedstatementsofoperations.SignificantinputsusedtodeterminethefairvalueincludethepricepershareoftheCompany'sClassAcommonstockonthedateofvaluation,timetomaturityofthederivativeinstruments,thestrikepricesofthederivativeinstruments,therisk-freeinterestrate,andthevolatilityoftheCompany'sClassAcommonstock.ChangestotheseinputscouldmateriallyaffectthevaluationoftheConvertibleNoteHedgesandNoteHedgeWarrantsinfutureperiods.
RevenueRecognition
TheCompany'srevenueisgeneratedprimarilythroughcollaborativeresearchanddevelopment,licensingandco-promotionagreements.Thetermsoftheseagreementscontainmultipledeliverableswhichmayinclude(i)licenses,(ii)researchanddevelopmentactivities,includingparticipationonjointsteeringcommittees,(iii)themanufactureoffinisheddrugproduct,API,ordevelopmentmaterialsforapartnerwhicharereimbursedatacontractuallydeterminedrate,and(iv)co-promotionactivitiesbytheCompany'sclinicalsalesspecialists.Non-refundablepaymentstotheCompanyundertheseagreementsmayinclude(i)up-frontlicensefees,(ii)paymentsforresearchanddevelopmentactivities,(iii)paymentsforthemanufactureoffinisheddrugproduct,API,ordevelopmentmaterials,(iv)paymentsbasedupontheachievementofcertainmilestones,(v)paymentsforsalesdetailing,promotionalsupportservicesandmedicaleducationinitiatives,and(vi)royaltiesonproductsales.Additionally,theCompanymayreceiveitsshareofthenetprofitsorbearitsshareofthenetlossesfromthesaleoflinaclotideintheU.S.andforChina,HongKongandMacauthroughitscollaborationswithAllerganandAstraZeneca,respectively.
AtDecember31,2015,theCompanyhadcollaborationagreementswithAllergan(NorthAmerica)andAstraZeneca(China,HongKongandMacau),aswellaslicenseagreementswithAllergan(Europe)andAstellas(Japan).Additionally,theCompanyhadco-promotionagreementswithAllerganforVIBERZIandExactSciencesforCologuardintheU.S.(Note4).
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
TheCompanyrecognizesrevenuewhenthereispersuasiveevidencethatanarrangementexists,serviceshavebeenrenderedordeliveryhasoccurred,thepriceisfixedordeterminable,andcollectionisreasonablyassured.
ForcertainoftheCompany'sarrangements,particularlythelicenseagreementwithAllerganfortheEuropeanterritory,itisrequiredthattaxesbewithheldonpaymentstotheCompany.TheCompanyhasadoptedapolicytorecognizerevenuenetofthesetaxwithholdings.
AgreementsEnteredintoPriortoJanuary1,2011
ForarrangementsthatincludemultipledeliverablesandwereenteredintopriortoJanuary1,2011,theCompanyfollowstheprovisionsofASCTopic605-25,RevenueRecognition—Multiple-ElementArrangements("ASC605-25"),inaccountingfortheseagreements.UnderASC605-25,theCompanywasrequiredtoidentifythedeliverablesincludedwithintheagreementandevaluatewhichdeliverablesrepresentseparateunitsofaccounting.Collaborativeresearchanddevelopmentandlicensingagreementsthatcontainedmultipledeliverablesweredividedintoseparateunitsofaccountingwhenthefollowingcriteriaweremet:
• Deliveredelement(s)hadvaluetothecollaboratoronastandalonebasis,
• Therewasobjectiveandreliableevidenceofthefairvalueoftheundeliveredobligation(s),and
• Ifthearrangementincludedageneralrightofreturnrelativetothedelivereditem(s),deliveryorperformanceoftheundelivereditem(s)wasconsideredprobableandsubstantiallywithintheCompany'scontrol.
TheCompanyallocatedarrangementconsiderationamongtheseparateunitsofaccountingeitheronthebasisofeachunit'srespectivefairvalueorusingtheresidualmethod,andappliedtheapplicablerevenuerecognitioncriteriatoeachoftheseparateunits.Iftheseparationcriteriawerenotmet,revenueofthecombinedunitofaccountingwasrecordedbasedonthemethodappropriateforthelastdelivereditem.
Up-FrontLicenseFees
TheCompanyrecognizesrevenuefromnonrefundable,up-frontlicensefeesonastraight-linebasisoverthecontractedorestimatedperiodofperformance,whichistypicallytheperiodoverwhichtheresearchanddevelopmentisexpectedtooccurormanufacturingservicesareexpectedtobeprovided.Accordingly,theCompanyisrequiredtomakeestimatesregardingthedrugdevelopmentandcommercializationtimelinesfordrugsanddrugcandidatesbeingdevelopedpursuanttoanyapplicableagreement.Thedeterminationofthelengthoftheperiodoverwhichtorecognizetherevenueissubjecttojudgmentandestimationandcanhaveanimpactontheamountofrevenuerecognizedinagivenperiod.Quarterly,theCompanyreassessesitsperiodofsubstantialinvolvementoverwhichtheCompanyamortizesitsup-frontlicensefeesandmakesadjustmentsasappropriate.TheCompany'sestimatesregardingtheperiodofperformanceunderitscollaborativeresearchanddevelopmentandlicensingagreementshavechangedinthepastandmaychangeinthefuture.AnychangeintheCompany'sestimatescouldresultinsubstantialchangestotheCompany'sresultsfortheperiodoverwhichtherevenuesfromanup-frontlicensefeearerecognized.Intheeventthatanarrangementweretobeterminated,theCompanywouldrecognizeasrevenueanyportionoftheup-frontfeethathadnotpreviouslybeenrecordedasrevenue,butwasclassifiedasdeferredrevenueatthedateofsuch
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NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
termination.AtDecember31,2015,oftheCompany'slinaclotidecollaborationandlicensearrangements,onlyaportionofAstellas'up-frontlicensefeeremaineddeferred.Theup-frontlicensefeesundertheAllergancollaborationforNorthAmericaandtheAllergancollaborationforEurope(previouslywithAlmirall)werefullyamortizedatDecember31,2015,astheperiodofperformanceunderthosearrangementsendedinthethreemonthsendedSeptember30,2012.
AgreementsEnteredintoorMateriallyModifiedonorafterJanuary1,2011
TheCompanyevaluatesrevenuefromnewmultipleelementagreementsenteredintoonorafterJanuary1,2011underASUNo.2009-13,Multiple-DeliverableRevenueArrangements("ASU2009-13").TheCompanyalsoevaluateswhetheramendmentstoitsmultipleelementarrangementsareconsideredmaterialmodificationsthataresubjecttotheapplicationofASU2009-13.Thisevaluationrequiresmanagementtoassessallrelevantfactsandcircumstancesandtomakesubjectivedeterminationsandjudgments.Aspartofthisassessment,theCompanyconsiderswhetherthemodificationresultsinamaterialchangetothearrangement,includingwhetherthereisachangeintotalarrangementconsiderationthatismorethaninsignificant,whethertherearechangesinthedeliverablesincludedinthearrangement,whetherthereisachangeinthetermofthearrangementandwhetherthereisasignificantmodificationtothedeliveryscheduleforcontracteddeliverables.
WhenevaluatingmultipleelementarrangementsunderASU2009-13,theCompanyconsiderswhetherthedeliverablesunderthearrangementrepresentseparateunitsofaccounting.Thisevaluationrequiressubjectivedeterminationsandrequiresmanagementtomakejudgmentsabouttheindividualdeliverablesandwhethersuchdeliverablesareseparablefromtheotheraspectsofthecontractualrelationship.Indeterminingtheunitsofaccounting,managementevaluatescertaincriteria,includingwhetherthedeliverableshavestandalonevalue,basedontheconsiderationoftherelevantfactsandcircumstancesforeacharrangement.Factorsconsideredinthisdeterminationincludetheresearch,manufacturingandcommercializationcapabilitiesofthepartnerandtheavailabilityofpeptideresearchandmanufacturingexpertiseinthegeneralmarketplace.Inaddition,theCompanyconsiderswhetherthecollaboratorcanusethelicenseorotherdeliverablesfortheirintendedpurposewithoutthereceiptoftheremainingelements,andwhetherthevalueofthedeliverableisdependentontheundelivereditemsandwhetherthereareothervendorsthatcanprovidetheundelivereditems.
Theconsiderationreceivedisallocatedamongtheseparateunitsofaccountingusingtherelativesellingpricemethod,andtheapplicablerevenuerecognitioncriteriaareappliedtoeachoftheseparateunits.
TheCompanydeterminestheestimatedsellingpricefordeliverablesusingvendor-specificobjectiveevidence("VSOE")ofsellingprice,ifavailable,third-partyevidence("TPE")ofsellingpriceifVSOEisnotavailable,orbestestimateofsellingprice("BESP")ifneitherVSOEnorTPEisavailable.DeterminingtheBESPforadeliverablerequiressignificantjudgment.TheCompanyusesBESPtoestimatethesellingpriceforlicensestotheCompany'sproprietarytechnology,sincetheCompanyoftendoesnothaveVSOEorTPEofsellingpriceforthesedeliverables.InthosecircumstanceswheretheCompanyutilizesBESPtodeterminetheestimatedsellingpriceofalicensetotheCompany'sproprietarytechnology,theCompanyconsidersmarketconditionsaswellasentity-specificfactors,includingthosefactorscontemplatedinnegotiatingtheagreementsaswellasinternallydevelopedmodelsthatincludeassumptionsrelatedtothemarketopportunity,estimateddevelopmentcosts,probabilityofsuccessandthetimeneededtocommercializeaproductcandidatepursuanttothe
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TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
license.InvalidatingtheCompany'sBESP,theCompanyevaluateswhetherchangesinthekeyassumptionsusedtodeterminetheBESPwillhaveasignificanteffectontheallocationofarrangementconsiderationbetweenmultipledeliverables.
AtDecember31,2015,theCompany'scollaborationagreementwithAstraZenecaforlinaclotideandco-promotionagreementswithAllerganforVIBERZIandExactSciencesforCologuardintheU.S.areeachbeingaccountedforunderASU2009-13.
Up-FrontLicenseFees
Whenmanagementbelievesthelicensetoitsintellectualpropertyhasstand-alonevalue,theCompanygenerallyrecognizesrevenueattributedtothelicenseupondelivery.Whenmanagementbelievesthelicensetoitsintellectualpropertydoesnothavestand-alonevaluefromtheotherdeliverablestobeprovidedinthearrangement,itiscombinedwithotherdeliverablesandtherevenueofthecombinedunitofaccountingisrecordedbasedonthemethodappropriateforthelastdelivereditem.
Milestones
Attheinceptionofeacharrangementthatincludespre-commercialmilestonepayments,theCompanyevaluateswhethereachpre-commercialmilestoneissubstantive,inaccordancewithASUNo.2010-17,RevenueRecognition—MilestoneMethod("ASU2010-17"),adoptedonJanuary1,2011.Thisevaluationincludesanassessmentofwhether(a)theconsiderationiscommensuratewitheither(1)theentity'sperformancetoachievethemilestone,or(2)theenhancementofthevalueofthedelivereditem(s)asaresultofaspecificoutcomeresultingfromtheentity'sperformancetoachievethemilestone,(b)theconsiderationrelatessolelytopastperformanceand(c)theconsiderationisreasonablerelativetoallofthedeliverablesandpaymenttermswithinthearrangement.TheCompanyevaluatesfactorssuchasthescientific,clinical,regulatory,commercialandotherrisksthatmustbeovercometoachievetherespectivemilestone,thelevelofeffortandinvestmentrequiredandwhetherthemilestoneconsiderationisreasonablerelativetoalldeliverablesandpaymenttermsinthearrangementinmakingthisassessment.AtDecember31,2015,theCompanyhadnopre-commercialmilestonesthatweredeemedsubstantive.Ifasubstantivepre-commercialmilestonewereachievedandcollectionoftherelatedreceivablewasreasonablyassured,theCompanywouldrecognizerevenuerelatedtothemilestoneinitsentiretyintheperiodinwhichthemilestonewasachieved.IftheCompanyweretoachievemilestonesthatareconsideredsubstantiveunderanyoftheCompany'scollaborations,theCompanymayexperiencesignificantfluctuationsincollaborativearrangementsrevenuefromquartertoquarterandyeartoyeardependingonthetimingofachievingsuchsubstantivemilestones.Inthosecircumstanceswhereapre-commercialmilestoneisnotsubstantive,theCompanyrecognizesasrevenueonthedatethemilestoneisachievedanamountequaltotheapplicablepercentageoftheperformanceperiodthathadelapsedasofthedatethemilestonewasachieved,withthebalancebeingdeferredandrecognizedovertheremainingperiodofperformance.Pre-commercialmilestonepaymentsreceivedpriortotheadoptionofASU2010-17continuetoberecognizedovertheremainingperiodofperformance.
Commercialmilestonesareaccountedforasroyaltiesandarerecordedasrevenueuponachievementofthemilestone,assumingallotherrevenuerecognitioncriteriaaremet.
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TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
NetProfitorNetLossSharing
InaccordancewithASC808Topic,CollaborativeArrangements,andASC605-45,PrincipalAgentConsiderations,theCompanyconsidersthenatureandcontractualtermsofthearrangementandthenatureoftheCompany'sbusinessoperationstodeterminetheclassificationofthetransactionsundertheCompany'scollaborationagreements.TheCompanyrecordsrevenuetransactionsgrossintheconsolidatedstatementsofoperationsifitisdeemedtheprincipalinthetransaction,whichincludesbeingtheprimaryobligorandhavingtherisksandrewardsofownership.
TheCompanyrecognizesitsshareofthepre-taxcommercialnetprofitornetlossgeneratedfromthesalesofLINZESSintheU.S.intheperiodtheproductsalesarereportedbyAllerganandrelatedcostofgoodssoldandselling,generalandadministrativeexpensesareincurredbytheCompanyanditscollaborationpartner.TheseamountsarepartiallydeterminedbasedonamountsprovidedbyAllerganandinvolvetheuseofestimatesandjudgments,suchasproductsalesallowancesandaccrualsrelatedtopromptpaymentdiscounts,chargebacks,governmentalandcontractualrebates,wholesalerfees,productreturns,andco-paymentassistancecosts,whichcouldbeadjustedbasedonactualresultsinthefuture.TheCompanyishighlydependentonAllerganfortimelyandaccurateinformationregardinganynetrevenuesrealizedfromsalesofLINZESSintheU.S.andthecostsincurredinsellingit,inordertoaccuratelyreportitsresultsofoperations.Fortheperiodscoveredintheconsolidatedfinancialstatementspresented,therehavebeennomaterialchangestopriorperiodestimatesofrevenues,costofgoodssoldorselling,generalandadministrativeexpensesassociatedwiththesalesofLINZESSintheU.S.However,iftheCompanydoesnotreceivetimelyandaccurateinformationorincorrectlyestimatesactivitylevelsassociatedwiththecollaborationatagivenpointintime,theCompanycouldberequiredtorecordadjustmentsinfutureperiods.
TheCompanyrecordsitsshareofthenetprofitsornetlossesfromthesalesofLINZESSintheU.S.onanetbasisandpresentsthesettlementpaymentstoandfromAllerganascollaborationexpenseorcollaborativearrangementsrevenue,asapplicable,astheCompanyisnottheprimaryobligoranddoesnothavetherisksandrewardsofownershipinthecollaborationagreementwithAllerganforNorthAmerica.TheCompanyandAllergansettlethecostsharingquarterly,suchthattheCompany'sstatementofoperationsreflects50%ofthepre-taxnetprofitorlossgeneratedfromsalesofLINZESSintheU.S.
RoyaltiesonProductSales
TheCompanyreceivesorexpectstoreceiveinthefutureroyaltyrevenuesundercertainoftheCompany'slicenseorcollaborationagreements.IftheCompanydoesnothaveanyfutureperformanceobligationsundertheselicenseorcollaborationsagreements,theCompanyrecordstheserevenuesasearned.TotheextenttheCompanydoesnothaveaccesstotheroyaltyreportsfromtheCompany'spartnersortheabilitytoaccuratelyestimatetheroyaltyrevenueintheperiodearned,theCompanyrecordssuchroyaltyrevenuesonequarterinarrears.
Other
TheCompanyproducesfinisheddrugproduct,APIanddevelopmentmaterialsforcertainofitspartners.
F-19
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
TheCompanyrecognizesrevenueonfinisheddrugproduct,APIanddevelopmentmaterialswhenthematerialhaspassedallqualitytestingrequiredforcollaboratoracceptance,deliveryhasoccurred,titleandriskoflosshavetransferredtothecollaborator,thepriceisfixedordeterminable,andcollectionisreasonablyassured.AsitrelatestodevelopmentmaterialsandAPIproducedforAstellas,theCompanyisreimbursedatacontractedrate.SuchreimbursementsareconsideredaspartofrevenuegeneratedpursuanttotheAstellaslicenseagreementandarepresentedascollaborativearrangementsrevenue.Anyfinisheddrugproduct,APIanddevelopmentmaterialscurrentlyproducedforAllerganfortheU.S.orAstraZenecaforChina,HongKongandMacauarerecognizedinaccordancewiththecost-sharingprovisionsoftheAllerganandAstraZenecacollaborationagreements,respectively.InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan,andtheCompanyseparatelyenteredintoanamendmenttothelicenseagreementwithAllerganrelatingtothedevelopmentandcommercializationoflinaclotideinEurope.Pursuanttothetermsoftheamendment,AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEuropefromtheCompany,aswellastheassociatedcosts(Note4).
CostofRevenue
CostofrevenueisrecognizeduponshipmentoflinaclotideAPItocertainoftheCompany'slicensingpartnersoutsideoftheU.S.andconsistsoftheinternalandexternalcostsofproducingsuchAPI.
DuringtheyearendedDecember31,2015,theCompanyrecordedexpensesofapproximately$17.6millionforthewrite-downofinventoryandanaccrualforexcessnon-cancelableinventorypurchasecommitmentsrelatedtolinaclotideAPI.ThesechargesprimarilyrelatedtoareductionintheneartermdemandforecastforCONSTELLAintheEuropeanterritorybyAlmirall,theCompany'sformerEuropeanpartner;recentregulatorychangesmadebytheCFDAtothemarketingapprovalprocessinChina;andtheamendmenttothelicenseagreementwithAllerganpertainingtothedevelopmentandcommercializationoflinaclotideforEuropeexecutedinOctober2015.Pursuanttothetermsoftheamendment,AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEurope,aswellastheassociatedcosts,whichresultedinaccruingforalossonnon-cancelableinventorypurchasecommitmentsunderoneoftheCompany'sAPIsupplyagreementscoveringthecommercialsupplyoflinaclotideAPIfortheEuropeanmarket.
DuringtheyearendedDecember31,2014,theCompanywrote-downapproximately$20.3millionininventorytoanestimatednetrealizablevalueofapproximately$5.0million.Thiswrite-downwasprimarilyattributabletoAlmirall'sreducedinventorydemandforecastsfortheEuropeanterritory,mainlyduetothesuspensionofcommercializationofCONSTELLAinGermanyandachallengingcommercialenvironmentthroughoutEurope.
Thewrite-downofinventorytonetrealizablevalueandthelossonnon-cancelableinventorypurchasecommitmentsisrecordedasaseparatelineitemintheCompany'sConsolidatedStatementofOperations.ThesechargesaremorefullydescribedinNote7,Inventory,totheseconsolidatedfinancialstatements.
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TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
ResearchandDevelopmentCosts
TheCompanyexpensesresearchanddevelopmentcoststooperationsasincurred.TheCompanydefersandcapitalizesnonrefundableadvancepaymentsmadebytheCompanyforresearchanddevelopmentactivitiesuntiltherelatedgoodsarereceivedortherelatedservicesareperformed.
Researchanddevelopmentexpensesarecomprisedofcostsincurredinperformingresearchanddevelopmentactivities,includingsalary,benefitsandotheremployee-relatedexpenses;share-basedcompensationexpense;laboratorysuppliesandotherdirectexpenses;facilitiesexpenses;overheadexpenses;third-partycontractualcostsrelatingtononclinicalstudiesandclinicaltrialactivitiesandrelatedcontractmanufacturingexpenses,developmentofmanufacturingprocessesandregulatoryregistrationofthird-partymanufacturingfacilities;licensingfeesfortheCompany'sproductcandidates;andotheroutsideexpenses.
TheCompanyhasenteredintocollaborationagreementswithAllerganfortheU.S.andAstraZenecaforChina,HongKongandMacaupursuanttowhichitsharesresearchanddevelopmentexpenseswithitscollaborators.TheCompanyrecordsexpensesincurredunderthecollaborationarrangementsforsuchworkasresearchanddevelopmentexpense.Becausethecollaborationarrangementsarecost-sharingarrangements,theCompanyconcludedthatwhenthereisaperiodduringthecollaborationarrangementsduringwhichtheCompanyreceivespaymentsfromAllerganorAstraZenecaforsuchterritories,theCompanyrecordsthepaymentsbyAllerganorAstraZenecafortheirshareofthedevelopmenteffortasareductionofresearchanddevelopmentexpense.PaymentstoAllerganorAstraZenecaforsuchterritoriesarerecordedasincrementalresearchanddevelopmentexpense.
Selling,GeneralandAdministrativeExpenses
TheCompanyexpensesselling,generalandadministrativecoststooperationsasincurred.Selling,generalandadministrativeexpenseconsistsprimarilyofcompensation,benefitsandotheremployee-relatedexpensesforpersonnelintheCompany'sadministrative,finance,legal,informationtechnology,businessdevelopment,commercial,sales,marketing,communicationsandhumanresourcefunctions.OthercostsincludethelegalcostsofpursuingpatentprotectionoftheCompany'sintellectualproperty,generalandadministrativerelatedfacilitycosts,insurancecostsandprofessionalfeesforaccountingandlegalservices.
UnderthecollaborationagreementswithAllerganfortheU.S.andAstraZenecaforChina,HongKongandMacau,theCompanyisreimbursedforcertainselling,generalandadministrativeexpensesanditnetsthesereimbursementsagainstselling,generalandadministrativeexpensesasincurred.PaymentstoAllerganorAstraZenecaforsuchterritoriesarerecordedasincrementalselling,generalandadministrativeexpense.
Share-BasedCompensation
TheCompany'sstock-basedcompensationprogramsgrantawardswhichhaveincludedstockawards,restrictedstock,restrictedstockunits("RSUs"),andstockoptions.Share-basedcompensationisrecognizedasanexpenseinthefinancialstatementsbasedonthegrantdatefairvalueovertherequisiteserviceperiod.Forawardsthatvestbasedonserviceconditions,theCompanyusesthestraight-linemethodtoallocatecompensationexpensetoreportingperiods.Thegrantdatefairvalueof
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TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
optionsgrantediscalculatedusingtheBlack-Scholesoption-pricingmodel,whichrequirestheuseofsubjectiveassumptionsincludingvolatilityandexpectedterm,amongothers.ThefairvalueoftheCompany'sRSUsisbasedonthemarketvalueoftheCompany'sClassAcommonstockonthedateofgrant.CompensationexpenseforRSUsisrecognizedonastraight-linebasisovertheapplicableserviceperiod.
TheCompanyrecordstheexpenseforstockoptiongrantssubjecttoperformance-basedmilestonevestingusingtheacceleratedattributionmethodovertheremainingserviceperiodwhenmanagementdeterminesthatachievementofthemilestoneisprobable.Managementevaluateswhentheachievementofaperformance-basedmilestoneisprobablebasedontherelativesatisfactionoftheperformanceconditionsasofthereportingdate.
TheCompanyrecordstheexpenseofservicesrenderedbynon-employeesbasedontheestimatedfairvalueofthestockoptionusingtheBlack-Scholesoption-pricingmodel.Thefairvalueofunvestednon-employeeawardsisremeasuredateachreportingperiodandexpensedoverthevestingtermoftheunderlyingstockoptions.
PatentCosts
TheCompanyincurredandrecordedasoperatingexpenselegalandotherfeesrelatedtopatentsofapproximately$2.2million,approximately$1.3million,andapproximately$3.2millionfortheyearsendedDecember31,2015,2014and2013,respectively.Thesecostswerechargedtoselling,generalandadministrativeexpensesasincurred.
NetIncome(Loss)PerShare
TheCompanycalculatesbasicnetincome(loss)percommonshareanddilutednetincome(loss)percommonsharebydividingthenetincome(loss)bytheweightedaveragenumberofcommonsharesoutstandingduringtheperiod.Dilutednetincome(loss)percommonshareiscomputedbydividingnetincome(loss)bythedilutednumberofsharesoutstandingduringtheperiod.Exceptwheretheresultwouldbeantidilutivetonetincome(loss),dilutednetincome(loss)percommonshareiscomputedassumingtheconversionofthe2022Notes,theexerciseofoutstandingcommonstockoptionsandthevestingofRSUsandrestrictedstock(usingthetreasurystockmethod),aswellastheirrelatedincometaxeffects.TheCompanyallocatesundistributedearningsbetweentheclassesofcommonstockonaone-to-onebasiswhencomputingnetincome(loss)pershare.Asaresult,basicanddilutednetincome(loss)perClassAandClassBsharesareequivalent.
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TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
PropertyandEquipment
Propertyandequipment,includingleaseholdimprovements,arerecordedatcost,andaredepreciatedwhenplacedintoserviceusingthestraight-linemethodbasedontheirestimatedusefullivesasfollows:
Includedinpropertyandequipmentarecertaincostsofsoftwareobtainedforinternaluse.Costsincurredduringthepreliminaryprojectstageareexpensedasincurred,whilecostsincurredduringtheapplicationdevelopmentstagearecapitalizedandamortizedovertheestimatedusefullifeofthesoftware.TheCompanyalsocapitalizescostsrelatedtospecificupgradesandenhancementswhenitisprobabletheexpenditureswillresultinadditionalfunctionality.Maintenanceandtrainingcostsrelatedtosoftwareobtainedforinternaluseareexpensedasincurred.
Leaseholdimprovementsareamortizedovertheshorteroftheestimatedusefullifeoftheassetortheleaseterm.Capitalleaseassetsareamortizedovertheleaseterm.However,ifownershipwastransferredbytheendofthecapitallease,ortherewasabargainpurchaseoption,suchcapitalleaseassetswouldbeamortizedovertheusefullifethatwouldbeassignedifsuchassetswereowned.
Costsforcapitalassetsnotyetplacedintoservicehavebeencapitalizedasconstructioninprogress,andwillbedepreciatedinaccordancewiththeaboveguidelinesonceplacedintoservice.Maintenanceandrepaircostsareexpensedasincurred.
IncomeTaxes
TheCompanyprovidesforincometaxesundertheliabilitymethod.Deferredtaxassetsandliabilitiesaredeterminedbasedondifferencesbetweenfinancialreportingandtaxbasesofassetsandliabilitiesandaremeasuredusingtheenactedtaxratesineffectwhenthedifferencesareexpectedtoreverse.Deferredtaxassetsarereducedbyavaluationallowancetoreflecttheuncertaintyassociatedwiththeirultimaterealization.
InNovember2015,theFASBissuedASUNo.2015-17,BalanceSheetClassificationofDeferredTaxes("ASU2015-17")whichprovidesguidanceforbalancesheetclassificationofdeferredtaxes.Thisstandardrequiresthatdeferredtaxassetsandliabilitiesbeclassifiedasnon-currentonthebalancesheet,andeliminatesthepriorguidancewhichrequiredanentitytoseparatedeferredtaxliabilitiesandassetsintoacurrentamountandanoncurrentamountonthebalancesheet.ASU2015-17iseffectiveforfiscalyears,andinterimperiodswithinthoseyears,beginningafterDecember15,2016.Earlieradoptionispermittedasofthebeginningofaninterimorannualperiod.TheamendmentsinASU2015-17maybeappliedeitherprospectivelytoalldeferredtaxliabilitiesandassetsorretrospectivelytoallperiodspresented.TheCompanyelectedearlyadoptionintheyearendedDecember31,2015,andelectedtoapplytheamendmentsonaretrospectivebasis.TheCompany's
F-23
AssetDescription EstimatedUsefulLife
(InYears) Manufacturingequipment 10Laboratoryequipment 5Computerandofficeequipment 3Furnitureandfixtures 7Software 3
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
adoptionofthisstandarddidnothaveasignificantimpactonitsconsolidatedbalancesheetfortheyearsendedDecember31,2015or2014,orontheresultsofoperationsorcashflowsfortheyearsendedDecember31,2015,2014or2013.
TheCompanyaccountsforuncertaintaxpositionsrecognizedintheconsolidatedfinancialstatementsinaccordancewiththeprovisionsofASCTopic740,IncomeTaxes,byprescribingamore-likely-than-notthresholdforfinancialstatementrecognitionandmeasurementofataxpositiontakenorexpectedtobetakeninataxreturn.Whenuncertaintaxpositionsexist,theCompanyrecognizesthetaxbenefitoftaxpositionstotheextentthatthebenefitwillmorelikelythannotberealized.Thedeterminationastowhetherthetaxbenefitwillmorelikelythannotberealizedisbaseduponthetechnicalmeritsofthetaxpositionaswellasconsiderationoftheavailablefactsandcircumstances.TheCompanyevaluatesuncertaintaxpositionsonaquarterlybasisandadjuststheleveloftheliabilitytoreflectanysubsequentchangesintherelevantfactssurroundingtheuncertainpositions.Anychangestotheseestimates,basedontheactualresultsobtainedand/orachangeinassumptions,couldimpacttheCompany'sincometaxprovisioninfutureperiods.Interestandpenaltycharges,ifany,relatedtounrecognizedtaxbenefitswouldbeclassifiedasaprovisionforincometaxintheCompany'sconsolidatedstatementofoperations.
ImpairmentofLong-LivedAssets
TheCompanyregularlyreviewsthecarryingamountofitslong-livedassetstodeterminewhetherindicatorsofimpairmentmayexist,whichwarrantadjustmentstocarryingvaluesorestimatedusefullives.Ifindicationsofimpairmentexist,projectedfutureundiscountedcashflowsassociatedwiththeassetarecomparedtothecarryingamounttodeterminewhethertheasset'svalueisrecoverable.Ifthecarryingvalueoftheassetexceedssuchprojectedundiscountedcashflows,theassetwillbewrittendowntoitsestimatedfairvalue.Therewerenosignificantimpairmentsoflong-livedassetsfortheyearsendedDecember31,2015,2014,or2013.
ComprehensiveIncome(Loss)
Comprehensiveincome(loss)isdefinedasthechangeinequityofabusinessenterpriseduringaperiodfromtransactions,andothereventsandcircumstancesfromnon-ownersourcesandcurrentlyconsistsofnetlossandchangesinunrealizedgainsandlossesonavailable-for-salesecurities.
SegmentInformation
OperatingsegmentsarecomponentsofanenterpriseforwhichseparatefinancialinformationisavailableandisevaluatedregularlybytheCompany'schiefoperatingdecision-makerindecidinghowtoallocateresourcesandinassessingperformance.TheCompanycurrentlyoperatesinonereportablebusinesssegment—humantherapeutics.
ReclassificationsandRevisionstoPriorPeriodFinancialStatements
Certainfinancialstatementitemshavebeenreclassifiedtoconformtothecurrentperiodpresentation.
F-24
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
SubsequentEvents
TheCompanyconsiderseventsortransactionsthathaveoccurredafterthebalancesheetdateofDecember31,2015,butpriortothefilingofthefinancialstatementswiththeSecuritiesandExchangeCommissiontoprovideadditionalevidencerelativetocertainestimatesortoidentifymattersthatrequireadditionalrecognitionordisclosure.SubsequenteventshavebeenevaluatedthroughthefilingofthefinancialstatementsaccompanyingthisAnnualReportonForm10-K.
NewAccountingPronouncements
Fromtimetotime,newaccountingpronouncementsareissuedbytheFASBorotherstandardsettingbodiesthatareadoptedbytheCompanyasofthespecifiedeffectivedate.Exceptassetforthbelow,theCompanydidnotadoptanynewaccountingpronouncementsduringtheyearendedDecember31,2015thathadamaterialeffectonitsconsolidatedfinancialstatements.
InMay2014,theFASBissuedASUNo.2014-09,RevenuefromContractswithCustomers("ASU2014-09"),whichsupersedestherevenuerecognitionrequirementsinASCTopic605,RevenueRecognition,andmostindustry-specificguidance.Thenewstandardrequiresthatanentityrecognizerevenuetodepictthetransferofpromisedgoodsorservicestocustomersinanamountthatreflectstheconsiderationtowhichthecompanyexpectstobeentitledinexchangeforthosegoodsorservices.Theupdatealsorequiresadditionaldisclosureaboutthenature,amount,timinganduncertaintyofrevenueandcashflowsarisingfromcustomercontracts,includingsignificantjudgmentsandchangesinjudgmentsandassetsrecognizedfromcostsincurredtoobtainorfulfillacontract.ASU2014-09iseffectiveforfiscalyears,andinterimperiodswithinthoseyears,beginningafterDecember15,2017andshouldbeappliedretrospectivelytoeachpriorreportingperiodpresentedorretrospectivelywiththecumulativeeffectofinitiallyapplyingthisupdaterecognizedatthedateofinitialapplication.EarlyadoptionispermittedbeginningafterDecember15,2016,includinginterimreportingperiodswithinthoseyears.TheCompanyiscurrentlyevaluatingthepotentialimpactthatASU2014-09mayhaveonitsfinancialpositionandresultsofoperations.
InAugust2014,theFASBissuedASUNo.2014-15,PresentationofFinancialStatements—GoingConcern:DisclosureofUncertaintiesaboutanEntity'sAbilitytoContinueasaGoingConcern("ASU2014-15").ASU2014-15isintendedtodefinemanagement'sresponsibilitytoevaluatewhetherthereissubstantialdoubtaboutanorganization'sabilitytocontinueasagoingconcernandtoproviderelatedfootnotedisclosures,ifrequired.ASU2014-15iseffectiveforannualreportingperiodsendingafterDecember15,2016,andappliestoannualandinterimperiodsthereafter.TheCompanyisevaluatingtheimpactthattheadoptionofASU2014-15willhaveontheCompany'sconsolidatedfinancialstatementsandrelateddisclosures,butdoesnotexpectittohaveasignificantimpactontheCompany'sresultsofoperations,cashflowsorfinancialposition.
InApril2015,theFASBissuedASUNo.2015-05,Customer'sAccountingforFeesPaidinaCloudComputingArrangement,whichamendsASCTopic350,Intangibles—GoodwillandOther—InternalUseSoftware.Underthisstandard,ifacloudcomputingarrangementincludesasoftwarelicense,thesoftwarelicenseelementofthearrangementshouldbeaccountedforconsistentwiththeacquisitionofothersoftwarelicenses.Ifacloudcomputingarrangementdoesnotincludeasoftwarelicense,thearrangementshouldbeaccountedforasaservicecontract.Theamendmentsareeffectiveforfiscalyears,andinterimperiodswithinthoseyears,beginningafterDecember15,2015andmaybeappliedoneitheraprospectiveorretrospectivebasis.Earlyadoptionisnotpermitted.TheCompanydoesnot
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TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
2.SummaryofSignificantAccountingPolicies(Continued)
expectadoptionofthisstandardtohaveasignificantimpactontheCompany'sfinancialpositionorresultsofoperations.
InJuly2015,theFASBissuedASUNo.2015-11,Inventory(Topic330):SimplifyingtheMeasurementofInventory("ASU2015-11").ASU2015-11requiresthatforentitiesthatmeasureinventoryusingthefirst-in,first-outmethod,inventoryshouldbemeasuredatthelowerofcostandnetrealizablevalue.Thestandarddefinesnetrealizablevalueastheestimatedsellingpricesintheordinarycourseofbusiness,lessreasonablypredictablecostsofcompletion,disposalandtransportation.Thestandardiseffectiveforfiscalyears,andinterimperiodswithinthoseyears,beginningafterDecember15,2016.Earlyadoptionispermitted.TheadoptionofthisstandardisnotexpectedtohaveasignificantimpactontheCompany'sfinancialpositionorresultsofoperations.
NootheraccountingstandardsknownbytheCompanytobeapplicabletoitthathavebeenissuedorproposedbytheFASBorotherstandard-settingbodiesandthatdonotrequireadoptionuntilafuturedateareexpectedtohaveamaterialimpactontheCompany'sconsolidatedfinancialstatementsuponadoption.
3.NetLossPerShare
Thefollowingtablesetsforththecomputationofbasicanddilutednetlosspershare(inthousands,exceptpershareamounts):
InJune2015,inconnectionwiththeissuanceofapproximately$335.7millioninaggregateprincipalamountofthe2022Notes,theCompanyenteredintotheConvertibleNoteHedges.TheConvertibleNoteHedgesaregenerallyexpectedtoreducethepotentialdilutiontotheCompany'sClassAcommonstockholdersuponaconversionofthe2022Notesand/oroffsetanycashpaymentstheCompanyisrequiredtomakeinexcessoftheprincipalamountofconverted2022NotesintheeventthatthemarketpricepershareoftheCompany'sClassAcommonstock,asmeasuredunderthetermsoftheConvertibleNoteHedges,isgreaterthantheconversionpriceofthe2022Notes(Note10).TheConvertibleNoteHedgesarenotconsideredforpurposesofcalculatingthenumberofdilutedweightedaveragesharesoutstanding,astheireffectwouldbeantidilutive.
ConcurrentlywithenteringintotheConvertibleNoteHedges,theCompanyalsoissuedNoteHedgeWarrantstotheConvertibleNoteHedgecounterpartiestoacquire20,249,665sharesoftheCompany'sClassAcommonstock,subjecttocustomaryanti-dilutionadjustments.TheNoteHedgeWarrantscouldhaveadilutiveeffectontheCompany'sClassAcommonstocktotheextentthatthemarketpricepershareoftheClassAcommonstockexceedstheapplicablestrikepriceofsuch
F-26
YearEndedDecember31, 2015 2014 2013 Numerator: NetLoss $ (142,669) $ (189,618) $ (272,812)
Denominator: Weightedaveragenumberofcommonsharesusedinnetlosspershare—basicanddiluted 142,155 136,811 115,852
Netlosspershare—basicanddiluted $ (1.00) $ (1.39) $ (2.35)
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
3.NetLossPerShare(Continued)
warrants(Note10).TheNoteHedgeWarrantsarenotconsideredforpurposesofcalculatingthenumberofdilutedweightedaveragessharesoutstanding,astheireffectwouldbeantidilutive.
Thefollowingpotentiallydilutivesecuritieshavebeenexcludedfromthecomputationofdilutedweightedaveragesharesoutstandingastheywouldbeanti-dilutive(inthousands):
AninsignificantnumberofsharesissuableundertheCompany'semployeestockpurchaseplanwereexcludedfromthecalculationofdilutedweightedaveragesharesoutstandingbecausetheireffectswouldbeanti-dilutive.
4.Collaboration,LicenseandCo-promotionAgreements
FortheyearendedDecember31,2015,theCompanyhadlinaclotidecollaborationagreementswithAllerganforNorthAmericaandAstraZenecaforChina,HongKongandMacau,aswellaslinaclotidelicenseagreementswithAllerganfortheEuropeanterritory(formerlywithAlmirall)andAstellasforJapan.TheCompanyalsohadaco-promotionagreementwithExactSciencestoco-promoteCologuardintheU.S.andaco-promotionagreementwithAllergantoco-promoteVIBERZIintheU.S.ThefollowingtableprovidesamountsincludedintheCompany'sconsolidatedstatementsofoperationsascollaborativearrangementsrevenueattributabletotransactionsfromthesearrangements(inthousands):
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YearEndedDecember31, 2015 2014 2013 Optionstopurchasecommonstock 20,567 19,958 20,928Sharessubjecttorepurchase 74 99 —Unvestedrestrictedstockunits 900 — —Notehedgewarrants 20,250 — —2022Notes 20,250 — —
62,041 20,057 20,928
CollaborativeArrangements
RevenueYearEndedDecember31, 2015 2014 2013 LinaclotideAgreements: Allergan(NorthAmerica) $ 134,335 $ 47,682 $ 2,957AstraZeneca(China,HongKongandMacau) 2,370 3,417 1,044Almirall(Europe)(1) 540 7,587 13,103Astellas(Japan) 7,696 17,750 5,777
Co-promotionAgreements: ExactSciences(Cologuard) 4,437 — —Allergan(VIBERZI) 177 — —
Totalcollaborativearrangementsrevenue $ 149,555 $ 76,436 $ 22,881
(1) InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan.
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NotestoConsolidatedFinancialStatements(Continued)
4.Collaboration,LicenseandCo-promotionAgreements(Continued)
LinaclotideAgreements
Collaboration Agreement for North America with Allergan
InSeptember2007,theCompanyenteredintoacollaborationagreementwithAllergantodevelopandcommercializelinaclotideforthetreatmentofIBS-C,CICandotherGIconditionsinNorthAmerica.Underthetermsofthiscollaborationagreement,theCompanysharesequallywithAllerganalldevelopmentcostsaswellasnetprofitsorlossesfromthedevelopmentandsaleoflinaclotideintheU.S.TheCompanyreceivesroyaltiesinthemid-teenspercentbasedonnetsalesinCanadaandMexico.Allerganissolelyresponsibleforthefurtherdevelopment,regulatoryapprovalandcommercializationoflinaclotideinthosecountriesandfundinganycosts.InSeptember2012,AllergansublicenseditscommercializationrightsinMexicotoAlmirall.InOctober2015,AlmirallandAllerganterminatedthesublicensearrangementwithrespecttoMexico,returningtheexclusiverightstocommercializeCONSTELLAinMexicotoAllergan.CONSTELLAcontinuestobeavailabletoadultIBS-CpatientsinMexico.Allerganmadenon-refundable,up-frontpaymentstotaling$70.0milliontotheCompanyinordertoobtainrightstolinaclotideinNorthAmerica.BecausethelicensetojointlydevelopandcommercializelinaclotidedidnothaveastandalonevaluewithoutresearchanddevelopmentactivitiesprovidedbytheCompany,theCompanyrecordedtheup-frontlicensefeeascollaborativearrangementsrevenueonastraightlinebasisthroughSeptember30,2012,theperiodoverwhichlinaclotidewasjointlydevelopedunderthecollaboration.TheCompanyachievedallsixdevelopmentmilestonesunderthisagreementtotaling$135.0million,whichwererecognizedthroughSeptember2012.TheremainingmilestonepaymentthatcouldbereceivedfromAllerganupontheachievementofsalestargetswillberecognizedascollaborativearrangementsrevenueasearned.ThecollaborationagreementforNorthAmericaalsoincludescontingentmilestonepayments,aswellasacontingentequityinvestment,basedontheachievementofspecificdevelopmentandcommercialmilestones.AtDecember31,2015,$205.0millioninlicensefeesanddevelopmentmilestonepaymentshadbeenreceivedbytheCompany,aswellasa$25.0millionequityinvestmentintheCompany'scapitalstock.TheCompanycanalsoachieveupto$100.0millioninasalesrelatedmilestoneifcertainconditionsaremet.
ThecollaborationagreementforNorthAmericaincludedacontingentequityinvestment,intheformofaforwardpurchasecontract,whichrequiredAllergantopurchasesharesoftheCompany'sconvertiblepreferredstockuponachievementofaspecificdevelopmentmilestone.Attheinceptionofthearrangement,theCompanyvaluedthecontingentequityinvestmentandrecordedanapproximately$9.0millionassetandincrementaldeferredrevenue.The$9.0millionofincrementaldeferredrevenuewasrecognizedascollaborativearrangementsrevenueonastraight-linebasisovertheperiodoftheCompany'scontinuinginvolvementthroughSeptember30,2012.InJuly2009,theCompanyachievedthedevelopmentmilestonetriggeringtheequityinvestmentandreclassifiedtheforwardpurchasecontractasareductiontoconvertiblepreferredstock.OnSeptember1,2009,theCompanyissued2,083,333sharesofconvertiblepreferredstocktoAllergan(Note16).
Asaresultoftheresearchanddevelopmentcost-sharingprovisionsofthecollaborationforNorthAmerica,theCompanyoffsetapproximately$16.9millionand$4.3millionagainstresearchanddevelopmentcostsduringtheyearsendedDecember31,2015and2014,respectively.TheCompanyrecognizedapproximately$2.2millioninincrementalresearchanddevelopmentcostsduringtheyearendedDecember31,2013,toreflectitsobligationunderthecollaborationtobearhalfofthedevelopmentcostsincurredbybothparties.Inaddition,inMarch2015,theCompanyandAllergan
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NotestoConsolidatedFinancialStatements(Continued)
4.Collaboration,LicenseandCo-promotionAgreements(Continued)
agreedtosharecertaincostsrelatingtothemanufacturingoflinaclotideAPIandcertainothermanufacturingactivities.ThisarrangementresultedinnetamountsreceivedfromAllerganofapproximately$4.3millionforcostsincurredinpriorperiods,whichwererecordedbytheCompanyasareductioninresearchanddevelopmentexpensesduringtheyearendedDecember31,2015.
TheCompanyreceives50%ofthenetprofitsandbears50%ofthenetlossesfromthecommercialsaleofLINZESSintheU.S.;provided,however,thatifeitherpartyprovidesfewercallsonphysiciansinaparticularyearthanitiscontractuallyrequiredtoprovide,suchparty'sshareofthenetprofitswillbeadjustedasstipulatedbythecollaborationagreementforNorthAmerica.Certainoftheseadjustmentstotheshareofthenetprofitsmaybereducedoreliminatedinconnectionwiththeco-promotionactivitiesundertheCompany'sagreementwithAllergantoco-promoteVIBERZIintheU.S.,asdescribedbelow.Netprofitsornetlossesconsistofnetsalestothird-partycustomersandsublicenseincomeintheU.S.lessthecostofgoodssoldaswellasselling,generalandadministrativeexpenses.NetsalesarecalculatedandrecordedbyAllerganandmayincludegrosssalesnetofdiscounts,rebates,allowances,salestaxes,freightandinsurancecharges,andotherapplicabledeductions.TheCompanyrecordsitsshareofthenetprofitsornetlossesfromthesaleofLINZESSonanetbasisandpresentsthesettlementpaymentstoandfromAllerganascollaborationexpenseorcollaborativearrangementsrevenue,asapplicable.TheCompanyandAllerganbegancommercializingLINZESSintheU.S.inDecember2012.
TheCompanyrecognizedcollaborativearrangementsrevenuefromtheAllergancollaborationagreementforNorthAmericaduringtheyearsendedDecember31,2015,2014and2013asfollows(inthousands):
ThecollaborativearrangementsrevenuerecognizedintheyearsendedDecember31,2015,2014and2013primarilyrepresentstheCompany'sshareofthenetprofitsandnetlossesonthesaleofLINZESSintheU.S.
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YearEndedDecember31, 2015 2014 2013 CollaborativearrangementsrevenuerelatedtosalesofLINZESSintheU.S.(1)(2) $ 133,425 $ 47,618 $ 2,914
Royaltyrevenue 910 64 —SaleofAPI — — 43Totalcollaborativearrangementsrevenue $ 134,335 $ 47,682 $ 2,957
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NotestoConsolidatedFinancialStatements(Continued)
4.Collaboration,LicenseandCo-promotionAgreements(Continued)
ThefollowingtablepresentstheamountsrecordedbytheCompanyforcommercialeffortsrelatedtoLINZESSintheU.S.intheyearsendedDecember31,2015,2014and2013(inthousands):
InMay2014,AllerganbegancommercializingCONSTELLAinCanadaandinJune2014,AlmirallbegancommercializingLINZESSinMexico.InOctober2015,AlmirallandAllerganterminatedthesublicensearrangementwithrespecttoMexico,returningtheexclusiverightstocommercializeCONSTELLAinMexicotoAllergan.CONSTELLAcontinuestobeavailabletoadultIBS-CpatientsinMexico.TheCompanyrecordsroyaltiesonsalesofCONSTELLAinCanadaandLINZESSinMexicoonequarterinarrearsasitdoesnothaveaccesstotheroyaltyreportsfromitspartnersortheabilitytoestimatetheroyaltyrevenueintheperiodearned.TheCompanyrecognizedapproximately$0.9millionandaninsignificantamountofroyaltyrevenuesfromCanadaandMexicoduringtheyearsendedDecember31,2015and2014,respectively.
License Agreement for the European Territory with Allergan (formerly with Almirall through October 2015)
InApril2009,theCompanyenteredintoalicenseagreementwithAlmirall(the"EuropeanLicenseAgreement")todevelopandcommercializelinaclotideinEurope(includingtheCommonwealthofIndependentStatesandTurkey)forthetreatmentofIBS-C,CICandotherGIconditions.UnderthetermsoftheEuropeanLicenseAgreement,AlmirallwasresponsiblefortheexpensesassociatedwiththedevelopmentandcommercializationoflinaclotideintheEuropeanterritoryandtheCompanywasrequiredtoparticipateonajointdevelopmentcommitteeoverlinaclotide'sdevelopmentperiodandajointcommercializationcommitteewhiletheproductwasbeingcommercialized.
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YearEndedDecember31, 2015 2014 2013
CollaborativearrangementsrevenuerelatedtosalesofLINZESSintheU.S.(1)(2) $ 133,425 $ 47,618 $ 2,914Collaborationexpense — — (42,074)Selling,generalandadministrativecostsincurredbytheCompany(1) (32,028) (31,646) (33,839)TheCompany'sshareofnetprofit(loss) $ 101,397 $ 15,972 $ (72,999)
(1) Includesonlycollaborativearrangementrevenueorselling,generalandadministrativecostsattributabletothecost-sharingarrangementwithAllergan.
(2) IncludesnetprofitshareadjustmentpayabletoAllerganofapproximately$2.4millionrecordedduringtheyearendedDecember31,2015.CertainoftheunfavorableadjustmentstotheCompany'sshareoftheLINZESSnetprofitsmaybereducedoreliminatedinconnectionwiththeco-promotionactivitiesundertheCompany'sagreementwithAllergantoco-promoteVIBERZIintheU.S.,asdescribedbelow.DuringtheyearendedDecember31,2015,inconnectionwiththeseco-promotionactivities,thenetprofitshareadjustmentspayabletoAllerganunderthelinaclotidecollaborationagreementforNorthAmericawerereducedbyapproximately$2.9millionandwerereflectedascollaborativearrangementsrevenueunderthisagreement.NetprofitshareadjustmentsreceivedfromAllerganofapproximately$1.7millionwererecordedduringtheyearendedDecember31,2014.
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NotestoConsolidatedFinancialStatements(Continued)
4.Collaboration,LicenseandCo-promotionAgreements(Continued)
InMay2009,theCompanyreceivedanapproximately$38.0millionpaymentfromAlmirallrepresentinga$40.0millionnon-refundableup-frontpaymentnetofforeignwithholdingtaxes.TheCompanyelectedtorecordthenon-refundableup-frontpaymentnetoftaxeswithheld.Thelicenseagreementalsoincludeda$15.0millioncontingentequityinvestment,intheformofaforwardpurchasecontract,whichrequiredAlmiralltopurchasesharesoftheCompany'sconvertiblepreferredstockuponachievementofaspecificdevelopmentmilestone.Attheinceptionofthearrangement,theCompanyvaluedthecontingentequityinvestmentatapproximately$6.0million.TheCompanyrecognizedtheup-frontlicensefeeandthevalueofthecontingentequityinvestmenttotalingapproximately$6.0millionascollaborativearrangementsrevenueonastraight-linebasisthroughSeptember30,2012,theperiodoverwhichlinaclotidewasdevelopedundertheEuropeanLicenseAgreement.InNovember2009,theCompanyachievedthedevelopmentmilestonetriggeringtheequityinvestmentandonNovember13,2009,theCompanyreceived$15.0millionfromAlmirallforthepurchaseof681,819sharesofconvertiblepreferredstock(Note16).
TheoriginalEuropeanLicenseAgreementalsoincludedcontingentmilestonepaymentsthatcouldtotalupto$40.0millionuponachievementofspecificdevelopmentandcommerciallaunchmilestones.InNovember2010,theCompanyachievedadevelopmentmilestone,whichresultedinanapproximately$19.0millionpayment,representinga$20.0millionmilestone,netofforeignwithholdingtaxes.ThisdevelopmentmilestonewasrecognizedascollaborativearrangementsrevenuethroughSeptember2012.CommercialmilestonepaymentsundertheoriginalEuropeanLicenseAgreementconsistedof$4.0milliondueuponthefirstcommerciallaunchineachofthefivemajorEuropeanUnion("E.U.")countriessetforthintheagreement.
InJune2013andFebruary2014,theCompanyandAlmirallamendedtheoriginalEuropeanLicenseAgreement.Pursuanttothetermsoftheamendments,(i)thecommerciallaunchmilestoneswerereducedto$17.0million;(ii)newsales-basedmilestonepaymentswereaddedtotheagreement;and(iii)theescalatingroyaltiesbasedonsalesoflinaclotideweremodifiedsuchthattheybeganinthelow-twentiespercentandescalatedtothemid-fortiespercentthroughApril2017,andthereafterbeganinthemid-twentiespercentandescalatedtothemid-fortiespercentatlowersalesthresholds.Ineachcase,theseroyaltypaymentswerereducedbythetransferpricepaidfortheAPIincludedintheproductactuallysoldintheAlmirallterritoryandothercontractualdeductions.TheCompanyconcludedthattheseamendmentswereamodificationtotheEuropeanLicenseAgreementunderASUNo.2009-13,butthemodificationdidnothaveamaterialimpactontheCompany'sconsolidatedfinancialstatements.
Duringthesecondquarterof2013,theCompanyachievedtwomilestonesundertheamendedEuropeanLicenseAgreement,whichresultedinpaymentsofapproximately$1.9millionfromAlmiralltotheCompanyrelatedtothecommerciallaunchesintwoofthefivemajorE.U.countries,theUnitedKingdomandGermany.Theapproximately$1.9millionpaymentrepresentedthetwo$1.0millionmilestones,netofforeigntaxwithholdings.Duringthefirstandsecondquartersof2014,theCompanyachievedtwoadditionalmilestonesundertheamendedEuropeanLicenseAgreementtriggeringpaymentsofapproximately$1.0millioneachrelatedtothecommerciallaunchesintwoadditionalmajorE.U.countries,ItalyandSpain.Eachapproximately$1.0millionpaymentrepresentsthe$1.0millionmilestone,netofforeigntaxwithholdings.
InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan.Additionally,inOctober2015,theCompanyandAllerganseparatelyentered
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4.Collaboration,LicenseandCo-promotionAgreements(Continued)
intoanamendmenttotheEuropeanLicenseAgreementrelatingtothedevelopmentandcommercializationoflinaclotideinEurope.Pursuanttothetermsoftheamendment,(i)theremainingsales-basedmilestonespayabletotheCompanyundertheEuropeanLicenseAgreementweremodifiedtoincreasethetotalmilestonepaymentssuchthat,whenaggregatedwiththeremainingcommerciallaunchmilestones,theycouldtotalupto$42.5million,(ii)theroyaltiespayabletotheCompanyduringthetermoftheEuropeanLicenseAgreementweremodifiedsuchthattheroyaltiesbasedonsalesvolumeinEuropebegininthemid-singledigitpercentandescalatetotheupper-teenspercentbycalendaryear2019,and(iii)AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEuropefromtheCompany,aswellastheassociatedcosts.Furthermore,withtheCompanynolongerresponsibleforthemanufacturingoflinaclotideAPIforEurope,theroyaltiesunderthelicenseagreementwillnolongerbereducedbythetransferpricepaidfortheAPIincludedintheproductactuallysoldbyAllerganinEuropeinanygivenperiod.
The2015amendmenttotheEuropeanLicenseAgreementdoesnotrepresentamaterialmodificationtothelinaclotidecollaborationagreementwithAllerganforNorthAmericaanddidnothaveamaterialimpactontheCompany'sconsolidatedfinancialstatements.Thecommerciallaunchandsales-basedmilestonesundertheEuropeanLicenseAgreementarerecognizedasrevenueasearned.TheCompanyalsorecordsroyaltiesonsalesofCONSTELLAonequarterinarrearsasitdoesnothaveaccesstotheroyaltyreportsfromAllerganortheabilitytoestimatetheroyaltyrevenueintheperiodearned.
ConcurrentlywiththeEuropeanlicensetransfer,AlmirallandAllerganterminatedthesublicensearrangementwithrespecttoMexico,returningtheexclusiverightstocommercializeCONSTELLAinMexicotoAllergan.CONSTELLAcontinuestobeavailabletoadultIBS-CpatientsinMexico.
TheCompanyrecognizedapproximately$0.5millionofcollaborativearrangementsrevenue,comprisedofroyaltyrevenue,fromtheEuropeanLicenseAgreementduringtheyearendedDecember31,2015.TheCompanyrecognizedapproximately$7.6millionintotalcollaborativearrangementsrevenuefromtheEuropeanLicenseAgreementduringtheyearendedDecember31,2014,includingapproximately$5.1millionfromthesaleofAPItoAlmirall,approximately$1.9millionincommerciallaunchmilestones,andapproximately$0.6millioninroyaltyrevenue.TheCompanyrecognizedapproximately$13.1millionintotalcollaborativearrangementsrevenuefromtheEuropeanLicenseAgreementduringtheyearendedDecember31,2013,includingapproximately$11.1millionfromthesaleofAPItoAlmirall,approximately$0.2millioninroyaltyrevenueandapproximately$1.9millionincommerciallaunchmilestones.
License Agreement for Japan with Astellas
InNovember2009,theCompanyenteredintoalicenseagreementwithAstellastodevelopandcommercializelinaclotideforthetreatmentofIBS-C,CICandotherGIconditionsinJapan,SouthKorea,Taiwan,Thailand,thePhilippinesandIndonesia.AsaresultofanamendmentexecutedinMarch2013,theCompanyregainedrightstolinaclotideinSouthKorea,Taiwan,Thailand,thePhilippinesandIndonesia.TheCompanyconcludedthattheamendmentwasnotamaterialmodificationofthelicenseagreement.Astellascontinuestoberesponsibleforallactivitiesrelatingtodevelopment,regulatoryapprovalandcommercializationinJapanaswellasfundinganycostsandtheCompanyisrequiredtoparticipateonajointdevelopmentcommitteeoverlinaclotide'sdevelopmentperiod.
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4.Collaboration,LicenseandCo-promotionAgreements(Continued)
In2009,AstellaspaidtheCompanyanon-refundable,up-frontlicensingfeeof$30.0million,whichisbeingrecognizedascollaborativearrangementsrevenueonastraight-linebasisovertheCompany'sestimateoftheperiodoverwhichlinaclotidewillbedevelopedunderthelicenseagreement.InMarch2013,theCompanyreviseditsestimateofthedevelopmentperiodfrom115monthsto85monthsbasedontheCompany'sassessmentofregulatoryapprovaltimelinesforJapan.DuringtheyearsendedDecember31,2015,2014and2013,theCompanyrecognizedapproximately$5.1million,$5.1millionand$4.6millionofrevenuerelatedtotheup-frontlicensingfee,respectively,includingapproximately$1.9million,$1.9millionand$1.5millionofrevenueineachperiodattributabletotheMarch2013revisiontotheestimateddevelopmentperiod.AtDecember31,2015,approximately$6.3millionoftheup-frontlicensefeeremaineddeferred.
Theagreementalsoincludesthreedevelopmentmilestonepaymentsthatcouldtotalupto$45.0million,noneofwhichtheCompanyconsiderssubstantive.Thefirstmilestonepayment,consistingof$15.0millionuponenrollmentofthefirststudysubjectinaPhaseIIIstudyforlinaclotideinJapan,wasachievedinNovember2014,andapproximately$12.3millionwasrecognizedasrevenuethroughDecember31,2015,includingapproximately$2.1millionandapproximately$10.2millionduringtheyearsendedDecember31,2015and2014,respectively.Theremainingapproximately$2.6millionofthismilestonepaymentwillberecognizedovertheremainingdevelopmentperiod.Thetwoadditionalmilestonepaymentsconsistof$15.0millionuponfilingoftheJapaneseequivalentofanNDAwiththerelevantregulatoryauthorityinJapanand$15.0millionuponapprovalofsuchequivalentbytherelevantregulatoryauthority.Inaddition,theCompanywillreceiveroyaltieswhichescalatebasedonsalesvolume,beginninginthelow-twentiespercent,lessthetransferpricepaidfortheAPIincludedintheproductactuallysoldandothercontractualdeductions.
DuringtheyearsendedDecember31,2015,2014and2013,theCompanyrecognizedapproximately$7.7million,approximately$17.7million,andapproximately$5.8million,respectively,incollaborativearrangementsrevenuefromtheAstellaslicenseagreement,includingapproximately$0.5million,approximately$2.4million,andapproximately$1.2million,respectively,fromthesaleofAPItoAstellas.
Collaboration Agreement for China, Hong Kong and Macau with AstraZeneca
InOctober2012,theCompanyenteredintoacollaborationagreementwithAstraZeneca(the"AstraZenecaCollaborationAgreement")toco-developandco-commercializelinaclotideinChina,HongKongandMacau(the"LicenseTerritory").ThecollaborationprovidesAstraZenecawithanexclusivenontransferablelicensetoexploittheunderlyingtechnologyintheLicenseTerritory.Thepartiesshareresponsibilityforcontinueddevelopmentandcommercializationoflinaclotideunderajointdevelopmentplanandajointcommercializationplan,respectively,withAstraZenecahavingprimaryresponsibilityforthelocaloperationalexecution.
ThepartiesagreedtoanInitialDevelopmentPlan("IDP")whichincludestheplanneddevelopmentoflinaclotideinChina,includingtheleadresponsibilityforeachactivityandtherelatedinternalandexternalcosts.TheIDPindicatesthatAstraZenecaisresponsibleforamultinationalPhaseIIIclinicaltrial(the"PhaseIIITrial"),theCompanyisresponsiblefornonclinicaldevelopmentandsupplyingclinicaltrialmaterialandbothpartiesareresponsiblefortheregulatorysubmissionprocess.TheIDPindicatesthatthepartyspecificallydesignatedasbeingresponsibleforaparticulardevelopmentactivityundertheIDPshallimplementandconductsuchactivities.Theactivitiesare
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NotestoConsolidatedFinancialStatements(Continued)
4.Collaboration,LicenseandCo-promotionAgreements(Continued)
governedbyaJointDevelopmentCommittee("JDC"),withequalrepresentationfromeachparty.TheJDCisresponsibleforapproving,byunanimousconsent,thejointdevelopmentplananddevelopmentbudget,aswellasapprovingprotocolsforclinicalstudies,reviewingandcommentingonregulatorysubmissions,andprovidinganexchangeofdataandinformation.
TheAstraZenecaCollaborationAgreementwillcontinueuntilthereisnolongeradevelopmentplanorcommercializationplaninplace,however,itcanbeterminatedbyAstraZenecaatanytimeupon180days'priorwrittennotice.Undercertaincircumstances,eitherpartymayterminatetheAstraZenecaCollaborationAgreementintheeventofbankruptcyoranuncuredmaterialbreachoftheotherparty.UponcertainchangeincontrolscenariosofAstraZeneca,theCompanymayelecttoterminatetheAstraZenecaCollaborationAgreementandmayre-acquireitsproductrightsinalumpsumpaymentequaltothefairmarketvalueofsuchproductrights.
InconnectionwiththeAstraZenecaCollaborationAgreement,theCompanyandAstraZenecaalsoexecutedaco-promotionagreement(the"Co-PromotionAgreement"),pursuanttowhichtheCompanyutilizeditsexistingsalesforcetoco-promoteNEXIUM®(esomeprazolemagnesium),oneofAstraZeneca'sproducts,intheU.S.TheCo-PromotionAgreementexpiredinMay2014.
TherearenorefundprovisionsintheAstraZenecaCollaborationAgreementandtheCo-PromotionAgreement(together,the"AstraZenecaAgreements").
UnderthetermsoftheAstraZenecaCollaborationAgreement,theCompanyreceiveda$25.0millionnon-refundableupfrontpaymentuponexecution.TheCompanyisalsoeligiblefor$125.0millioninadditionalcommercialmilestonepaymentscontingentontheachievementofcertainsalestargets.ThepartieswillalsoshareinthenetprofitsandlossesassociatedwiththedevelopmentandcommercializationoflinaclotideintheLicenseTerritory,withAstraZenecareceiving55%ofthenetprofitsorincurring55%ofthenetlossesuntilacertainspecifiedcommercialmilestoneisachieved,atwhichtimeprofitsandlosseswillbesharedequallythereafter.
ActivitiesundertheAstraZenecaAgreementswereevaluatedinaccordancewiththeASC605-25,RevenueRecognition—Multiple-ElementArrangements("ASC605-25"),todetermineiftheyrepresentedamultipleelementrevenuearrangement.TheCompanyidentifiedthefollowingdeliverablesintheAstraZenecaAgreements:
• anexclusivelicensetodevelopandcommercializelinaclotideintheLicenseTerritory(the"LicenseDeliverable"),
• research,developmentandregulatoryservicespursuanttotheIDP,asmodifiedfromtimetotime(the"R&DServices"),
• JDCservices,
• obligationtosupplyclinicaltrialmaterial,and
• co-promotionservicesforAstraZeneca'sproduct(the"Co-PromotionDeliverable").
TheLicenseDeliverableisnontransferableandhascertainsublicenserestrictions.TheCompanydeterminedthattheLicenseDeliverablehadstandalonevalueasaresultofAstraZeneca'sinternalproductdevelopmentandcommercializationcapabilities,whichwouldenableittousetheLicenseDeliverableforitsintendedpurposeswithouttheinvolvementoftheCompany.Theremainingdeliverablesweredeemedtohavestandalonevaluebasedontheirnatureandalldeliverablesmetthe
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4.Collaboration,LicenseandCo-promotionAgreements(Continued)
criteriatobeaccountedforasseparateunitsofaccountingunderASC605-25.Factorsconsideredinthisdeterminationincluded,amongotherthings,whetheranyothervendorsselltheitemsseparatelyandifthecustomercouldusethedelivereditemforitsintendedpurposewithoutthereceiptoftheremainingdeliverables.
TheCompanyidentifiedthesupplyoflinaclotidedrugproductforcommercialrequirementsandcommercializationservicesascontingentdeliverablesbecausetheseservicesarecontingentuponthereceiptofregulatoryapprovaltocommercializelinaclotideintheLicenseTerritory,andtherewerenobindingcommitmentsorfirmpurchaseorderspendingforcommercialsupply.Asthesedeliverablesarecontingent,andarenotatanincrementaldiscount,theyarenotevaluatedasdeliverablesattheinceptionofthearrangement.Thesecontingentdeliverableswillbeevaluatedandaccountedforseparatelyaseachrelatedcontingencyisresolved.AsofDecember31,2015,nocontingentdeliverableswereprovidedbytheCompanyundertheAstraZenecaAgreements.
InAugust2014,theCompanyandAstraZeneca,throughtheJDC,modifiedtheIDPanddevelopmentbudgettoincludeapproximately$14.0millioninadditionalactivitiesovertheremainingdevelopmentperiod,tobesharedbytheCompanyandAstraZenecaunderthetermsoftheAstraZenecaCollaborationAgreement.TheseadditionalactivitiesservetosupportthecontinueddevelopmentoflinaclotideintheLicensedTerritory,includingthePhaseIIITrial.PursuanttothetermsofthemodifiedIDPanddevelopmentbudget,certainoftheCompany'sdeliverablesweremodified,specificallytheR&DServicesandtheobligationtosupplyclinicaltrialmaterial.Themodificationdidnot,however,haveamaterialimpactontheCompany'sconsolidatedfinancialstatements.
Thetotalamountofthenon-contingentconsiderationallocabletotheAstraZenecaAgreementsofapproximately$34.0million("ArrangementConsideration")includesthe$25.0millionnon-refundableupfrontpaymentand55%ofthecostsforclinicaltrialmaterialsupplyservicesandresearch,developmentandregulatoryactivitiesallocatedtotheCompanyintheIDPorasapprovedbytheJDCinsubsequentperiods,orapproximately$9.0million.
TheCompanyallocatedtheArrangementConsiderationofapproximately$34.0milliontothenon-contingentdeliverablesbasedonmanagement'sBESPofeachdeliverableusingtherelativesellingpricemethodastheCompanydidnothaveVSOEorTPEofsellingpriceforsuchdeliverables.TheCompanyestimatedtheBESPfortheLicenseDeliverableusingamulti-periodexcess-earningsmethodundertheincomeapproachwhichutilizedcashflowprojections,thekeyassumptionsofwhichincludedthefollowingmarketconditionsandentity-specificfactors:(a)thespecificrightsprovidedunderthelicensetodevelopandcommercializelinaclotide;(b)thepotentialindicationsforlinaclotidepursuanttothelicense;(c)thelikelihoodlinaclotidewillbedevelopedformorethanoneindication;(d)thestageofdevelopmentoflinaclotideforIBS-CandCICandtheprojectedtimelineforregulatoryapproval;(e)thedevelopmentriskbyindication;(f)themarketsizebyindication;(g)theexpectedproductlifeoflinaclotideassumingcommercialization;(h)thecompetitiveenvironment,and(i)theestimateddevelopmentandcommercializationcostsoflinaclotideintheLicenseTerritory.TheCompanyutilizedadiscountrateof11.5%initsanalysis,representingtheweightedaveragecostofcapitalderivedfromreturnsonequityforcomparablecompanies.TheCompanydetermineditsBESPfortheremainingdeliverablesbasedonthenatureoftheservicestobeperformedandestimatesoftheassociatedeffortandcostoftheservicesadjustedforareasonableprofitmarginsuchthattheyrepresentedestimatedmarketratesforsimilarservicessoldonastandalonebasis.TheCompany
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NotestoConsolidatedFinancialStatements(Continued)
4.Collaboration,LicenseandCo-promotionAgreements(Continued)
concludedthatachangeinkeyassumptionsusedtodetermineBESPforeachdeliverablewouldnothaveasignificanteffectontheallocationoftheArrangementConsideration,astheestimatedsellingpriceoftheLicenseDeliverablesignificantlyexceedstheotherdeliverables.
Oftheapproximately$34.0millionofArrangementConsideration,consistingofthe$25.0millionnon-refundableupfrontpaymentand55%ofthecostsforclinicaltrialmaterialsupplyservicesandresearch,developmentandregulatoryactivitiesallocatedtotheCompany,approximately$29.7millionwasallocatedtotheLicenseDeliverable,approximately$1.8milliontotheR&DServices,approximately$0.1milliontotheJDCservices,approximately$0.3milliontotheclinicaltrialmaterialsupplyservices,andapproximately$2.1milliontotheCo-PromotionDeliverableintherelativesellingpricemodel,atthetimeofthematerialmodification.
BecausetheCompanysharesdevelopmentcostswithAstraZeneca,paymentsfromAstraZenecawithrespecttobothresearchanddevelopmentandselling,generalandadministrativecostsincurredbytheCompanypriortothecommercializationoflinaclotideintheLicenseTerritoryarerecordedasareductioninexpense,inaccordancewiththeCompany'spolicy,whichisconsistentwiththenatureofthecostreimbursement.DevelopmentcostsincurredbytheCompanythatpertaintothejointdevelopmentplanandsubsequentamendmentstothejointdevelopmentplan,asapprovedbytheJDC,arerecordedasresearchanddevelopmentexpenseasincurred.PaymentstoAstraZenecaarerecordedasincrementalresearchanddevelopmentexpense.
TheCompanycompleteditsobligationsrelatedtotheLicenseDeliverableuponexecutionoftheAstraZenecaAgreements;however,therevenuerecognizedinthestatementofoperationswaslimitedtothenon-contingentportionoftheLicenseDeliverableconsiderationinaccordancewithASC605-25.DuringtheyearsendedDecember31,2015and2014,theCompanyrecognizedapproximately$2.2millionandapproximately$2.5million,respectively,incollaborativearrangementsrevenuerelatedtotheLicenseDeliverableinconnectionwiththemodificationtotheIDPanddevelopmentbudgetinAugust2014,asthisportionoftheArrangementConsiderationwasnolongercontingent.DuringtheyearendedDecember31,2013,theCompanydidnotrecognizeanyamountsincollaborativearrangementsrevenuerelatedtotheLicenseDeliverable.
TheCompanyalsoperformsR&DServicesandJDCservices,andsuppliesclinicaltrialmaterialsduringtheestimateddevelopmentperiod.AllArrangementConsiderationallocatedtosuchservicesisbeingrecognizedasareductionofresearchanddevelopmentcosts,usingtheproportionalperformancemethod,bywhichtheamountsarerecognizedinproportiontothecostsincurred.Asaresultofthecost-sharingarrangementsunderthecollaboration,theCompanyrecognizedapproximately$0.7million,$2.4millionand$1.9millioninincrementalresearchanddevelopmentcostsduringtheyearsendedDecember31,2015,2014and2013,respectively.TheamountallocatedtotheCo-PromotionDeliverablewasrecognizedascollaborativearrangementsrevenueusingtheproportionalperformancemethod,whichapproximatesrecognitiononastraight-linebasisbeginningonthedatethattheCompanybegantoco-promoteAstraZeneca'sproductthroughDecember31,2013(theearliestcancellationdate).AsofDecember31,2013,theCompanycompleteditsobligationrelatedtotheCo-PromotionDeliverable;however,therevenuerecognizedinthestatementofoperationswaslimitedtothenon-contingentconsiderationinaccordancewithASC605-25.DuringtheyearsendedDecember31,2015,2014and2013,theCompanyrecognizedapproximately$0.2million,approximately$0.9millionandapproximately$1.0million,respectively,ascollaborativearrangementsrevenuerelatedtothisdeliverable,assuchportionsoftheArrangementConsiderationwerenolongercontingent.
F-36
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
4.Collaboration,LicenseandCo-promotionAgreements(Continued)
TheCompanyreassessestheperiodsofperformanceforeachdeliverableattheendofeachreportingperiod.
MilestonepaymentsreceivedfromAstraZenecaupontheachievementofsalestargetswillberecognizedasearned.
Co-PromotionAgreements
Co-promotion Agreement with Exact Sciences Corp. for Cologuard
InMarch2015,theCompanyandExactSciencesenteredintoanagreementtoco-promoteExactSciences'Cologuard,thefirstandonlyFDA-approvednoninvasivestoolDNAscreeningtestforcolorectalcancer(the"ExactSciencesCo-promotionAgreement").UnderthetermsoftheExactSciencesCo-promotionAgreement,theCompany'ssalesteamispromotingandeducatinghealthcarepractitionersregardingCologuard,withLINZESSremainingtheCompany'sfirst-positionproduct.Thecompaniesarealsocollaboratingonmedicaleducationinitiativestosupportmorein-depthunderstandingofCologuardandtheimportanceofcolorectalcancerscreening.ExactSciencesmaintainsresponsibilityforallotheraspectsofthecommercializationofCologuardoutsideoftheco-promotion.UnderthetermsoftheExactSciencesCo-promotionAgreement,theCompanyiscompensatedviareimbursementsforsalesdetailing,promotionalsupportservicesandmedicaleducationinitiatives.Duringtheinitialone-yeartermoftheagreement,theCompanycouldreceiveuptoamaximumreimbursementofapproximately$4.8million.TheCompanyalsoearnsroyaltiesonthenetsalesofCologuardgeneratedfromthehealthcarepractitionersonwhomtheCompanycallslessthesalespromotionreimbursementtotheCompany,suchroyaltiesbeingpayableduringthetermandforoneyearfollowingtheterminationoftheCompany'sco-promotionefforts.TherearenorefundprovisionsintheExactSciencesCo-promotionAgreement.
Thenon-exclusiveExactSciencesCo-promotionAgreementcoversaninitialone-yearterm,andrenewsautomaticallyforsuccessiveonemonthperiodsunlessanduntilterminatedbyeitherparty.Eitherpartymayterminatetheagreementintheeventofanuncuredmaterialbreachbytheotherparty,withdrawalofCologuardfromtheU.S.market,restrictionontheindicationsforCologuardbytheFDA,impositionofrestrictivefederalorstatepricecontrols,changeofcontroloftheotherparty,orbankruptcyorinsolvencyoftheotherparty.
ActivitiesundertheExactSciencesCo-promotionAgreementwereevaluatedinaccordancewithASC605-25,todetermineiftheyrepresentedamultipleelementrevenuearrangement.TheCompanyidentifiedthefollowingdeliverablesintheExactSciencesCo-promotionAgreement:(i)secondpositionsalesdetailing,(ii)promotionalsupportservices,and(iii)medicaleducationservices.EachofthedeliverableswasdeemedtohavestandalonevaluebasedontheirnatureandalldeliverablesmetthecriteriatobeaccountedforasseparateunitsofaccountingunderASC605-25.TheCompanydeterminedthattheBESPforeachofthethreedeliverablesapproximatedthevalueallocatedtothedeliverablesundertheagreement.TherevenuerelatedtoeachdeliverableisrecognizedascollaborativearrangementsrevenueintheCompany'sconsolidatedstatementofoperations,inaccordancewithASC605-25,duringtheperiodearned.DuringtheyearendedDecember31,2015,theCompanyrecognizedapproximately$4.4millionascollaborativearrangementsrevenuerelatedtothisarrangement.
F-37
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
4.Collaboration,LicenseandCo-promotionAgreements(Continued)
Co-promotion Agreement with Allergan for VIBERZI
InAugust2015,theCompanyandAllerganenteredintoanagreementfortheco-promotionofVIBERZIintheU.S.,Allergan'streatmentforadultssufferingfromIBS-D(the"VIBERZICo-promotionAgreement").UnderthetermsoftheVIBERZICo-promotionAgreement,theCompany'sclinicalsalesspecialistsaredetailingVIBERZItotheapproximately25,000healthcarepractitionerstowhomtheydetailLINZESS.AllerganisresponsibleforallcostsandactivitiesrelatingtothecommercializationofVIBERZIoutsideoftheco-promotion.
UnderthetermsoftheVIBERZICo-promotionAgreement,theCompany'spromotionaleffortsarecompensatedbasedonthevolumeofcallsdeliveredbytheCompany'ssalesforce,withthetermsoftheagreementreducingoreliminatingcertainoftheunfavorableadjustmentstotheCompany'sshareofnetprofitsstipulatedbythelinaclotidecollaborationagreementwithAllerganforNorthAmerica,providedthattheCompanyprovidesaminimumnumberofVIBERZIcallsonphysicians.TheCompanyhasthepotentialtoachievemilestonepaymentsofupto$10.0millionbasedonthenetsalesofVIBERZIineachof2017and2018,andisalsocompensatedviareimbursementsformedicaleducationinitiatives.
TheCompany'spromotionaleffortsunderthenon-exclusiveco-promotionbeganwhenVIBERZIbecamecommerciallyavailableinDecember2015,andwillcontinueuntilDecember31,2017,unlessearlierterminatedbyeitherpartypursuanttotheprovisionsoftheVIBERZICo-promotionAgreement.EitherpartymayalsoterminatetheVIBERZICo-promotionAgreementintheeventofanuncuredmaterialbreachbytheotherparty,withdrawalofnecessaryapprovalsbytheFDA,forconvenience,orbankruptcyorinsolvencyoftheotherparty.AllerganmayterminatetheVIBERZICo-promotionAgreementiftheCompanydoesnotprovidetheminimumnumberofcallsonphysiciansforVIBERZI.
ActivitiesundertheVIBERZICo-promotionAgreementwereevaluatedinaccordancewithASC605-25todetermineiftheyrepresentedamultipleelementrevenuearrangement.TheCompanyconcludedthattheVIBERZICo-promotionAgreementdoesnotrepresentamaterialmodificationtothelinaclotidecollaborationagreementwithAllerganforNorthAmerica,asitisnotmaterialtothetotalarrangementconsiderationunderthecollaborationagreement,doesnotsignificantlymodifytheexistingdeliverables,anddoesnotsignificantlychangethetermoftheagreement.TheCompanyidentifiedthefollowingdeliverablesintheVIBERZICo-promotionAgreement:(i)secondpositionsalesdetailingofVIBERZI,and(ii)medicaleducationservices.EachofthedeliverableswasdeemedtohavestandalonevaluebasedontheirnatureandbothdeliverablesmetthecriteriatobeaccountedforasseparateunitsofaccountingunderASC605-25.TheCompanydeterminedtheBESPforeachofthedeliverablesapproximatedthevalueallocatedtothedeliverablesundertheagreement.Asconsiderationisearnedoverthetermoftheagreement,therevenuewillbeallocatedtoeachdeliverablebasedontherelativesellingprice,usingmanagement'sBESP,andrecognizedascollaborativearrangementsrevenueintheCompany'sconsolidatedstatementofoperations,inaccordancewithASC605-25,duringthequarterearned.DuringtheyearendedDecember31,2015,inconnectionwiththeCompany'sVIBERZIco-promotionactivities,thenetprofitshareadjustmentspayabletoAllerganunderthelinaclotidecollaborationagreementforNorthAmericawerereducedbyapproximately$2.9millionandwerereflectedascollaborativearrangementsrevenueunderthisagreement.DuringtheyearendedDecember31,2015,theCompanyalsorecognizedapproximately
F-38
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
4.Collaboration,LicenseandCo-promotionAgreements(Continued)
$0.2millioninrevenuerelatedtotheVIBERZICo-promotionAgreementfortheperformanceofmedicaleducationservices.
OtherCollaborationandLicenseAgreements
TheCompanyhasothercollaborationandlicenseagreementsthatarenotindividuallysignificanttoitsbusiness.Inconnectionwithenteringintotheseagreements,theCompanymadeaggregateup-frontpaymentsofapproximately$5.8million,whichwereexpensedasresearchanddevelopmentexpense.Pursuanttothetermsofoneagreement,theCompanymayberequiredtopay$7.5millionfordevelopmentmilestones,ofwhich,approximately$2.5millionhadbeenpaidasofDecember31,2015,and$18.0millionforregulatorymilestones,noneofwhichhadbeenpaidasofDecember31,2015.Inaddition,pursuanttothetermsofanotheragreement,thecontingentmilestonescouldtotalupto$114.5millionperproducttooneoftheCompany'scollaborationpartners,including$21.5millionfordevelopmentmilestones,$58.0millionforregulatorymilestonesand$35.0millionforsales-basedmilestones.Further,undersuchagreements,theCompanyisalsorequiredtofundcertainresearchactivitiesand,ifanyproductrelatedtothesecollaborationsisapprovedformarketing,topaysignificantroyaltiesonfuturesales.DuringtheyearendedDecember31,2015,theCompanyincurredaninsignificantamountinresearchanddevelopmentexpenseassociatedwiththeCompany'sothercollaborationandlicenseagreements.DuringtheyearsendedDecember31,2014and2013,theCompanyincurredapproximately$1.0million,andapproximately$3.6million,respectively,inresearchanddevelopmentexpenseassociatedwiththeCompany'sothercollaborationandlicenseagreements.
5.FairValueofFinancialInstruments
ThetablesbelowpresentinformationabouttheCompany'sassetsthataremeasuredatfairvalueonarecurringbasisasofDecember31,2015and2014andindicatethefairvaluehierarchyofthevaluationtechniquestheCompanyutilizedtodeterminesuchfairvalue.Ingeneral,fairvaluesdeterminedbyLevel1inputsutilizeobservableinputssuchasquotedpricesinactivemarketsforidenticalassetsorliabilities.FairvaluesdeterminedbyLevel2inputsutilizedatapointsthatareeitherdirectlyorindirectlyobservable,suchasquotedprices,interestratesandyieldcurves.FairvaluesdeterminedbyLevel3inputsutilizeunobservabledatapointsinwhichthereislittleornomarketdata,whichrequiretheCompanytodevelopitsownassumptionsfortheassetorliability.
TheCompany'sinvestmentportfolioincludesmainlyfixedincomesecuritiesthatdonotalwaystradeonadailybasis.Asaresult,thepricingservicesusedbytheCompanyapplyotheravailableinformationasapplicablethroughprocessessuchasbenchmarkyields,benchmarkingoflikesecurities,sectorgroupingsandmatrixpricingtopreparevaluations.Inaddition,modelprocessesareusedtoassessinterestrateimpactanddevelopprepaymentscenarios.Thesemodelstakeintoconsiderationrelevantcreditinformation,perceivedmarketmovements,sectornewsandeconomicevents.Theinputsintothesemodelsmayincludebenchmarkyields,reportedtrades,broker-dealerquotes,issuerspreadsandotherrelevantdata.TheCompanyvalidatesthepricesprovidedbyitsthirdpartypricingservicesbyobtainingmarketvaluesfromotherpricingsourcesandanalyzingpricingdataincertaininstances.
F-39
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
5.FairValueofFinancialInstruments(Continued)
ThefollowingtablespresenttheassetsandliabilitiestheCompanyhasmeasuredatfairvalueonarecurringbasis(inthousands):
TherewerenotransfersbetweenfairvaluemeasurementlevelsduringtheyearsendedDecember31,2015or2014.
Cashequivalents,accountsreceivable,relatedpartyaccountsreceivable,prepaidexpensesandothercurrentassets,accountspayable,relatedpartyaccountspayable,accruedexpensesandthecurrentportionofcapitalleaseobligationsatDecember31,2015and2014arecarriedatamountsthatapproximatefairvalueduetotheirshort-termmaturities.
Thenon-currentportionofthecapitalleaseobligationsatDecember31,2015and2014approximatesfairvalueasitbearsinterestatarateapproximatingamarketinterestrate.
F-40
FairValueMeasurementsatReportingDateUsing
December31,
2015
QuotedPricesinActiveMarketsforIdenticalAssets
(Level1)
SignificantOtherObservableInputs
(Level2)
SignificantUnobservable
Inputs(Level3)
Assets: Cashandcashequivalents: Moneymarketfunds $ 254,903 $ 254,903 $ — $ —U.S.government-sponsoredsecurities 3,340 — 3,340 —
Available-for-salesecurities: U.S.Treasurysecurities 50,091 50,091 — —U.S.government-sponsoredsecurities 128,016 — 128,016 —
ConvertibleNoteHedges 86,466 — — 86,466Totalassets $ 522,816 $ 304,994 $ 131,356 $ 86,466
Liabilities: NoteHedgeWarrants $ 75,328 $ — $ — $ 75,328
Totalliabilities $ 75,328 $ — $ — $ 75,328
FairValueMeasurementsatReportingDateUsing
December31,
2014
QuotedPricesinActiveMarketsforIdenticalAssets
(Level1)
SignificantOtherObservableInputs
(Level2)
SignificantUnobservable
Inputs(Level3)
Assets: Cashandcashequivalents: Moneymarketfunds $ 60,966 $ 60,966 $ — $ —
Available-for-salesecurities: U.S.Treasurysecurities 24,005 24,005 — —U.S.government-sponsoredsecurities 150,032 — 150,032 —
Totalassetsmeasuredatfairvalue $ 235,003 $ 84,971 $ 150,032 $ —
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
5.FairValueofFinancialInstruments(Continued)
TheCompany'sConvertibleNoteHedgesandtheNoteHedgeWarrantsarerecordedasderivativeassetsandliabilities,andareclassifiedasLevel3underthefairvaluehierarchy.ThesederivativesarenotactivelytradedandarevaluedusingtheBlack-Scholesoption-pricingmodelwhichrequirestheuseofsubjectiveassumptions.SignificantinputsusedtodeterminethefairvalueasofDecember31,2015includedthepricepershareoftheCompany'sClassAcommonstock,timetomaturityofthederivativeinstruments,thestrikepricesofthederivativeinstruments,therisk-freeinterestrate,andthevolatilityoftheCompany'sClassAcommonstock.TheCompanyhasnotpaidanddoesnotanticipatepayingcashdividendsonitssharesofcommonstockintheforeseeablefuture;therefore,theexpecteddividendyieldisassumedtobezero.ChangestotheseinputscouldmateriallyaffectthevaluationoftheConvertibleNoteHedgesandNoteHedgeWarrants.
ThefollowinginputswereusedinthefairmarketvaluationoftheConvertibleNoteHedgesandNoteHedgeWarrantsasofDecember31,2015:
TheConvertibleNoteHedgesandtheNoteHedgeWarrantsarerecordedatfairvalueateachreportingperiodandchangesinfairvaluearerecordedinotherexpense,netwithintheCompany'sconsolidatedstatementsofoperations.GainsandlossesforthesederivativefinancialinstrumentsarepresentedseparatelyintheCompany'sconsolidatedstatementsofcashflows.
F-41
ConvertibleNoteHedges
NoteHedgeWarrants
Risk-freeinterestrate(1) 2.0% 2.1%Timetomaturity 6.5 7.0Stockprice(2) $ 11.59 $ 11.59Strikeprice(3) $ 16.58 $ 21.50Commonstockvolatility(4) 45.0% 45.0%Dividendyield —% —%
(1) BasedonU.S.Treasuryyieldcurve,withtermscommensuratewiththetermsoftheConvertibleNoteHedgesandtheNoteHedgeWarrants.
(2) TheclosingpriceoftheCompany'sClassAcommonstockonthelasttradingdayoftheyearendedDecember31,2015.
(3) AspertherespectiveagreementsfortheConvertibleNoteHedgesandNoteHedgeWarrants.
(4) SelectedvolatilitybasedonhistoricalvolatilityandimpliedvolatilityoftheCompany'sClassAcommonstock.
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
5.FairValueofFinancialInstruments(Continued)
ThefollowingtablereflectsthechangeintheCompany'sLevel3convertiblenotederivativesfromtheirinitialvalueatissuancethroughDecember31,2015(inthousands):
11%PhaRMANotes
InJanuary2013,theCompanyclosedaprivateplacementof$175.0millioninaggregateprincipalamountofthePhaRMANotesdueonorbeforeJune15,2024.TheestimatedfairvalueofthePhaRMANoteswasapproximately$166.8millionandapproximately$182.5millionasofDecember31,2015andDecember31,2014,respectively,andwasdeterminedusingLevel3inputs,includingaquotedrate.
2.25%ConvertibleSeniorNotes
InJune2015,theCompanyissuedapproximately$335.7millionofits2022Notes.TheCompanyseparatelyaccountedfortheliabilityandequitycomponentsofthe2022Notesbyallocatingtheproceedsbetweentheliabilitycomponentandequitycomponent(Note10).Thefairvalueofthe2022Notes,whichdiffersfromtheircarryingvalue,isinfluencedbyinterestrates,thepriceoftheCompany'sClassAcommonstockandthevolatilitythereof,andthepricesforthe2022Notesobservedinmarkettrading,whichareLevel2inputs.Theestimatedfairvalueofthe2022NotesasofDecember31,2015wasapproximately$311.6million.
6.Available-for-SaleSecurities
Thefollowingtablessummarizetheavailable-for-salesecuritiesheldatDecember31,2015and2014(inthousands):
F-42
ConvertibleNoteHedges
NoteHedgeWarrants
BalanceatDecember31,2014 $ — $ —IssuanceofNoteHedgeWarrants — (70,849)PurchaseofConvertibleNoteHedges 91,915 —Changeinfairvalue,recordedasacomponentoflossonderivatives (5,449) (4,479)
BalanceatDecember31,2015 $ 86,466 $ (75,328)
Amortized
Cost
GrossUnrealized
Gains
GrossUnrealizedLosses
FairValue
December31,2015 U.S.Treasurysecurities $ 50,124 $ — $ (33) $ 50,091U.S.government-sponsoredsecurities 128,069 2 (55) 128,016
Total $ 178,193 $ 2 $ (88) $ 178,107
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
6.Available-for-SaleSecurities(Continued)
ThecontractualmaturitiesofallsecuritiesheldatDecember31,2015areoneyearorless.Therewere32and27available-for-salesecuritiesinanunrealizedlosspositionatDecember31,2015and2014,respectively,noneofwhichhadbeeninanunrealizedlosspositionformorethantwelvemonths.TheaggregatefairvalueofthesesecuritiesatDecember31,2015and2014wasapproximately$167.6millionandapproximately$101.9million,respectively.TheCompanyreviewsitsinvestmentsforother-than-temporaryimpairmentwheneverthefairvalueofaninvestmentislessthanamortizedcostandevidenceindicatesthataninvestment'scarryingamountisnotrecoverablewithinareasonableperiodoftime.Todeterminewhetheranimpairmentisother-than-temporary,theCompanyconsiderswhetherithastheabilityandintenttoholdtheinvestmentuntilamarketpricerecoveryandconsiderswhetherevidenceindicatingthecostoftheinvestmentisrecoverableoutweighsevidencetothecontrary.TheCompanydoesnotintendtoselltheinvestmentsanditisnotmorelikelythannotthattheCompanywillberequiredtoselltheinvestmentsbeforerecoveryoftheiramortizedcostbases,whichmaybematurity.TheCompanydidnotholdanysecuritieswithother-than-temporaryimpairmentatDecember31,2015.
Therewerenosalesofavailable-for-salesecuritiesduringtheyearsendedDecember31,2015,2014and2013.NetunrealizedholdinggainsorlossesfortheperiodthathavebeenincludedinaccumulatedothercomprehensiveincomewerenotmaterialtotheCompany'sconsolidatedresultsofoperations.
7.Inventory
Inventoryconsistedofthefollowing(inthousands):
InventoryrepresentslinaclotideAPIthatisavailableforcommercialsale.TheCompanyevaluatesinventorylevelsquarterlyandanyinventorythathasacostbasisinexcessofitsexpectednetrealizablevalue,inventorythatbecomesobsolete,inventoryinexcessofexpectedsalesrequirements,inventorythatfailstomeetcommercialsalespecificationsorisotherwiseimpairediswrittendownwithacorrespondingchargetothestatementofoperationsintheperiodthattheimpairmentisfirstidentified.
TheCompanyhasenteredintomultiplecommercialsupplyagreementsforthepurchaseoflinaclotideAPI.TwooftheCompany'sAPIsupplyagreementsforsupplyingAPItoitscollaborationpartnersoutsideofNorthAmericacontainminimumpurchasecommitments(Note11).PriortoOctober2015,theCompanywasalsoresponsibleforthemanufacturingoflinaclotideAPIforEurope.
F-43
Amortized
Cost
GrossUnrealized
Gains
GrossUnrealizedLosses
FairValue
December31,2014 U.S.Treasurysecurities $ 24,001 $ 4 $ — $ 24,005U.S.government-sponsoredsecurities 150,055 2 (25) 150,032
Total $ 174,056 $ 6 $ (25) $ 174,037
December31, 2015 2014 Rawmaterials $ — $ 4,954
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
7.Inventory(Continued)
AspartoftheCompany'snetrealizablevalueassessmentofitsinventory,theCompanyassesseswhetherithasanyexcessnon-cancelablepurchasecommitmentsresultingfromitsminimumsupplyagreementswithitssuppliersoflinaclotideAPI.
Thedeterminationofthenetrealizablevalueofinventoryandnon-cancelablepurchasecommitmentsisbasedondemandforecastsfromtheCompany'spartners,thatarereceivedquarterly,toprojectthenext24monthsofdemandandtheCompany'sinternalforecastforprojecteddemandinsubsequentyears.DuringthethreemonthsendedJune30,2015,Almirall,theCompany'sformerEuropeanpartner,reduceditsforecastedpurchasesoflinaclotideAPIforitsterritoryforthesubsequent18months.Inaddition,recentregulatorychangesmadebytheCFDAtothemarketingapprovalprocessinChinaresultedinapotentiallylengthenedapprovaltimelineforthecommercializationoflinaclotide.ThereduceddemandfromAlmirallandthepotentialextendedtimelineforcommercializationoflinaclotideinChinaresultedinlowerprojectedsalesoflinaclotideAPItotheCompany'spartnersinEuropeandChina.Asaresult,duringthethreemonthsendedJune30,2015,theCompanywrote-downthebalanceofitsinventoryofapproximately$5.0milliontozeroandaccruedapproximately$3.2millionforexcessnon-cancelableinventorypurchasecommitments.
InOctober2015,AlmiralltransferreditsexclusivelicensetodevelopandcommercializelinaclotideinEuropetoAllergan,andtheCompanyseparatelyenteredintoanamendmenttothelicenseagreementwithAllerganrelatingtothedevelopmentandcommercializationoflinaclotideinEurope.Pursuanttothetermsoftheamendment,AllerganassumedresponsibilityforthemanufacturingoflinaclotideAPIforEurope,aswellastheassociatedcosts(Note4).Upontheexecutionoftheamendmenttothelicenseagreement,theCompanyrecordedanincrementallossonnon-cancelableAPIpurchasecommitmentsofapproximately$6.9millionrelatedtooneoftheCompany'sAPIsupplyagreementscoveringthecommercialsupplyoflinaclotideAPIfortheEuropeanmarket.DuringthethreemonthsendedSeptember30,2015,theCompanyalsorecordedanincrementallossonnon-cancelableAPIpurchasecommitmentsrelatedtoin-processAPIbatches.AsofDecember31,2015,theCompanyhasevaluatedallremainingminimumpurchasecommitmentsunderitslinaclotideAPIsupplyagreementsthrough2023(Note11)andconcludedthattheapproximately$22.3millionofpurchasecommitmentsfromthesecondAPIsupplyagreementcoveringtheJapan,China,HongKongandMacaumarketsarerealizablebasedonthecurrentforecastsreceivedfromtheCompany'spartnersintheseterritoriesandtheCompany'sinternalforecasts.
DuringtheyearendedDecember31,2014,theCompanywrote-downapproximately$20.3millionininventorytoanestimatednetrealizablevalueofapproximately$5.0million.Thiswrite-downwasprimarilyattributabletoAlmirall'sreducedinventorydemandforecastsfortheEuropeanterritory,mainlyduetothesuspensionofcommercializationofCONSTELLAinGermanyandachallengingcommercialenvironmentthroughoutEurope.
Thewrite-downsofinventorytonetrealizablevalueandthelossonnon-cancelableinventorypurchasecommitmentsarerecordedasaseparatelineitemintheCompany'sconsolidatedstatementofoperations.AsofDecember31,2015,theaccrualforexcesspurchasecommitmentsisrecordedasapproximately$10.1millioninotherliabilitiesintheCompany'sconsolidatedbalancesheet.
F-44
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
8.PropertyandEquipment
Propertyandequipment,netconsistedofthefollowing(inthousands):
AsofDecember31,2015and2014,substantiallyalloftheCompany'smanufacturingequipmentwaslocatedintheUnitedKingdomatoneoftheCompany'scontractmanufacturers.AllotherpropertyandequipmentwerelocatedintheU.S.fortheperiodspresented.
TheCompanyhasenteredintocapitalleasesforcertaincomputers,vehiclesandofficeequipment(Note11).AsofDecember31,2015and2014,theCompanyhadapproximately$3.8millionandapproximately$5.5millionofassetsundercapitalleaseswithaccumulatedamortizationbalancesofapproximately$1.3millionandapproximately$2.0million,respectively.
Depreciationandamortizationexpenseofpropertyandequipment,includingamountsrecordedundercapitalleases,wasapproximately$11.6million,approximately$12.3millionandapproximately$11.7millionfortheyearsendedDecember31,2015,2014and2013,respectively.Inaddition,theCompanywrote-downapproximately$0.5millionofleaseholdimprovementassetsnotutilizedbytheCompanyunderthetermsofitssubleasesduringtheyearendedDecember31,2014.
9.AccruedExpenses
Accruedexpensesconsistedofthefollowing(inthousands):
F-45
December31, 2015 2014 Manufacturingequipment $ 3,748 $ 3,623Laboratoryequipment 13,681 15,126Computerandofficeequipment 3,596 5,185Furnitureandfixtures 2,062 2,093Software 12,715 13,921Constructioninprocess 375 1,457Leasedvehicles 3,039 4,472Leaseholdimprovements 38,465 36,928
77,681 82,805Lessaccumulateddepreciationandamortization (56,606) (52,979)
$ 21,075 $ 29,826
December31, 2015 2014 Salariesandbenefits $ 19,582 $ 16,582Professionalfees 507 574Accruedinterest 1,103 850Other 2,109 4,606
$ 23,301 $ 22,612
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
10.NotesPayable
2.25%ConvertibleSeniorNotesdue2022
InJune2015,theCompanyissuedapproximately$335.7millionaggregateprincipalamountofthe2022Notes.TheCompanyreceivednetproceedsofapproximately$324.0millionfromthesaleofthe2022Notes,afterdeductingfeesandexpensesofapproximately$11.7million.TheCompanyusedapproximately$21.1millionofthenetproceedsfromthesaleofthe2022NotestopaythenetcostoftheConvertibleNoteHedges(aftersuchcostwaspartiallyoffsetbytheproceedstotheCompanyfromthesaleoftheNoteHedgeWarrants),asdescribedbelow.
The2022Notesaregovernedbyanindenture(the"Indenture")betweentheCompanyandU.S.BankNationalAssociation,asthetrustee.The2022Notesareseniorunsecuredobligationsandbearcashinterestattheannualrateof2.25%,payableonJune15andDecember15ofeachyear,whichbeganonDecember15,2015.The2022NoteswillmatureonJune15,2022,unlessearlierconvertedorrepurchased.TheCompanymaysettleconversionsofthe2022Notesthroughpaymentordelivery,asthecasemaybe,ofcash,sharesofClassAcommonstockoftheCompanyoracombinationofcashandsharesofClassAcommonstock,attheCompany'soption(subjectto,andinaccordancewith,thesettlementprovisionsoftheIndenture).Theinitialconversionrateforthe2022Notesis60.3209sharesofClassAcommonstock(subjecttoadjustmentasprovidedforintheIndenture)per$1,000principalamountofthe2022Notes,whichisequaltoaninitialconversionpriceofapproximately$16.58pershareand20,249,665shares.Holdersofthe2022Notesmayconverttheir2022NotesattheiroptionatanytimepriortothecloseofbusinessonthebusinessdayimmediatelyprecedingDecember15,2021inmultiplesof$1,000principalamount,onlyunderthefollowingcircumstances:
• duringanycalendarquartercommencingafterthecalendarquarterendingonSeptember30,2015(andonlyduringsuchcalendarquarter),ifthelastreportedsalepriceoftheCompany'sClassAcommonstockforatleast20tradingdays(whetherornotconsecutive)duringaperiodof30consecutivetradingdaysendingonthelasttradingdayoftheimmediatelyprecedingcalendarquarterisgreaterthanorequalto130%oftheconversionpriceforthe2022Notesoneachapplicabletradingday;
• duringthefivebusinessdayperiodafteranyfiveconsecutivetradingdayperiod(the"measurementperiod")inwhichthe"tradingprice"(asdefinedintheIndenture)per$1,000principalamountofthe2022Notesforeachtradingdayofthemeasurementperiodwaslessthan98%oftheproductofthelastreportedsalepriceoftheCompany'sClassAcommonstockandtheconversionrateforthe2022Notesoneachsuchtradingday;or
• upontheoccurrenceofspecifiedcorporateeventsdescribedintheIndenture.
OnorafterDecember15,2021,untilthecloseofbusinessonthesecondscheduledtradingdayimmediatelyprecedingJune15,2022,holdersmayconverttheir2022Notes,inmultiplesof$1,000principalamount,attheoptionoftheholderregardlessoftheforegoingcircumstances.
Ifamake-wholefundamentalchange,asdescribedintheIndenture,occursandaholderelectstoconvertits2022Notesinconnectionwithsuchmake-wholefundamentalchange,suchholdermaybeentitledtoanincreaseintheconversionrateasdescribedintheIndenture.TheCompanymaynotredeemthe2022Notespriortothematuritydateandno"sinkingfund"isprovidedforbythe2022Notes,whichmeansthattheCompanyisnotrequiredtoperiodicallyredeemorretirethe2022Notes.UpontheoccurrenceofcertainfundamentalchangesinvolvingtheCompany,holdersofthe2022NotesmayrequiretheCompanytorepurchaseforcashallorpartoftheir2022Notesatarepurchaseprice
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
10.NotesPayable(Continued)
equalto100%oftheprincipalamountofthe2022Notestoberepurchased,plusaccruedandunpaidinterest.
TheIndenturedoesnotcontainanyfinancialcovenantsorrestricttheCompany'sabilitytorepurchasetheCompany'ssecurities,paydividendsormakerestrictedpaymentsintheeventofatransactionthatsubstantiallyincreasestheCompany'slevelofindebtedness.TheIndentureprovidesforcustomaryeventsofdefault.Inthecaseofaneventofdefaultwithrespecttothe2022Notesarisingfromspecifiedeventsofbankruptcyorinsolvency,alloutstanding2022Noteswillbecomedueandpayableimmediatelywithoutfurtheractionornotice.Ifanyothereventofdefaultwithrespecttothe2022NotesundertheIndentureoccursoriscontinuing,thetrusteeorholdersofatleast25%inaggregateprincipalamountofthethenoutstanding2022Notesmaydeclaretheprincipalamountofthe2022Notestobeimmediatelydueandpayable.Notwithstandingtheforegoing,theIndentureprovidesthat,upontheCompany'selection,andforupto180days,thesoleremedyforaneventofdefaultrelatingtocertainfailuresbytheCompanytocomplywithcertainreportingcovenantsintheIndentureconsistsexclusivelyoftherighttoreceiveadditionalinterestonthe2022Notes.
Inaccordancewithaccountingguidancefordebtwithconversionandotheroptions,theCompanyseparatelyaccountedfortheliabilityandequitycomponentsofthe2022Notesbyallocatingtheproceedsbetweentheliabilitycomponentandtheembeddedconversionoption,orequitycomponent,duetotheCompany'sabilitytosettlethe2022Notesincash,itsClassAcommonstock,oracombinationofcashandClassAcommonstockattheoptionoftheCompany.Thecarryingamountoftheliabilitycomponentwascalculatedbymeasuringthefairvalueofasimilarliabilitythatdoesnothaveanassociatedconvertiblefeature.TheallocationwasperformedinamannerthatreflectedtheCompany'snon-convertibledebtborrowingrateforsimilardebt.Theequitycomponentofthe2022Noteswasrecognizedasadebtdiscountandrepresentsthedifferencebetweenthegrossproceedsfromtheissuanceofthe2022Notesandthefairvalueoftheliabilityofthe2022Notesontheirrespectivedatesofissuance.Theexcessoftheprincipalamountoftheliabilitycomponentoveritscarryingamount,ordebtdiscount,isamortizedtointerestexpenseusingtheeffectiveinterestmethodoversevenyears,orthelifeofthe2022Notes.Theequitycomponentisnotremeasuredaslongasitcontinuestomeettheconditionsforequityclassification.
TheCompany'soutstandingConvertibleNotebalancesasofDecember31,2015consistedofthefollowing(inthousands):
Inconnectionwiththeissuanceofthe2022Notes,theCompanyincurredapproximately$11.7millionofdebtissuancecosts,whichprimarilyconsistedofinitialpurchasers'discountsandlegalandotherprofessionalfees.TheCompanyallocatedthesecoststotheliabilityandequitycomponentsbasedontheallocationoftheproceeds.Theportionofthesecostsallocatedtotheequitycomponentstotalingapproximately$4.0millionwererecordedasareductiontoadditionalpaid-incapital.Theportionofthesecostsallocatedtotheliabilitycomponentstotalingapproximately$7.7millionwere
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Principal $ 335,699Less:unamortizeddebtdiscount (107,636)Less:unamortizeddebtissuancecosts (7,443)Netcarryingamount $ 220,620Equitycomponent $ 114,199
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
10.NotesPayable(Continued)
recordedasareductioninthecarryingvalueofthedebtonthebalancesheetandareamortizedtointerestexpenseusingtheeffectiveinterestmethodovertheexpectedlifeofthe2022Notes.
TheCompanydeterminedtheexpectedlifeofthe2022Noteswasequaltotheirseven-yearterm.Theeffectiveinterestrateontheliabilitycomponentsofthe2022NotesfortheperiodfromthedateofissuancethroughDecember31,2015was9.34%.Thefollowingtablesetsforthtotalinterestexpenserecognizedrelatedtothe2022NotesduringtheyearendedDecember31,2015(inthousands):
Futureminimumpaymentsunderthe2022NotesasofDecember31,2015,areasfollows(inthousands):
ConvertibleNoteHedgeandWarrantTransactionswithRespectto2022Notes
TominimizetheimpactofpotentialdilutiontotheCompany'sClassAcommonstockholdersuponconversionofthe2022Notes,theCompanyenteredintotheConvertibleNoteHedgescovering20,249,665sharesoftheCompany'sClassAcommonstockinconnectionwiththeissuanceofthe2022Notes.TheConvertibleNoteHedgeshaveanexercisepriceofapproximately$16.58pershareandareexercisablewhenandifthe2022Notesareconverted.Ifuponconversionofthe2022Notes,thepriceoftheCompany'sClassAcommonstockisabovetheexercisepriceoftheConvertibleNoteHedges,thecounterpartiesareobligatedtodeliversharesoftheCompany'sClassAcommonstockand/orcashwithanaggregatevalueapproximatelyequaltothedifferencebetweenthepriceoftheCompany'sClassAcommonstockattheconversiondateandtheexerciseprice,multipliedbythenumberofsharesoftheCompany'sClassAcommonstockrelatedtotheConvertibleNoteHedgebeingexercised.
ConcurrentlywithenteringintotheConvertibleNoteHedges,theCompanyalsosoldNoteHedgeWarrantstotheConvertibleNoteHedgecounterpartiestoacquire20,249,665sharesoftheCompany'sClassAcommonstock,subjecttocustomaryanti-dilutionadjustments.ThestrikepriceoftheNote
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Contractualinterestexpense $ 4,069Amortizationofdebtissuancecosts 305Amortizationofdebtdiscount 6,563Totalinterestexpense $ 10,937
2016 $ 7,5532017 7,5532018 7,5532019 7,5532020 7,553Thereafter 347,030Totalfutureminimumpaymentsunderthe2022Notes 384,795Less:amountsrepresentinginterest (49,096)Less:unamortizeddebtdiscount (107,636)Less:unamortizeddebtissuancecosts (7,443)
Convertibleseniornotesbalance $ 220,620
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
10.NotesPayable(Continued)
HedgeWarrantsisinitially$21.50pershare,subjecttoadjustment,andsuchwarrantsareexercisableoverthe150tradingdayperiodbeginningonSeptember15,2022.TheNoteHedgeWarrantscouldhaveadilutiveeffectontheClassAcommonstocktotheextentthatthemarketpricepershareoftheCompany'sClassAcommonstockexceedstheapplicablestrikepriceofsuchwarrants.
TheConvertibleNoteHedgesandtheNoteHedgeWarrantsareseparatetransactionsenteredintobytheCompanyandarenotpartofthetermsofthe2022Notes.Holdersofthe2022NotesandtheNoteHedgeWarrantsdonothaveanyrightswithrespecttotheConvertibleNoteHedges.TheCompanypaidapproximately$91.9millionfortheConvertibleNoteHedgesandrecordedthisamountasalong-termassetontheconsolidatedbalancesheet.TheCompanyreceivedapproximately$70.8millionfortheNoteHedgeWarrantsandrecordedthisamountasalong-termliability,resultinginanetcosttotheCompanyofapproximately$21.1million.TheConvertibleNoteHedgesandNoteHedgeWarrantsareaccountedforasderivativeassetsandliabilities,respectively,inaccordancewithASC815(Note5).
11%PhaRMANotesdue2024
InJanuary2013,theCompanyclosedaprivateplacementof$175.0millioninaggregateprincipalamountofnotesdueonorbeforeJune15,2024.ThePhaRMANotesbearanannualinterestrateof11%,withinterestpayableMarch15,June15,September15andDecember15ofeachyear(eacha"PaymentDate")whichbeganonJune15,2013.OnMarch15,2014,theCompanybeganmakingquarterlypaymentsonthePhaRMANotesequaltothegreaterof(i)7.5%ofnetsalesofLINZESSintheU.S.fortheprecedingquarter(the"SyntheticRoyaltyAmount")and(ii)accruedandunpaidinterestonthePhaRMANotes(the"RequiredInterestAmount").PrincipalonthePhaRMANoteswillberepaidinanamountequaltotheSyntheticRoyaltyAmountminustheRequiredInterestAmount,whenthisisapositivenumber,untiltheprincipalhasbeenpaidinfull.GiventheprincipalpaymentsonthePhaRMANotesarebasedontheSyntheticRoyaltyAmount,whichwillvaryfromquartertoquarter,thePhaRMANotesmayberepaidpriortoJune15,2024,thefinallegalmaturitydate.TheCompanymadeprincipalpaymentsofapproximately$13.9millionthroughDecember31,2015,andexpectstopayapproximately$25.0millionoftheprincipalwithintwelvemonthsfollowingDecember31,2015.
ThePhaRMANotesaresecuredsolelybyasecurityinterestinasegregatedbankaccountestablishedtoreceivetherequiredquarterlypayments.UptotheamountoftherequiredquarterlypaymentsunderthePhaRMANotes,Allerganwilldeposititsquarterlyprofit(loss)sharingpaymentsduetotheCompanyunderthecollaborationagreementforNorthAmerica,ifany,intothesegregatedbankaccount.IfthefundsdepositedbyAllerganintothesegregatedbankaccountareinsufficienttomakearequiredpaymentofinterestorprincipalonaparticularPaymentDate,theCompanyisobligatedtodepositsuchshortfalloutoftheCompany'sgeneralfundsintothesegregatedbankaccount.
ThePhaRMANotesmayberedeemedatanytimepriortomaturity,inwholeorinpart,attheoptionoftheCompany.TheCompanywillpayaredemptionpriceequaltothepercentageofoutstandingprincipalbalanceofthePhaRMANotesbeingredeemedspecifiedbelowfortheperiodin
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
10.NotesPayable(Continued)
whichtheredemptionoccurs(plustheaccruedandunpaidinteresttotheredemptiondateonthePhaRMANotesbeingredeemed):
ThePhaRMANotescontaincertaincovenantsrelatedtotheCompany'sobligationswithrespecttothecommercializationofLINZESSandtherelatedcollaborationagreementwithAllerganforNorthAmerica,aswellascertaincustomarycovenants,includingcovenantsthatlimitorrestricttheCompany'sabilitytoincurcertainliens,mergeorconsolidateormakedispositionsofassets.ThePhaRMANotesalsospecifyanumberofeventsofdefault(someofwhicharesubjecttoapplicablecureperiods),including,amongotherthings,covenantdefaults,othernon-paymentdefaults,andbankruptcyandinsolvencydefaults.Upontheoccurrenceofaneventofdefault,subjecttocureperiodsincertaincircumstances,allamountsoutstandingmaybecomeimmediatelydueandpayable.
Theupfrontcashproceedsof$175.0million,lessadiscountofapproximately$0.4millionforpaymentoflegalfeesincurredonbehalfofthenoteholders,wererecordedasnotespayableatissuance.TheCompanyalsocapitalizedapproximately$7.3millionofdebtissuancecostsinconnectionwiththePhaRMANotes.DuringthethreemonthsendedJune30,2015,theCompanyearlyadoptedASU2015-03,whichrequiresdebtissuancecoststobepresentedinanentity'sbalancesheetasadirectdeductionfromtheassociateddebtliability(Note2).TheCompany'sadoptionofASU2015-03resultedinabalancesheetreclassificationofissuancecostsinconnectionwiththePhaRMANotesofapproximately$1.4millionofprepaidexpensesandothercurrentassetsandapproximately$2.8millionofotherassetstoareductioninPhaRMANotespayableasofDecember31,2014.ThePhaRMANotesissuancecostsanddiscountarebeingamortizedovertheestimatedtermoftheobligationusingtheeffectiveinterestmethod.TherepaymentprovisionsrepresentembeddedderivativesthatareclearlyandcloselyrelatedtothePhaRMANotesandassuchdonotrequireseparateaccountingtreatment.
TheaccountingforthePhaRMANotesrequirestheCompanytomakecertainestimatesandassumptionsaboutthefuturenetsalesofLINZESSintheU.S.LINZESShasbeenmarketedsinceDecember2012andtheestimatesofthemagnitudeandtimingofLINZESSnetsalesaresubjecttovariabilityandsignificantuncertainty.Theseestimatesandassumptionsarelikelytochange,whichmayresultinfutureadjustmentstotheportionofthePhaRMANotesthatisclassifiedasacurrentliability,theamortizationofdebtissuancecostsanddiscountsaswellastheaccretionoftheinterestexpense.AnysuchadjustmentscouldbematerialtotheCompany'sconsolidatedfinancialstatements.
11.CommitmentsandContingencies
Lease Commitments
TheCompanyleasesitsfacility,offsitedatastoragelocation,vehiclesandvariousequipmentunderleasesthatexpireatvaryingdatesthrough2018.Certainoftheseleasescontainrenewaloptions,andrequiretheCompanytopayoperatingcosts,includingpropertytaxes,insurance,maintenanceandotheroperatingexpenses.
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PaymentDates RedemptionPercentage
FromandincludingJanuary1,2015toandincludingDecember31,2015 105.50%FromandincludingJanuary1,2016toandincludingDecember31,2016 102.75%FromandincludingJanuary1,2017andthereafter 100.00%
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
11.CommitmentsandContingencies(Continued)
AsofDecember31,2015,theCompanyrentsofficeandlaboratoryspaceatitscorporateheadquartersinCambridge,Massachusettsunderanon-cancelableoperatinglease,enteredintoinJanuary2007,asamended("2007LeaseAgreement").The2007LeaseAgreementcontainsvariousprovisionsforrenewalattheCompany'soptionand,incertaincases,freerentperiodsandrentescalationtiedtotheConsumerPriceIndex.Therentexpense,inclusiveoftheescalatingrentpaymentsandfreerentperiods,isrecognizedonastraight-linebasisovertheleasetermthroughJanuary2018.TheCompanymaintainsaletterofcreditsecuringitsobligationsundertheleaseagreementofapproximately$7.6million,whichisrecordedasrestrictedcash.Inadditiontorentsdueunderthislease,theCompanyisobligatedtopayfacilitiescharges,includingutilitiesandtaxes.Inconnectionwiththe2007LeaseAgreement,theCompanywasprovidedallowancestotalingapproximately$22.9millionasreimbursementforfinancingcapitalimprovementstothefacility.Thereimbursementamountisrecordedasdeferredrentontheconsolidatedbalancesheetsandisbeingamortizedasareductiontorentexpenseovertheleaseterm,asapplicable.
DuringthethreemonthsendedSeptember30,2014,theCompanyenteredintoarrangements,withthelandlord'sconsent,tosubleaseaportionofitsCambridge,Massachusettscorporateheadquartersasitdidnotintendtousethespaceforitsoperations.Underthefirstsublease,theCompany'soperatingleaseobligationsthrough2018arepartiallyoffsetbyfuturesubleasepaymentstoitofapproximately$16.1million(ofwhichapproximately$5.0millionhasbeenreceivedthroughDecember31,2015)andunderthesecondsublease,theCompany'soperatingleaseobligationsthrough2016arepartiallyoffsetbyfuturesubleasepaymentstoitofapproximately$1.9million(ofwhichapproximately$1.1millionhasbeenreceivedthroughDecember31,2015).DuringtheyearendedDecember31,2014,theCompanyrecordedaggregatechargesofapproximately$2.6million,whichrepresentitsobligationstothelandlordassociatedwiththesubletspace,netofsubleaseincomeduetotheCompanyunderthesubleases,andapartialwrite-downofleaseholdimprovementassetsnotutilizedbytheCompanyunderthetermsofthesubleases.
In2013,theCompanyenteredinto36-monthcapitalleases(the"2013VehicleLeases")forthevehiclefleetforitsfield-basedsalesforceandmedicalscienceliaisons.The2013VehicleLeasesexpireatvarioustimesthroughSeptember2016.Inaccordancewiththetermsof2013VehicleLeases,theCompanymaintainsaletterofcreditsecuringitsobligationsundertheleaseagreementsof$0.5million,whichisrecordedasrestrictedcash.
InNovember2015,theCompanyenteredinto12-monthcapitalleases(the"2015VehicleLeases")forcertainvehicleswithinitsvehiclefleetforitsfield-basedsalesforceandmedicalscienceliaisons.The2015VehicleLeasesexpireatvaryingtimesbeginninginNovember2016.Inaccordancewiththetermsofthe2015VehicleLeases,theCompanymaintainsaletterofcreditsecuringitsobligationsundertheleaseagreementsof$0.6million,whichisrecordedasrestrictedcash.Inconnectionwithenteringintothe2015VehicleLeases,certainofthe2013VehicleLeaseswereterminatedasofDecember31,2015.AtDecember31,2015,theweightedaverageinterestrateontheoutstanding2015VehicleLeaseobligationswasapproximately3.3%andtheweightedaverageinterestrateontheoutstanding2013VehicleLeaseobligationswasapproximately7.7%.
TheCompanyhasalsoenteredintocapitalleasesforcertaincomputerandofficeequipment.ThesecapitalleasesexpireinApril2018.AtDecember31,2015,theweightedaverageinterestrateontheoutstandingcapitalleaseobligationswasapproximately14.5%.
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IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
11.CommitmentsandContingencies(Continued)
AtDecember31,2015,futureminimumleasepaymentsunderallnon-cancelableleasearrangementswereasfollows(inthousands):
Rentalexpense,netofsubleaseincomeofapproximately$5.3millionandapproximately$2.6million,undertheoperatingleasesamountedtoapproximately$6.3millionandapproximately$10.2millionfortheyearsendedDecember31,2015and2014,respectively.Rentalexpenseamountedtoapproximately$8.8millionfortheyearendedDecember31,2013.
Commercial Supply Commitments
TheCompanyhasenteredintomultiplecommercialsupplyagreementsforthepurchaseoflinaclotidefinisheddrugproductandAPI.TwooftheCompany'sAPIsupplyagreementsforsupplyingAPItoitscollaborationpartnersoutsideofNorthAmericacontainminimumpurchasecommitments.InJuly2015andAugust2015,theCompanyenteredintoamendmentstoitsagreementswithtwoofitssuppliersoflinaclotideAPI.OneamendmentreducedtheCompany'snon-cancelablepurchasecommitmentsandtheotherincreasedtheCompany'snon-cancelablepurchasecommitments,butextendedthetimeframeoverwhichtheCompanymustpurchasetheAPI.Theamendedcontractsincludetotalnon-cancelablecommercialsupplypurchaseobligationsofapproximately$34.9millionthrough2023.
DuringtheyearendedDecember31,2015,theCompanyrecognizedapproximately$10.1millionasanaccrualforexcesspurchasescommitmentsthatisrecordedinotherliabilitiesintheCompany'sconsolidatedbalancesheet(Note7).Paymentsundertheseaccruedexcesspurchasecommitmentsbeginin2017,andareapproximately$2.5millionineachoftheyears2017,2018,2019and2020.AsofDecember31,2015,theCompany'sunrecognizedminimumpurchaserequirementsandotherfirm
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OperatingLease
Payments
LeasePaymentstobeReceivedfromSubleases
NetOperatingLeasePayments
CapitalLease
Payments 2016 $ 15,617 $ (5,740) $ 9,878 $ 2,7562017 16,170 (5,665) 10,505 2532018 635 (476) 159 85Totalfutureminimumleasepayments $ 32,422 $ (11,881) $ 20,542 $ 3,094Less:amountsrepresentinginterest (157)
CapitalleaseobligationsatDecember31,2015 2,937Less:currentportionofcapitalleaseobligations (2,631)
CapitalleaseObligations,netofcurrentportion $ 306
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
11.CommitmentsandContingencies(Continued)
commitmentsrelatedtothesupplycontractsassociatedwiththeterritoriesnotcoveredbythepartnershipswithAllerganforNorthAmericawereasfollows(inthousands):
Inaddition,theCompanyandAllerganarejointlyobligatedtomakeminimumpurchasesoflinaclotideAPIfortheterritoriescoveredbytheCompany'scollaborationwithAllerganforNorthAmerica.Currently,Allerganfulfillsallsuchminimumpurchasecommitmentsand,asaresult,theyareexcludedfromtheamountsabove.
Commitments Related to the Collaboration and License Agreements
UnderthecollaborativeagreementswithAllerganforNorthAmericaandAstraZenecaforChina,HongKongandMacau,respectively,theCompanyshareswithAllerganandAstraZenecaalldevelopmentandcommercializationcostsrelatedtolinaclotideintheU.S.andforChina,HongKongandMacau,respectively.TheactualamountsthattheCompanypaysitspartnersorthatpartnerspaytotheCompanywilldependonnumerousfactorsoutsideoftheCompany'scontrol,includingthesuccessofcertainclinicaldevelopmenteffortswithrespecttolinaclotide,thecontentandtimingofdecisionsmadebytheregulators,thereimbursementandcompetitivelandscapearoundlinaclotideandtheCompany'sotherproductcandidates,andotherfactors.
Inaddition,theCompanyhascommitmentstomakepotentialfuturemilestonepaymentstothirdpartiesundercertainofitslicenseandcollaborationarrangements.Thesemilestonesprimarilyincludethecommencementandresultsofclinicaltrials,obtainingregulatoryapprovalinvariousjurisdictionsandthefuturecommercialsuccessofdevelopmentprograms,theoutcomeandtimingofwhicharedifficulttopredictandsubjecttosignificantuncertainty.Inadditiontothemilestonesdiscussedabove,theCompanyisobligatedtopayroyaltiesonfuturesales,whicharecontingentongeneratinglevelsofsalesoffutureproductsthathavenotbeenachievedandmayneverbeachieved.
TheseagreementsaremorefullydescribedinNote4,Collaboration,LicenseandCo-promotionAgreements,totheseconsolidatedfinancialstatements.
Other Funding Commitments
AsofDecember31,2015,theCompanyhasseveralon-goingstudiesinvariousclinicaltrialstages.TheCompany'smostsignificantclinicaltrialexpendituresaretocontractresearchorganizations("CRO").ThecontractswithCROsgenerallyarecancellable,withnotice,attheCompany'soptionanddonothaveanysignificantcancellationpenalties.
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2016 $ 2,2592017 2,2592018 2,3222019 3,0962020 3,096Thereafter 9,288Totalunrecognizedminimumpurchaserequirements $ 22,320
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
11.CommitmentsandContingencies(Continued)
Guarantees
AspermittedunderDelawarelaw,theCompanyindemnifiesitsofficersanddirectorsforcertaineventsoroccurrenceswhiletheofficerordirectoris,orwas,servingattheCompany'srequestinsuchcapacity.ThemaximumpotentialamountoffuturepaymentstheCompanycouldberequiredtomakeisunlimited;however,theCompanyhasdirectors'andofficers'insurancecoveragethatisintendedtolimititsexposureandenableittorecoveraportionofanyfutureamountspaid.
TheCompanyentersintocertainagreementswithotherpartiesintheordinarycourseofbusinessthatcontainindemnificationprovisions.Thesetypicallyincludeagreementswithdirectorsandofficers,businesspartners,contractors,landlords,clinicalsitesandcustomers.Undertheseprovisions,theCompanygenerallyindemnifiesandholdsharmlesstheindemnifiedpartyforlossessufferedorincurredbytheindemnifiedpartyasaresultoftheCompany'sactivities.Theseindemnificationprovisionsgenerallysurviveterminationoftheunderlyingagreements.ThemaximumpotentialamountoffuturepaymentstheCompanycouldberequiredtomakeundertheseindemnificationprovisionsisunlimited.However,todatetheCompanyhasnotincurredmaterialcoststodefendlawsuitsorsettleclaimsrelatedtotheseindemnificationprovisions.Asaresult,theestimatedfairvalueoftheseobligationsisminimal.Accordingly,theCompanyhadnoliabilitiesrecordedfortheseobligationsasofDecember31,2015and2014.
Litigation
Fromtimetotime,theCompanyisinvolvedinvariouslegalproceedingsandclaims,eitherassertedorunasserted,whichariseintheordinarycourseofbusiness.Whiletheoutcomeoftheseotherclaimscannotbepredictedwithcertainty,managementdoesnotbelievethattheoutcomeofanyoftheseongoinglegalmatters,individuallyandinaggregate,willhaveamaterialadverseeffectontheCompany'sconsolidatedfinancialstatements.
12.Stockholders'Equity
PreferredStock
TheCompany'spreferredstockmaybeissuedfromtimetotimeinoneormoreseries,witheachsuchseriestoconsistofsuchnumberofsharesandtohavesuchtermsasadoptedbytheboardofdirectors.Authorityisgiventotheboardofdirectorstodetermineandfixsuchvotingpowers,fullorlimited,ornovotingpowers,andsuchdesignations,preferencesandrelativeparticipating,optionalorotherspecialrights,andqualifications,limitationorrestrictionsthereof,includingwithoutlimitation,dividendrights,conversionrights,redemptionprivilegesandliquidationpreferences.
CommonStock
TheCompanyhasdesignatedtwoseriesofcommonstock,SeriesAcommonstock("ClassACommonStock")andSeriesBcommonstock("ClassBCommonStock").AllsharesofcommonstockthatwereoutstandingimmediatelypriortoAugust2008wereconvertedintosharesofClassBCommonStock.TheholdersofClassACommonStockandClassBCommonStockvotetogetherasasingleclass.ClassACommonStockisentitledtoonevotepershare.ClassBCommonStockisalsoentitledtoonevotepersharewiththefollowingexceptions:(1)afterthecompletionofaninitialpublicoffering("IPO")oftheCompany'sstock,theholdersoftheClassBCommonStockareentitledtoten
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TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
12.Stockholders'Equity(Continued)
votespershareifthematterisanadoptionofanagreementofmergerorconsolidation,anadoptionofaresolutionwithrespecttothesale,lease,orexchangeoftheCompany'sassetsoranadoptionofdissolutionorliquidationoftheCompany,and(2)ClassBcommonstockholdersareentitledtotenvotespershareonanymatterifanyindividual,entity,orgroupseekstoobtainorhasobtainedbeneficialownershipof30%ormoreoftheCompany'soutstandingsharesofcommonstock.ClassBCommonStockcanbesoldatanytimeandirrevocablyconvertstoClassACommonStock,onaone-for-onebasis,uponsaleortransfer.TheClassBCommonStockisalsoentitledtoaseparateclassvotefortheissuanceofadditionalsharesofClassBCommonStock(exceptpursuanttodividends,splitsorconvertiblesecurities),oranyamendment,alterationorrepealofanyprovisionoftheCompany'scharter.AllClassBCommonStockwillautomaticallyconvertintoClassACommonStockupontheearliestof:
• thelaterof(1)thefirstdateonwhichthenumberofsharesofClassBCommonStockthenoutstandingislessthan19,561,556whichrepresents25%ofthenumberofsharesofClassBCommonStockoutstandingimmediatelyfollowingthecompletionoftheCompany'sIPOor(2)December31,2018;
• December31,2038;or
• adateagreedtoinwritingbyamajorityoftheholdersoftheClassBCommonStock.
TheCompanyhasreservedsuchnumberofsharesofClassACommonStockasthereareoutstandingsharesofClassBCommonStocksolelyforthepurposeofeffectingtheconversionoftheClassBCommonStock.
TheholdersofsharesofClassACommonStockandClassBCommonStockareentitledtodividendsifandwhendeclaredbytheboardofdirectors.Intheeventthatdividendsarepaidintheformofcommonstockorrightstoacquirecommonstock,theholdersofsharesofClassACommonStockshallreceiveClassACommonStockorrightstoacquireClassACommonStockandtheholdersofsharesofClassBCommonStockshallreceiveClassBCommonStockorrightstoacquireClassBCommonStock,asapplicable.
Intheeventofavoluntaryorinvoluntaryliquidation,dissolution,distributionofassets,orwindingupoftheCompany,theholdersofsharesofClassACommonStockandtheholdersofsharesofClassBCommonStockareentitledtoshareequally,onapersharebasis,inallassetsoftheCompanyofwhateverkindavailablefordistributiontotheholdersofcommonstock.
TheCompanyhasreserved,outofitsauthorizedbutunissuedsharesofClassACommonStock,sufficientsharestoaffecttheconversionofthe2022NotesandtheNoteHedgeWarrants,pursuanttothetermsthereof(Note10).
Duringthesecondquarterof2013,theCompanysold11,204,948sharesofitsClassACommonStockthroughafirmcommitment,underwrittenpublicofferingatapricetothepublicof$13.00pershare.Asaresultofthisoffering,theCompanyreceivedaggregatenetproceeds,afterunderwritingdiscountsandcommissionsandotherofferingexpenses,ofapproximately$137.8million.
Inthefirstquarterof2014,theCompanysold15,784,325sharesofitsClassACommonStockthroughafirmcommitment,underwrittenpublicofferingatapricetothepublicof$12.75pershare.Asaresultofthisoffering,theCompanyreceivedaggregatenetproceeds,afterunderwritingdiscountsandcommissionsandotherofferingexpenses,ofapproximately$190.4million.
F-55
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
13.StockBenefitPlans
Thefollowingtablesummarizestheexpenserecognizedforshare-basedcompensationarrangementsintheconsolidatedstatementsofoperations(inthousands):
Share-basedcompensationisreflectedintheconsolidatedstatementsofoperationsasfollowsfortheyearsendedDecember31,2015,2014and2013(inthousands):
OnNovember4,2014,theCompanyagreedtoacceleratethevestingofallofaformerexecutiveofficer'soutstandingunvestedstockoptionsontheexecutiveofficer'sdeparturedateofDecember31,2014,andtoallowtheexerciseofvestedstockoptionsforuptotwoyearssubsequenttothedeparturedate,oruntiltheirexpiration,whicheverisearlier.Theseequitymodificationsresultedinanincrementalchargeofapproximately$2.3million,whichwasrecordedwithinselling,generalandadministrativeexpensesduringtheyearendedDecember31,2014.
StockBenefitPlans
TheCompanyhastwoshare-basedcompensationplanspursuanttowhichawardsarecurrentlybeingmade:theAmendedandRestated2010Employee,DirectorandConsultantEquityIncentivePlan("2010EquityPlan")andtheAmendedandRestated2010EmployeeStockPurchasePlan("2010PurchasePlan").TheCompanyalsohastwoshare-basedcompensationplansunderwhichthereareoutstandingawards,butfromwhichnofurtherawardswillbemade:theAmendedandRestated2005StockIncentivePlan("2005EquityPlan")andtheAmendedandRestated2002StockIncentivePlan("2002EquityPlan").AtDecember31,2015,therewere13,486,020sharesavailableforfuturegrantunderallsuchplans.
2010EquityPlan
During2010,theCompany'sstockholdersapprovedthe2010EquityPlanunderwhichstockoptions,restrictedstockawards,RSUs,andotherstock-basedawardsmaybegrantedtoemployees,
F-56
YearsEndedDecember31, 2015 2014 2013 Employeestockoptions $ 20,668 $ 19,373 $ 17,981Restrictedstockunits 1,536 — —Restrictedstockawards 2,408 2,671 552Non-employeestockoptions — 2,618 271Employeestockpurchaseplan 833 941 995Workforcereduction — 551 —Stockaward 24 30 30
$ 25,469 $ 26,184 $ 19,829
YearsEndedDecember31, 2015 2014 2013 Researchanddevelopment $ 10,065 $ 9,482 $ 9,178Selling,generalandadministrative 15,404 16,702 10,651
$ 25,469 $ 26,184 $ 19,829
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
13.StockBenefitPlans(Continued)
officers,directors,orconsultantsoftheCompany.Therewere6,000,000sharesofcommonstockinitiallyreservedforissuanceunderthe2010EquityPlan.Thenumberofsharesavailableforfuturegrantmaybeincreasedonthefirstdayofeachfiscalyearbyanamountequaltothelesserof:(i)6,600,000;(ii)4%ofthenumberofoutstandingsharesofcommonstockonthefirstdayofeachfiscalyear;and(iii)anamountdeterminedbytheboardofdirectors.AwardsthatarereturnedtotheCompany'sotherequityplansasaresultoftheirexpiration,cancellation,terminationorrepurchaseareautomaticallymadeavailableforissuanceunderthe2010EquityPlan.AtDecember31,2015,therewere11,410,963sharesavailableforfuturegrantunderthe2010EquityPlan.
2010PurchasePlan
During2010,theCompany'sstockholdersapprovedthe2010PurchasePlan,whichgiveseligibleemployeestherighttopurchasesharesofcommonstockatthelowerof85%ofthefairmarketvalueonthefirstorlastdayofanofferingperiod.Eachofferingperiodissixmonths.Therewere400,000sharesofcommonstockinitiallyreservedforissuancepursuanttothe2010PurchasePlan.Thenumberofsharesavailableforfuturegrantunderthe2010PurchasePlanmaybeincreasedonthefirstdayofeachfiscalyearbyanamountequaltothelesserof:(i)1,000,000shares,(ii)1%oftheClassAsharesofcommonstockoutstandingonthelastdayoftheimmediatelyprecedingfiscalyear,or(iii)suchlessernumberofsharesasisdeterminedbytheboardofdirectors.AtDecember31,2015,therewere2,075,057sharesavailableforfuturegrantunderthe2010PurchasePlan.
2005EquityPlanand2002EquityPlan
The2005EquityPlanand2002EquityPlanprovidedforthegrantingofstockoptions,restrictedstockawards,RSUs,andothershare-basedawardstoemployees,officers,directors,consultants,oradvisorsoftheCompany.AtDecember31,2015,therewerenosharesavailableforfuturegrantunderthe2005EquityPlanorthe2002EquityPlan.
RestrictedStockAwards
In2015,theCompanygrantedanaggregateof151,604sharesofClassACommonStocktoindependentmembersoftheboardofdirectorsunderrestrictedstockagreementsinaccordancewiththetermsofthe2010EquityPlanandtheCompany'sdirectorcompensationplan,effectiveinJanuary2014.ThesesharesofrestrictedstockvestratablyovertheperiodofservicefromtheCompany's2015annualmeetingofstockholdersthroughtheCompany's2016annualmeetingofstockholders,providedtheindividualcontinuestoserveontheCompany'sboardofdirectorsthrougheachvestdate.
In2014,theCompanygrantedanaggregateof288,606sharesofcommonstocktoindependentmembersoftheboardofdirectorsunderrestrictedstockagreementsinaccordancewiththetermsofthe2010EquityPlanandtheCompany'sdirectorcompensationplan,effectiveinJanuary2014.ThesesharesofrestrictedstockvestedratablyovertheperiodofservicefromJanuary2014throughtheCompany's2015annualmeetingofstockholders,providedtheindividualcontinuedtoserveontheCompany'sboardofdirectorsthrougheachvestdate.
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TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
13.StockBenefitPlans(Continued)
AsummaryoftheunvestedsharesofrestrictedstockasofDecember31,2015ispresentedbelow:
RestrictedStockUnits
In2015,theCompanybeganutilizingRSUs,inadditiontostockoptionsaspartoftheequitycompensationitprovidestoitsemployees,eachRSUrepresentingtherighttoreceiveoneshareoftheCompany'sClassACommonStockpursuanttothetermsoftheapplicableawardagreementandgrantedpursuanttothetermsoftheCompany's2010EquityPlan.TheRSUsgenerallyvest25%peryearontheapproximateanniversaryofthedateofgrantuntilfullyvested,providedtheemployeeremainscontinuouslyemployedwiththeCompanythrougheachvestingdate.SharesoftheCompany'sClassACommonStockaredeliveredtotheemployeeuponvesting,subjecttopaymentofapplicablewithholdingtaxes.ThefairvalueofallRSUsisbasedonthemarketvalueoftheCompany'sClassACommonStockonthedateofgrant.Compensationexpense,includingtheeffectofestimatedforfeitures,isrecognizedovertheapplicableserviceperiod.
AsummaryofRSUactivityfortheyearendedDecember31,2015isasfollows:
StockOptions
StockoptionsgrantedundertheCompany'sequityplansgenerallyhaveaten-yeartermandvestoveraperiodoffouryears,providedtheindividualcontinuestoserveattheCompanythroughthevestingdates.Optionsgrantedunderallequityplansareexercisableatapricepersharenotlessthanthefairmarketvalueoftheunderlyingcommonstockonthedateofgrant.Theestimatedfairvalueofoptions,includingtheeffectofestimatedforfeitures,isrecognizedovertherequisiteserviceperiod,whichistypicallythevestingperiodofeachoption.
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NumberofShares
Weighted-Average
GrantDateFairValue
UnvestedasofDecember31,2014 98,890 $ 13.77Granted 151,604 $ 14.16Vested (175,992) $ 13.95Forfeited — $ —
UnvestedasofDecember31,2015 74,502 $ 14.14
NumberofShares
Weighted-Average
GrantDateFairValue
UnvestedasofDecember31,2014 — $ —Granted 936,414 $ 13.44Vested — $ —Forfeited (36,363) $ 15.46
UnvestedasofDecember31,2015 900,051 $ 13.36
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
13.StockBenefitPlans(Continued)
TheweightedaverageassumptionsusedtoestimatethefairvalueofthestockoptionsusingtheBlack-Scholesoption-pricingmodelwereasfollowsfortheyearsendedDecember31,2015,2014and2013:
PriortoFebruary3,2010,theCompanywasnotpubliclytradedandthereforehadnotradinghistory.Therefore,theCompanyhasbeenusingablendedvolatilityratethatblendsitsownhistoricalvolatilitywiththatofcomparablepubliccompanies.Forpurposesofidentifyingcomparablecompanies,theCompanyselectedpublicly-tradedcompaniesthatareinthebiopharmaceuticalindustry,haveproductsorproductcandidatesinsimilartherapeuticareasandstagesofnonclinicalandclinicaldevelopment,havesufficienttradinghistorytoderiveahistoricvolatilityrateandhavesimilarvestingtermsastheCompany'soptions.Beginningin2014,theCompanyestimatestheexpectedtermusinghistoricaldata.Therisk-freeinterestrateusedforeachgrantisbasedonazero-couponU.S.Treasuryinstrumentwitharemainingtermsimilartotheexpectedtermoftheshare-basedaward.TheCompanyhasnotpaidanddoesnotanticipatepayingcashdividendsonitssharesofcommonstockintheforeseeablefuture;therefore,theexpecteddividendyieldisassumedtobezero.
Theweighted-averagegrantdatefairvaluepershareofoptionsgrantedduringtheyearsendedDecember31,2015,2014and2013was$6.73,$6.47and$5.96,respectively.
TheCompany'sClassBCommonStockisissuableuponexerciseofoptionsgrantedpriortotheclosingoftheCompany'sIPOunderthe2002EquityPlanandthe2005EquityPlan,anditsClassACommonStockisissuableuponexerciseofalloptionsgrantedaftertheclosingoftheCompany'sIPOundertheCompany'sequityplans.AtDecember31,2015,optionsexercisableinto4,554,128sharesofClassBCommonStockand16,012,732sharesofClassACommonStockwereoutstanding.
Subjecttoapprovalbytheboardofdirectors,optiongranteesunderthe2002EquityPlanandthe2005EquityPlanmayhavetherighttoexerciseanoptionpriortovesting.Theexerciseofthesesharesisnotsubstantiveandasaresult,thecashpaidfortheexercisepricesisconsideredadepositorprepaymentoftheexercisepriceandisrecordedasaliability.AmountsreceivedupontheexerciseoftheseshareswerenotmaterialtotheconsolidatedfinancialstatementsatDecember31,2015and2014.
TheCompany,fromtimetotime,issuescertaintime-acceleratedstockoptionstocertainemployees.Thevestingoftheseoptionsacceleratesupontheachievementofcertainperformance-basedmilestones.Ifthesecriteriaarenotmet,suchoptionswillvestbetweensixandtenyearsafterthedateofgrant.DuringtheyearendedDecember31,2015,nosharesvestedasaresultofmilestoneorserviceperiodachievements.AtDecember31,2015and2014,therewere400,000sharesissuableunderunvestedtime-acceleratedoptions.Whenachievementofthemilestoneisnotdeemedprobable,theCompanyrecognizescompensationexpenseassociatedwithtime-acceleratedstockoptionsinitiallyoverthevestingperiodoftherespectivestockoption.Whendeemedprobableofachievement,theCompanyexpensestheremainingunrecognizedcompensationovertheimplicitserviceperiod.The
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YearsEndedDecember31,
2015 2014 2013 Expectedvolatility 46.1% 46.8% 46.3%Expectedterm(inyears) 6.04 6.10 6.50Risk-freeinterestrate 1.7% 1.8% 1.6%Expecteddividendyield —% —% —%
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
13.StockBenefitPlans(Continued)
Companyrecordedshare-basedcompensationrelatedtothesetime-acceleratedoptionsofaninsignificantamount,$1.2million,andaninsignificantamountduringtheyearsendedDecember31,2015,2014and2013,respectively.
TheCompanyalsograntstocertainemployeesperformance-basedoptionstopurchasesharesofcommonstock.Theseoptionsaresubjecttoperformance-basedmilestonevesting.DuringtheyearendedDecember31,2015,nosharesvestedasaresultofperformancemilestoneachievements.TheCompanyrecordedshare-basedcompensationrelatedtotheseperformance-basedoptionsofapproximately$0.2million,approximately$0.5million,andaninsignificantamount,respectively,duringtheyearsendedDecember31,2015,2014and2013.
ThefollowingtablesummarizesstockoptionactivityundertheCompany'sshare-basedcompensationplans,includingperformance-basedoptions:
ThetotalintrinsicvalueofoptionsexercisedduringtheyearsendedDecember31,2015,2014and2013wasapproximately$17.7million,$26.9millionandapproximately$19.7million,respectively.TheintrinsicvaluewascalculatedasthedifferencebetweenthefairvalueoftheCompany'scommonstockandtheexercisepriceoftheoptionissued.
F-60
SharesofCommonStockAttributabletoOptions
Weighted-AverageExercisePrice
Weighted-Average
ContractualLife
AggregateIntrinsicValue
(inyears) (inthousands) OutstandingatDecember31,2014 19,957,773 $ 10.07 6.00 $ 104,897Granted 3,518,950 $ 14.69 Exercised (2,005,330) $ 5.49 Cancelled (904,533) $ 13.13
OutstandingatDecember31,2015 20,566,860 $ 11.18 5.90 $ 38,279VestedorexpectedtovestatDecember31,2015 19,137,709 $ 11.11 5.78 $ 36,239ExercisableatDecember31,2015(1) 12,669,438 $ 10.35 4.82 $ 29,953
(1) Allstockoptionsgrantedunderthe2002EquityPlanandthe2005EquityPlancontainprovisionsallowingfortheearlyexerciseofsuchoptionsintorestrictedstock.TheexercisablesharesdisclosedaboverepresentthosethatwerevestedasofDecember31,2015.
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
13.StockBenefitPlans(Continued)
ThefollowingtablesetsforththeCompany'sunrecognizedshare-basedcompensationexpense,netofestimatedforfeitures,asofDecember31,2015,bytypeofawardandtheweighted-averageperiodoverwhichthatexpenseisexpectedtoberecognized:
Thetotalunrecognizedshare-basedcompensationcostwillbeadjustedforfuturechangesinestimatedforfeitures.
14.IncomeTaxes
Ingeneral,theCompanyhasnotrecordedaprovisionforfederalorstateincometaxesasithashadcumulativenetoperatinglossessinceinception.
AreconciliationofincometaxescomputedusingtheU.S.federalstatutoryratetothatreflectedinoperationsfollows(inthousands):
F-61
UnrecognizedExpense,NetofEstimatedForfeitures
Weighted-AverageRemainingRecognition
Period (inthousands) (inyears) Typeofaward: Stockoptionswithtime-basedvesting $ 31,254 2.60Restrictedstockawards 892 0.42Restrictedstockunits 7,768 3.46Time-acceleratedstockoptions(1) 71 —Performance-basedoptions(1) 3,655 —
(1) Theweighted-averageremainingrecognitionperiodcannotbedeterminedforperformance-basedortime-acceleratedoptionsduetothenatureofsuchawards,asdetailedabove.
YearsEndedDecember31, 2015 2014 2013 IncometaxbenefitusingU.S.federalstatutoryrate $ (48,507) $ (64,470) $ (92,756)Permanentdifferences 688 1,916 1,413Stateincometaxes,netoffederalbenefit (4,826) (5,632) (13,684)Stock-basedcompensation 3,824 3,584 3,830FairmarketvaluationofNoteHedgeWarrantsandConvertibleNoteHedges 3,711 — —Taxcredits (1,987) (2,652) (5,089)Expiringnetoperatinglossesandtaxcredits 194 3,590 —Effectofchangeinstatetaxrateondeferredtaxassetsanddeferredtaxliabilities (627) 5,490 1,057Changeinthevaluationallowance 47,587 58,185 105,186Other (57) (11) 43
$ — $ — $ —
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
14.IncomeTaxes(Continued)
ComponentsoftheCompany'sdeferredtaxassetsandliabilitiesareasfollows(inthousands):
ManagementoftheCompanyhasevaluatedthepositiveandnegativeevidencebearingupontherealizabilityofitsdeferredtaxassets.ManagementhasconsideredtheCompany'shistoryofoperatinglossesandconcluded,inaccordancewiththeapplicableaccountingstandards,thatitismorelikelythannotthattheCompanymaynotrealizethebenefitofitsdeferredtaxassets.Accordingly,thedeferredtaxassetshavebeenfullyreservedatDecember31,2015and2014.Managementreevaluatesthepositiveandnegativeevidenceonaquarterlybasis.
Thevaluationallowanceincreasedapproximately$40.7millionduringtheyearendedDecember31,2015,dueprimarilytoanincreaseintheCompany'staxcreditcarryforwards,capitalizedresearchanddevelopmentexpensesandshare-basedcompensationexpense.Additionally,thechangeinvaluationallowancenotedinthetableabovereflectstheimpactofadeferredtaxliabilitybeingrecordedthroughadditionalpaid-incapitalofapproximately$6.9millionfortheestablishmentofbasisdifferencesonthe2022Notes.Thevaluationallowanceincreasedapproximately$58.7millionduringtheyearendedDecember31,2014,dueprimarilytotheincreaseinthenetoperatinglosscarryforwardsandtaxcredits.
Subjecttothelimitationsdescribedbelow,atDecember31,2015and2014,theCompanyhasnetoperatinglosscarryforwardsofapproximately$857.9millionandapproximately$745.6million,respectively,tooffsetfuturefederaltaxableincome,whichexpirebeginningin2018continuingthrough2035.Thefederalnetoperatinglosscarryforwardsexcludeapproximately$61.6millionofdeductionsrelatedtotheexerciseofstockoptions.Thisamountrepresentsanexcesstaxbenefitandhasnotbeenincludedinthegrossdeferredtaxassetreflectedfornetoperatinglosses.Thisamountwillberecordedasanincreaseinadditionalpaidincapitalontheconsolidatedbalancesheetoncetheexcessbenefitsare"realized"inaccordancewithASC718,Compensation—StockCompensation("ASC718").AsofDecember31,2015and2014,theCompanyhadstatenetoperatinglosscarryforwardsofapproximately$566.7millionandapproximately$517.4million,respectively,tooffsetfuturestatetaxableincome,whichhavebeguntoexpireandwillcontinuetoexpirethrough2035.TheCompanyalsohadtaxcredit
F-62
YearsEndedDecember31, 2015 2014 Deferredtaxassets: Netoperatinglosscarryforwards $ 280,191 $ 279,123Taxcreditcarryforwards 33,996 32,186Capitalizedresearchanddevelopment 30,064 6,826Deferredrevenue 3,360 4,220Other 66,450 45,135
Totaldeferredtaxassets 414,061 367,490Deferredtaxliabilities: Basisdifferenceon2022Notes (5,877) —
Totaldeferredtaxliabilities (5,877) —Netdeferredtaxasset 408,184 367,490Valuationallowance (408,184) (367,490)
Netdeferredtaxasset $ — $ —
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
14.IncomeTaxes(Continued)
carryforwardsofapproximately$37.1millionandapproximately$35.1millionasofDecember31,2015and2014,respectively,tooffsetfuturefederalandstateincometaxes,whichexpireatvarioustimesthrough2035.
UtilizationofnetoperatinglosscarryforwardsandresearchanddevelopmentcreditcarryforwardsmaybesubjecttoasubstantialannuallimitationduetoownershipchangelimitationsthatcouldoccurinthefutureinaccordancewithSection382oftheInternalRevenueCodeof1986("IRCSection382")andwithSection383oftheInternalRevenueCodeof1986,aswellassimilarstateprovisions.Theseownershipchangesmaylimittheamountofnetoperatinglosscarryforwardsandresearchanddevelopmentcreditcarryforwardsthatcanbeutilizedannuallytooffsetfuturetaxableincomeandtaxes,respectively.Ingeneral,anownershipchange,asdefinedbyIRCSection382,resultsfromtransactionsincreasingtheownershipofcertainstockholdersorpublicgroupsinthestockofacorporationbymorethan50percentagepointsoverathree-yearperiod.TheCompanyhascompletedseveralfinancingssinceitsinceptionwhichmayresultinachangeincontrolasdefinedbyIRCSection382,orcouldresultinachangeincontrolinthefuture.
ThefollowingtablesummarizesthechangesintheCompany'sunrecognizedincometaxbenefitsfortheyearendedDecember31,2015(inthousands):
TheCompanyhadgrossunrecognizedtaxbenefitsofapproximately$17.6millionasofDecember31,2015.TheCompanydidnothaveanyunrecognizedtaxbenefitsasofDecember31,2014and2013.Oftheapproximately$17.6millionoftotalunrecognizedtaxbenefitsatDecember31,2015,noneoftheunrecognizedtaxpositionswould,ifrecognized,affecttheCompany'seffectivetaxrate,asthisitemonlyimpactstheCompany'sdeferredtaxaccounting.
TheCompanywillrecognizeinterestandpenalties,ifany,relatedtouncertaintaxpositionsinincometaxexpense.AsofDecember31,2015,2014and2013,theCompanyhadnoaccruedinterestorpenaltiesrelatedtouncertaintaxpositionsandnoamountshavebeenrecognizedintheCompany'sconsolidatedstatementsofoperations.
ThestatuteoflimitationsforassessmentbytheInternalRevenueService("IRS")andstatetaxauthoritiesisopenfortaxyearsendedDecember31,2014,2013,and2012,althoughcarryforwardattributesthatweregeneratedpriortotaxyear2012maystillbeadjusteduponexaminationbytheIRSorstatetaxauthoritiesiftheyeitherhavebeen,orwillbe,usedinafutureperiod.Therearecurrentlynofederalorstateincometaxauditsinprogress.
F-63
BalanceatJanuary1,2015 $ —Increasesbasedontaxpositionsrelatedtothecurrentperiod 17,614Increasesfortaxpositionsrelatedtopriorperiods 10,174Decreasesfortaxpositionsinpriorperiods (10,174)Decreasesforstatuteoflimitationexpiration —Decreasesforsettlementoftaxaudits —
BalanceatDecember31,2015 $ 17,614
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
15.DefinedContributionPlan
TheIronwoodPharmaceuticals,Inc.401(k)SavingsPlanisadefinedcontributionplanintheformofaqualified401(k)planinwhichsubstantiallyallemployeesareeligibletoparticipateuponemployment.SubjecttocertainIRSlimits,eligibleemployeesmayelecttocontributefrom1%to100%oftheircompensation.CompanycontributionstotheplanareatthesolediscretionoftheCompany'sboardofdirectors.Currently,theCompanyprovidesamatchingcontributionof75%oftheemployee'scontributions,upto$6,000annually.DuringtheyearsendedDecember31,2015,2014and2013,theCompanyrecordedapproximately$2.5million,approximately$2.6million,andapproximately$2.8millionofexpenserelatedtoits401(k)companymatch,respectively.
16.RelatedPartyTransactions
InSeptember2009,AllerganbecamearelatedpartywhentheCompanysoldtoAllergan2,083,333sharesoftheCompany'sconvertiblepreferredstock.InNovember2009,AlmirallbecamearelatedpartywhentheCompanysoldtoAlmirall681,819sharesoftheCompany'sconvertiblepreferredstock(Note4).ThesesharesofpreferredstockconvertedtotheCompany'sClassBcommonstockona1:1basisuponthecompletionoftheCompany'sIPOinFebruary2010.AmountsduetoandduefromAllerganandAlmirallarereflectedasrelatedpartyaccountspayableandrelatedpartyaccountsreceivable,respectively.Thesebalancesarereportednetofanybalancesduetoorfromtherelatedparty.AtDecember31,2015,theCompanydidnothaveanyrelatedpartyaccountsreceivableassociatedwithAlmirall,andapproximately$51.6millioninrelatedpartyaccountsreceivable,netofrelatedpartyaccountspayable,associatedwithAllergan.AtDecember31,2014,theCompanydidnothaveanyrelatedpartyaccountsreceivableassociatedwithAlmirallandapproximately$25.8millioninrelatedpartyaccountsreceivable,netofrelatedpartyaccountspayable,associatedwithAllergan.
17.StateGrants
IntheyearsendedDecember31,2012and2011,theCompanywasawardedanapproximately$1.7millionandapproximately$0.9milliontaxincentive,respectively,associatedwiththeLifeSciencesTaxIncentiveProgramfromtheMassachusettsLifeSciencesCenter.Theprogramwasestablishedin2008inordertoincentivizelifesciencescompaniestocreatenewsustainedjobsinMassachusetts.Jobsmustbemaintainedforatleastfiveyears,duringwhichtimethegrantproceedscanberecoveredbytheMassachusettsDepartmentofRevenue("DOR")iftheCompanydoesnotmeetandmaintainitsjobcreationcommitments.Theawardreceivedin2011wasrecognizedasotherincomeintheconsolidatedstatementofoperationsinthethirdquarterof2011,astheCompanybelievedithadsatisfieditsjobcreationcommitments.Fortheapproximately$1.7millioninfundsreceivedin2012,theCompanybelievedithadsatisfieditsjobcreationcommitmentsfortheyears2012and2013andrecognizedapproximately$0.7millionasotherincomeintheconsolidatedstatementofoperationsfortheyearendedDecember31,2014.Theremainingapproximately$1.0millionwasrecordedasothercurrentliabilitiesatDecember31,2014andwasreturnedtotheDORduringtheyearendedDecember31,2015,astheCompanydidnotsatisfythejobcreationcommitmentsundertheaward.
18.WorkforceReduction
OnJanuary8,2014,theCompanyannouncedaheadcountreductionofapproximately10%toalignitsworkforcewithitsstrategy.Thefield-basedsalesforceandmedicalscienceliaisonteamwereexcludedfromtheworkforcereduction.
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TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
18.WorkforceReduction(Continued)
DuringthethreemonthsendedMarch31,2014,theCompanysubstantiallycompletedtheimplementationofthisreductioninworkforceand,inaccordancewithASC420,ExitorDisposalCostObligations,recordedapproximately$4.3millionofcosts,includingemployeeseverance,benefitsandrelatedcosts.ThesecostswerereflectedintheConsolidatedStatementofOperationsasapproximately$3.0millioninresearchanddevelopmentexpensesandapproximately$1.2millioninselling,generalandadministrativeexpenses.TheCompanydidnotrecordanyadditionalchargesassociatedwiththisworkforcereductionduringtheyearsendedDecember31,2015and2014.Allpaymentsrelatedtothisreductioninworkforceweremadebytheendof2014.
19.SelectedQuarterlyFinancialData(Unaudited)
ThefollowingtablecontainsquarterlyfinancialinformationfortheyearsendedDecember31,2015and2014.TheCompanybelievesthatthefollowinginformationreflectsallnormalrecurringadjustmentsnecessaryforafairpresentationoftheinformationfortheperiodspresented.Theoperatingresultsforanyquarterarenotnecessarilyindicativeofresultsforanyfutureperiod.
F-65
First
Quarter SecondQuarter
ThirdQuarter
FourthQuarter TotalYear
(inthousands,exceptpersharedata) 2015 Collaborativearrangementsrevenue $ 28,932 $ 27,744 $ 39,572 $ 53,307 $ 149,555Totalcostandexpenses(1) 56,999 69,753 65,757 59,134 251,643Other(expense)income,net(2) (5,155) (6,011) (21,205) (8,210) (40,581)Netloss (33,222) (48,020) (47,390) (14,037) (142,669)Netlosspershare—basicanddiluted $ (0.24) $ (0.34) $ (0.33) $ (0.09) $ (1.00)
First
Quarter SecondQuarter
ThirdQuarter
FourthQuarter TotalYear
(inthousands,exceptpersharedata) 2014 Collaborativearrangementsrevenue(3) $ 14,605 $ 6,840 $ 16,918 $ 38,073 $ 76,436Totalcostandexpenses(4) 58,992 61,959 53,657 71,198 245,806Other(expense)income,net (5,239) (5,238) (5,249) (4,522) (20,248)Netloss (49,626) (60,357) (41,988) (37,647) (189,618)Netlosspershare—basicanddiluted $ (0.38) $ (0.44) $ (0.30) $ (0.27) $ (1.39)
(1) TotalcostsandexpensesforthesecondandthirdquarteroftheyearendedDecember31,2015includesapproximately$8.2millionand$9.4million,respectively,relatedtoawritedownofinventorytonetrealizablevalueandaccrualsforexcessnon-cancelableinventorypurchasecommitments(Note7).
(2) Other(expense)income,netforthesecondandthirdquartersoftheyearendedDecember31,2015includesapproximately$0.2millionand$11.4million,respectively,asalossonderivatives.Other(expense)income,netforthefourthquarteroftheyearendedDecember31,2015includesapproximately$1.6million,asagainonderivatives.Thegain(loss)onderivativesconsistsofthechangeinfairvalueoftheCompany'sConvertibleNoteHedgesandNoteHedgeWarrants,whicharerecordedasderivativeassetsandliabilities.TheConvertibleNoteHedgesandtheNoteHedge
TableofContents
IronwoodPharmaceuticals,Inc.
NotestoConsolidatedFinancialStatements(Continued)
19.SelectedQuarterlyFinancialData(Unaudited)(Continued)
F-66
WarrantsarerecordedatfairvalueateachreportingperiodandchangesinfairvaluearerecordedintheCompany'sconsolidatedstatementsofoperations(Note5).
(3) CollaborativearrangementsrevenueforthefourthquarteroftheyearendedDecember31,2014includesapproximately$10.2millionrelatedtothereceiptofamilestonepaymentundertheCompany'slicenseagreementwithAstellasfortheenrollmentofthefirststudysubjectinaPhaseIIIstudyforlinaclotideinJapan,whichwasachievedinNovember2014(Note4).
(4) TotalcostsandexpensesforthesecondandfourthquarteroftheyearendedDecember31,2014includesapproximately$8.9millionand$11.4million,respectively,relatedtoawritedownofinventorytonetrealizablevalue(Note7).
TableofContents
ExhibitIndex
IncorporatedbyreferencehereinNumber Description Form Date
3.1 EleventhAmendedandRestatedCertificateofIncorporation AnnualReportonForm10-K(FileNo.001-34620)
March30,2010
3.2 FifthAmendedandRestatedBylaws AnnualReporton
Form10-K(FileNo.001-34620)
March30,2010
4.1 SpecimenClassAcommonstockcertificate Registration
StatementonFormS-1,asamended(FileNo.333-163275)
January20,2010
4.2 EighthAmendedandRestatedInvestors'RightsAgreement,datedasof
September1,2009,byandamongIronwoodPharmaceuticals,Inc.,theFoundersandtheInvestorsnamedtherein
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
November20,2009
4.3 Indenture,datedasofJanuary4,2013,byandbetweenIronwood
Pharmaceuticals,Inc.,asissueroftheNotes,andU.S.BankNationalAssociation,asinitialtrusteeoftheNotesandasOperatingBank(includingtheformoftheLinaclotidePhaRMASM11%Notesdue2024)
Form8-K(FileNo.001-34620)
January8,2013
4.4 Indenture,datedasofJune15,2015,byandbetweenIronwood
Pharmaceuticals,Inc.andU.S.BankNationalAssociation(includingtheformofthe2.25%ConvertibleSeniorNotedue2022)
Form8-K(FileNo.001-34620)
June15,2015
10.1# AmendedandRestated2002StockIncentivePlanandformagreements
thereunder RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
December23,2009
10.2# AmendedandRestated2005StockIncentivePlanandformagreements
thereunder RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
January29,2010
10.3# AmendedandRestated2010Employee,DirectorandConsultantEquity
IncentivePlan RegistrationStatementonFormS-8,asamended(FileNo.333-184396)
October12,2012
10.3.1# FormofStockOptionAgreementundertheAmendedandRestated2010
Employee,DirectorandConsultantEquityIncentivePlan AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.3.2# FormofNon-employeeDirectorRestrictedStockAgreementunderthe
AmendedandRestated2010Employee,DirectorandConsultantEquityIncentivePlan
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.3.3# FormofRestrictedStockUnitAgreementundertheAmendedand
Restated2010Employee,DirectorandConsultantEquityIncentivePlan AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
TableofContents
IncorporatedbyreferencehereinNumber Description Form Date
10.4# AmendedandRestated2010EmployeeStockPurchasePlan AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.5# ChangeofControlSeveranceBenefitPlan,asamendedand
restated QuarterlyReportonForm10-Q(FileNo.001-34620)
April29,2014
10.6# FormofExecutiveSeveranceAgreement AnnualReporton
Form10-K(FileNo.001-34620)
February18,2015
10.7# DirectorCompensationPlaneffectiveJanuary1,2014 AnnualReporton
Form10-K(FileNo.001-34620)
February7,2014
10.8# FormofIndemnificationAgreementwithDirectorsandOfficers RegistrationStatement
onFormS-1,asamended(FileNo.333-163275)
December23,2009
10.9# ConsultingAgreement,datedasofDecember16,2014,byand
betweenChristopherWalshandIronwoodPharmaceuticals,Inc. AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.10# ConsultingAgreement,datedDecember3,2014,byandbetween
LawrenceS.OlanoffandIronwoodPharmaceuticals,Inc. QuarterlyReportonForm10-Q(FileNo.001-34620)
May6,2015
10.11+ CollaborationAgreement,datedasofSeptember12,2007,as
amendedonNovember3,2009,byandbetweenForestLaboratories,Inc.andIronwoodPharmaceuticals,Inc.
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
February2,2010
10.11.1 AmendmentNo.2totheCollaborationAgreement,datedasof
January8,2013,byandbetweenForestLaboratories,Inc.andIronwoodPharmaceuticals,Inc.
AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.12+ LicenseAgreement,datedasofApril30,2009,byandbetween
AllerganPharmaceuticalsInternationalLtd.(formerlywithAlmirall,S.A.)andIronwoodPharmaceuticals,Inc.
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
February2,2010
10.12.1+ AmendmentNo.1toLicenseAgreement,datedasofJune11,
2013,byandbetweenAllerganPharmaceuticalsInternationalLtd.(formerlywithAlmirall,S.A.)andIronwoodPharmaceuticals,Inc.
QuarterlyReportonForm10-Q(FileNo.001-34620)
August8,2013
10.12.2++* AmendmenttotheLicenseAgreement,datedasofOctober26,
2015,byandbetweenAllerganPharmaceuticalsInternationalLtd.andIronwoodPharmaceuticals,Inc.
10.13++* NovationAgreement,datedasofOctober26,2015,byandamong
Almirall,S.A.,AllerganPharmaceuticalsInternationalLtd.andIronwoodPharmaceuticals,Inc.
TableofContents
IncorporatedbyreferencehereinNumber Description Form Date
10.14+ LicenseAgreement,datedasofNovember10,2009,byandamongAstellasPharmaInc.andIronwoodPharmaceuticals,Inc.
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
February2,2010
10.15+ CollaborationAgreement,datedasofOctober23,2012,byand
betweenAstraZenecaABandIronwoodPharmaceuticals,Inc. AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.16+ CommercialSupplyAgreement,datedasofJune23,2010,byand
amongPolyPeptideLaboratories,Inc.andPolypeptideLaboratories(SWEDEN)AB,ForestLaboratories,Inc.andIronwoodPharmaceuticals,Inc.
QuarterlyReportonForm10-Q(FileNo.001-34620)
August10,2010
10.17+ CommercialSupplyAgreement,datedasofMarch28,2011,byand
amongCordenPharmaColorado,Inc.(f/k/aRocheColoradoCorporation),IronwoodPharmaceuticals,Inc.andForestLaboratories,Inc.
QuarterlyReportonForm10-Q(FileNo.001-34620)
May13,2011
10.17.1+ AmendmentNo.3toCommercialSupplyAgreement,datedasof
November26,2013,byandbetweenCordenPharmaColorado,Inc.(f/k/aRocheColoradoCorporation),IronwoodPharmaceuticals,Inc.andForestLaboratories,Inc.
AnnualReportonForm10-K(FileNo.001-34620)
February7,2014
10.18 Leaseforfacilitiesat301BinneySt.,Cambridge,MA,datedasof
January12,2007,asamendedonApril9,2009,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
RegistrationStatementonFormS-1,asamended(FileNo.333-163275)
December23,2009
10.18.1 SecondAmendmenttoLeaseforfacilitiesat301BinneySt.,
Cambridge,MA,datedasofFebruary9,2010,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
March30,2010
10.18.2 ThirdAmendmenttoLeaseforfacilitiesat301BinneySt.,
Cambridge,MA,datedasofJuly1,2010,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
March30,2011
10.18.3 FourthAmendmenttoLeaseforfacilitiesat301BinneySt.,
Cambridge,MA,datedasofFebruary3,2011,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
March30,2011
10.18.4 FifthAmendmenttoLeaseforfacilitiesat301BinneySt.,
Cambridge,MA,datedasofOctober18,2011,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February29,2012
TableofContents
IncorporatedbyreferencehereinNumber Description Form Date
10.18.5 SixthAmendmenttoLeaseforfacilitiesat301BinneySt.,Cambridge,MA,datedasofJuly19,2012,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.18.6 SeventhAmendmenttoLeaseforfacilitiesat301BinneySt.,Cambridge,
MA,datedasofOctober30,2012,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February21,2013
10.18.7 EighthAmendmenttoLeaseforfacilitiesat301BinneySt.,Cambridge,
MA,datedasofJuly8,2014,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.18.8 NinthAmendmenttoLeaseforfacilitiesat301BinneySt.,Cambridge,
MA,datedasofOctober27,2014,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.18.9 TenthAmendmenttoLeaseforfacilitiesat301BinneySt.,Cambridge,
MA,datedasofJanuary21,2015,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.18.10 Sublease,datedasofJuly1,2014,byandbetweenBiogenIdecMAInc.
andIronwoodPharmaceuticals,Inc.toLeaseforfacilitiesat301BinneySt.,Cambridge,MA,asamended,byandbetweenIronwoodPharmaceuticals,Inc.andBMR-RogersStreetLLC
AnnualReportonForm10-K(FileNo.001-34620)
February18,2015
10.19 BaseCallOptionTransactionConfirmation,datedasofJune10,2015,
betweenIronwoodPharmaceuticals,Inc.andJPMorganChaseBank,NationalAssociation,LondonBranch
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.20 BaseCallOptionTransactionConfirmation,datedasofJune10,2015,
betweenIronwoodPharmaceuticals,Inc.andCreditSuisseCapitalLLC,throughitsagentCreditSuisseSecurities(USA)LLC
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.21 BaseWarrantsConfirmation,datedasofJune10,2015,betweenIronwood
Pharmaceuticals,Inc.andJPMorganChaseBank,NationalAssociation,LondonBranch
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.22 BaseWarrantsConfirmation,datedasofJune10,2015,betweenIronwood
Pharmaceuticals,Inc.andCreditSuisseCapitalLLC,throughitsagentCreditSuisseSecurities(USA)LLC
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.23 AdditionalCallOptionTransactionConfirmation,datedasofJune22,
2015,betweenIronwoodPharmaceuticals,Inc.andJPMorganChaseBank,NationalAssociation,LondonBranch
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
TableofContents
IncorporatedbyreferencehereinNumber Description Form Date
10.24 AdditionalCallOptionTransactionConfirmation,datedasofJune22,2015,betweenIronwoodPharmaceuticals,Inc.andCreditSuisseCapitalLLC,throughitsagentCreditSuisseSecurities(USA)LLC
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.25 AdditionalWarrantsConfirmation,datedasofJune22,2015,between
IronwoodPharmaceuticals,Inc.andJPMorganChaseBank,NationalAssociation,LondonBranch
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
10.26 AdditionalWarrantsConfirmation,datedasofJune22,2015,between
IronwoodPharmaceuticals,Inc.andCreditSuisseCapitalLLC,throughitsagentCreditSuisseSecurities(USA)LLC
QuarterlyReportonForm10-Q(FileNo.001-34620)
August7,2015
21.1* SubsidiariesofIronwoodPharmaceuticals,Inc. 23.1* ConsentofIndependentRegisteredPublicAccountingFirm 31.1* CertificationofChiefExecutiveOfficerpursuanttoRules13a-14or
15d-14oftheExchangeAct
31.2* CertificationofChiefFinancialOfficerpursuanttoRules13a-14or
15d-14oftheExchangeAct
32.1‡ CertificationofChiefExecutiveOfficerpursuanttoRules13a-14(b)or
15d-14(b)oftheExchangeActand18U.S.C.Section1350
32.2‡ CertificationofChiefFinancialOfficerpursuanttoRules13a-14(b)or
15d-14(b)oftheExchangeActand18U.S.C.Section1350
101.INS* XBRLInstanceDocument 101.SCH* XBRLTaxonomyExtensionSchemaDocument 101.CAL* XBRLTaxonomyExtensionCalculationLinkbaseDocument 101.LAB* XBRLTaxonomyExtensionLabelLinkbaseDatabase 101.PRE* XBRLTaxonomyExtensionPresentationLinkbaseDocument 101.DEF* XBRLTaxonomyExtensionDefinitionLinkbaseDocument
* Filedherewith.
‡ Furnishedherewith.
+ Confidentialtreatmentgrantedunder17C.F.R.§§200.80(b)(4)and230.406.Theconfidentialportionsofthisexhibithavebeenomittedandaremarkedaccordingly.TheconfidentialportionshavebeenprovidedseparatelytotheSECpursuanttotheconfidentialtreatmentrequest.
++ Confidentialtreatmentrequestedunder17C.F.R.§§200.80(b)(4)andRule24b-2.Theconfidentialportionsofthisexhibithavebeenomittedandaremarkedaccordingly.TheconfidentialportionshavebeenprovidedseparatelytotheSECpursuanttotheconfidentialtreatmentrequest.
# Managementcontractorcompensatoryplan,contract,orarrangement.
Exhibit 10.12.2
CONFIDENTIAL ExecutionVersion[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
AMENDMENT TO THE LICENSE AGREEMENTThisAmendmenttotheLicenseAgreement(the“Amendment”)ismadeasofOctober26,2015(the“AmendmentEffectiveDate”).Byandbetween,IRONWOOD PHARMACEUTICALS, INC. ,acompanyorganizedandexistingpursuanttotheLawsofDelaware,andhavingitsprincipalofficesat301BinneyStreet,Cambridge,MA02142,USA(hereinafter,referredtoas“Ironwood”)andALLERGAN PHARMACEUTICALS INTERNATIONAL LTD. ,acompanyregisteredinIreland,whoseregisteredofficeisatClonshaughBusiness&TechnologyPark,Coolock,Dublin,D17E400,Ireland(the“Partner”).WITNESSETHWHEREAS,Partner(astransfereefromAlmirall,S.A.,formerly,LaboratoriosAlmirall,S.A.(“Almirall”))andIronwoodarepartiestoaLicenseAgreement,datedApril30,2009,asamended(hereinafter,referredtoasthe“Agreement”),relatedtotheProduct(asdefinedintheAgreement).WHEREAS,Almirall,IronwoodandPartnerenteredintothatcertainNovationAgreementasofthedatehereof(the“NovationAgreement”),wherebyPartnerassumedcertainofAlmirall’sliabilitiesandobligationsandwasassignedcertainofAlmirall’srightsandbenefitsundertheAgreementinplaceofandtotheexclusionofAlmirall,ineachcase,asoftheEffectiveTime(asdefinedintheNovationAgreement)andonthetermsassetforthintheNovationAgreement.WHEREAS,thePartieshaveagreedtofurtheramendtheAgreementassetforthinthisAmendment.NOW,THEREFORE,thePartiesherebyagreeasfollows:ThisAmendmentshallbedeemedtotakeeffectimmediatelyfollowingtheEffectiveTime(asdefinedintheNovationAgreement)oftheNovationAgreement.Unlessotherwisestatedherein,allthedefinitionscontainedintheAgreementshallremainvalidandapplicabletothisAmendment.Article 1 — Definitions1.1.Sections1.26(DirectCosts),1.37(FullyAbsorbedCost),1.47(IndirectCosts)and1.115(TransferPrice)oftheAgreementareherebydeletedintheir
entiretyand
1
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
replacedwith“Reserved.”1.2.Section1.54(IronwoodKnow-How)oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
““IronwoodKnow-How”means(i)Know-HowIronwoodControlsasoftheEffectiveDate,includingKnow-HowthathasarisenorarisesundertheForestAgreement,orthatcomesintotheControlofIronwoodduringtheTerm(otherthanJointKnow-How)totheextentnecessaryorusefulintheTerritorytoDevelop,ManufactureorCommercializetheLicensedCompoundorProduct,includingwithoutlimitationanymethodofmakingtheLicensedCompoundorProduct,anycompositionorformulationoftheLicensedCompoundorProduct,oranymethodofusingoradministeringtheLicensedCompoundorProduct,and(ii)CollaborationKnow-How(otherthanJointKnow-How)thatisinvented,conceivedordevelopedbysolelyemployeesofIronwoodoritsAffiliates,orThirdPartiesactingonbehalfofIronwoodoritsAffiliates.”
1.3.ThepenultimatesentenceofSection1.69(NetSales)oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“NetSaleswillbedeterminedinaccordancewithGAAP.”Article 2 — Manufacturing and Supply2.1.Section2.1oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“LicensetoPartner.SubjecttothetermsandconditionsofthisAgreement,IronwoodherebygrantstoPartner,ontheEffectiveDate,anexclusivelicense,subjectonlytotherightsreservedtoIronwoodtotheextentnecessarytoperformitsobligationsorexerciseitsrightshereunder,withtherighttosublicenseasexpresslyprovidedinSection2.5,undertheIronwoodTechnologyandIronwood’sinterestintheJointTechnologyto(i)DeveloptheProductpursuanttotheDevelopmentPlan,(ii)CommercializetheProductintheFieldintheTerritoryand(iii)Manufacture(A)DevelopmentMaterials,(B)LicensedCompoundtobeincludedinaProductforCommercializationintheFieldintheTerritoryand(C)ProductforCommercializationintheFieldintheTerritory.Notwithstandingtheforegoing,IronwoodreservestherightundertheIronwoodTechnologytodevelopandmanufacturetheLicensedCompoundandProductinsideoroutsideoftheTerritory.”
2.2.ThefirstsentenceofSection2.4oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“RightofReference.IronwoodherebygrantstoPartnera“RightofReference,”asthattermisdefinedin21C.F.R.§314.3(b)andanyforeigncounterparttosuchregulationintheFieldintheTerritorytothedataincludedintheCollaborationTechnologytotheextentnecessaryorusefulto
2
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
Manufacture,DeveloporCommercializetheLicensedCompoundorProductsolelyforIBS-CorCC,andPartnerherebygrantstoIronwood(andIronwood’spartners)suchaRightofReferencetothedataincludedintheCollaborationTechnologytotheextentnecessaryorusefultoManufacture,DeveloporCommercializetheLicensedCompoundorProductintheFieldthroughouttheworldsolelyforIBS-CorCC,ineachcasesubjecttothetermsandconditionsofthisAgreement.”
2.3.Section3.3oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“ManufactureofProducts.Partnerwillberesponsible,atitssolecostandexpense,for(i)ManufactureofDevelopmentMaterialsinfinishedform,(ii)APIManufacturingand(iii)theManufactureofProductforCommercializationintheTerritory;provided,however,thatnothinginthisAgreementwillpreventPartnerfromcontractingwiththeThirdPartieslistedordescribedonSchedule3.3toperformanysuchManufacturingactivities.Partnerwillperform,andensurethattheThirdPartieslistedordescribedonSchedule3.3perform,allManufacturingactivitiesinaccordancewithGCP,GLPandGMP.”
2.4.TheattachedSchedule3.3isherebyappendedtotheAgreementasanewSchedule3.3.Article 3 — Royalties and Other Payments3.1.Section4.2oftheAgreementisherebyamendedbyaddingthefollowingimmediatelyfollowingSection4.2.6(andbeforethelastfourparagraphsofsuch
Section):
“4.2.7$[**]uponthefirsttimethatNetSalesachievedintheTerritory,inaggregate,exceedtheamountof€[**]inanyYear.”3.2.Section4.3.1oftheAgreementisherebydeletedinitsentiretyandreplacedwith“Reserved.”3.3.Section4.3.2oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“Royalty.PartnerwillpayIronwoodroyaltiesbasedontheaggregateannualNetSalesofProductssoldineachYearindicatedbyPartneroritsAffiliatesintheFieldintheTerritoryattheratessetforthinthetablebelowforsuchYear:
Year
Royalty Rate
2015-2017
[**]%
2018
[**]%
2019andthereafter
[**]% ”
3
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.3.4.Forclarity,theYear2015royaltyratesetforthinSection3.3hereofshallonlyapplytoaggregateNetSalesofProductssoldbyPartneroritsAffiliatesin
theFieldintheTerritoryonoraftertheAmendmentEffectiveDateandshallnotapplytoanyroyaltypaymentobligationsaccruedundertheAgreementpriortotheAmendmentEffectiveDate.AnysuchroyaltypaymentobligationsaccruedundertheAgreementpriortotheAmendmentEffectiveDateshallbesubjecttotheroyaltyratesunderSection4.3.2oftheAgreementineffectimmediatelypriortotheAmendmentEffectiveDate.
3.5.Section4.3.4(a)andSection4.3.4(b)oftheAgreementareherebydeletedintheirentiretyandreplacedwith“Reserved.”3.6.ThelastsentenceofSection4.3.4oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“InnoeventwillIronwoodbeobligatedto[**]paidpursuanttothisAgreement.”3.7.Section4.3.5oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“4.3.5CalculationofRoyaltiesatEndofYear.AttheendofeachYear,promptlyaftertheroyaltycalculationoftheroyaltyowedpursuanttoSection4.3.2forthefourthCalendarQuarteroftheprecedingYear,theroyaltiesowedtoIronwoodforsuchYear(the“AnnualRoyalties”)willbeequalto(i)[**](ii)[**].TheamountofroyaltiespaidwiththeQuarterlyReportprovidedpursuanttoSection4.4relatingtothefourthCalendarQuarterofeachYearwillbeequaltotheAnnualRoyaltiesforsuchYearlesstheroyaltiespaidforthefirstthreeCalendarQuartersofsuchYear.InnoeventwillIronwoodbeobligatedto[**]paidpursuanttothisAgreement.”
3.8.ThefirstsentenceofSection4.8oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“AllamountspayableandcalculationshereunderwillbeinUnitedStatesdollars.”Article 4 — Patent and Trademark Costs4.1.Section7.4.1oftheAgreementisherebyamendedbyappendingthefollowingtotheendofsuchsection:
“IrrespectiveofwhichPartyisresponsibleforpreparation,filing,prosecutingandmaintainingIronwoodPatentRightsandPartnerPatentRightspursuanttothisSection7.4.1,[**]thecostsforpreparation,filing,prosecutingandmaintainingIronwoodPatentRightsandPartnerPatentRightsintheTerritory.”
4
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.4.2.Section7.4.4oftheAgreementisherebyamendedbyappendingthefollowingtotheendofsuchsection:
“IrrespectiveofwhichPartyisresponsibleforobtaininganyPatentTermExtensionsorundertakinganyrelatedfilingsorotheractivitiespursuanttothisSection7.4.4,[**]thecostsofsuchfilingsandotheractivitiesintheTerritory.”
4.3.Section7.5.1oftheAgreementisherebyamendedbyappendingthefollowingtotheendofsuchsection:
“IrrespectiveofwhichPartyisresponsibleforfiling,prosecutingandmaintainingTrademarkspursuanttothisSection7.5.1,[**]thecostsforfiling,prosecutingandmaintainingsuchTrademarksintheTerritory.”
4.4.Section7.6.2oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“Enforcement.[**]willhavethefirstright(butnottheobligation),toenforce[**]underthisAgreementagainstsuchInfringement;provided,that(i)[**]willhavetherighttojoinsuchproceedingatanytimeatitsownexpense(subjecttotheprovisionsofSection7.6.3)andwilldosoatanytimeifitisdeemedtobeanecessarypartybythetribunalinwhichtheInfringementisbeingprosecuted,(ii)[**]willnot,without[**]’spriorwrittenconsent,takeanypositionwithrespectto,orcompromiseorsettle,anysuchInfringementinawaythatisreasonablylikelytoadverselyaffectthescope,validityorenforceabilityoftheapplicableTechnologyand(iii)[**]willadmittheinvalidityorunenforceabilityofanyCollaborationTechnologywhichCollaborationTechnologyisnecessaryorusefulintheTerritorytoManufacture,DeveloporCommercializetheLicensedCompoundorProductorotherTechnologyownedsolelybyorjointlywith[**]without[**]’spriorwrittenconsent.Intheevent[**]declinestoprosecutetheinfringingtechnologyortodefendsuchclaimwithin[**](orsuchshorterperiodasmayberequiredtocomplywithlegalorregulatorydeadlineswhichrelatetosuchinfringement)ofbecomingawarethereof,[**]willhavetherighttosoenforceordefend.IrrespectiveofwhichPartycontrolsanactionpursuanttothisSection,thePartieswillcollaborateinthechoiceofcounselwithrespecttosuchactionandthecommentsoftheotherPartywillnotbeunreasonablyrejectedwithrespecttostrategicdecisionsandtheirimplementationwithrespecttosuchaction.Infurtheranceoftheforegoing,thePartyresponsibleforanysuchactionwillkeeptheotherPartyreasonablyinformed,inpersonorbytelephone,regardingthestatusandcostsofsuchactionorproceedingpriortoandduringanysuchenforcement.NeitherPartywillsettleanysuchactionwithoutthewrittenconsentoftheotherParty,suchconsentnottobeunreasonablywithheld.NeitherPartywillincuranyliabilitytotheotherasaconsequenceofsuchlitigationoranyunfavorabledecisionresultingtherefrom,includinganydecisionholdinganyoftheIronwoodTechnology,
5
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
PartnerTechnology,orJointTechnologyinvalid,notinfringed,notmisappropriatedorunenforceable.”Article 5 — Non-CompeteSection5.2oftheAgreementisherebydeletedinitsentiretyandreplacedwiththefollowing:
“5.2Restrictions.
5.2.1During[**],withoutthepriorwrittenconsentoftheotherParty,neitherPartynorsuchParty’sAffiliateswill[**].Further,during[**],neither[**]will[**].
5.2.2During[**],withoutthepriorwrittenconsentof[**],neither[**]will[**].
5.2.3IntheeventthateitherPartyoranyofitsAffiliates[**].
5.2.4After[**],andsubjecttoSections5.2.2and5.2.3,ifeitherParty[**].
5.2.5Forpurposeshereof,(x)[**],and(y)[**].
Article 6 — AddressesInrecognitionofthenovationoftheAgreementbyAlmiralltoPartnerpursuanttotheNovationAgreement,theaddressandcontactinformationforserviceordeliveryofnoticesandothercommunicationstoPartnerundertheAgreement,setforthinSection10.5.2oftheAgreement,shallbereplacedbythefollowing:
“ForPartner:
Address: AllerganPharmaceuticalsInternationalLtd.
ClonshaughBusiness&TechnologyPark
Coolock
Dublin,D17E400
IrelandFax: (+1)862-261-7922Attention: ManagingDirector
Withacopyto:
Address: Allerganplc
MorrisCorporateCenterIII400InterpaceParkwayParsippany,NJ07054UnitedStates
6
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
Fax: (+1)862-261-7922Attention: ChiefLegalOfficer”
Article 7 — [**][**].Article 8 — Extent of the Present AmendmentThisAmendmentconstitutesanintegralpartoftheAgreement.ItisexpresslyunderstoodthatthetermsandconditionsoftheAgreementshallremainfullyenforceableexceptwheredirectlyandexpresslymodifiedbythisAmendment.
[RemainderofPageIntentionallyLeftBlank]
7
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.INWITNESSWHEREOF,thePartieshaveexecutedthisAmendmenttobeeffectiveasoftheAmendmentEffectiveDate.IRONWOODPHARMACEUTICALS,INC.
ALLERGANPHARMACEUTICALSINTERNATIONALLTD.
By: /s/ThomasGraney
By: /s/AlexNesbittName: ThomasGraney Name: AlexNesbittTitle: CFO Title: Director
[SignaturePagetotheAmendmenttoLicenseAgreement]
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
SCHEDULE 3.3
APPROVEDTHIRDPARTYMANUFACTURERS
(i)[**];and(ii)[**].
Exhibit 10.13
CONFIDENTIAL
ExecutionVersion[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
DATE: OCTOBER 26, 2015
NOVATION AGREEMENT
Among
ALMIRALL, S.A.
ALLERGAN PHARMACEUTICALS INTERNATIONAL LTD.
IRONWOOD PHARMACEUTICALS, INC.
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.THIS NOVATION AGREEMENT (the“Agreement” )ismadeonthe26thdayofOctober2015BETWEEN :(1)ALMIRALL,S.A.,aSpanishcompany,whoseregisteredofficeisatRondaGeneralMitre,151,08022Barcelona,Spain(the“Transferor” );(2)IRONWOODPHARMACEUTICALS,INC.,aDelawarecompany,whoseregisteredofficeisat301BinneyStreet,Cambridge,MA02142USA(the
“Licensor” );and(3)ALLERGANPHARMACEUTICALSINTERNATIONALLTD.,acompanyregisteredinIreland,whoseregisteredofficeisatClonshaughBusiness&
TechnologyPark,Coolock,Dublin,D17E400,Ireland(the“Transferee” )(togetherthe“Parties” andeacha“Party” ).RECITALS(A)TheTransferorandtheLicensorarepartiestotheTransferredContracts(definedbelow).(B)TheTransferorandtheTransfereearepartiestotheMainAgreement(definedbelow).(C)EachofthePartiesiswillingtoagreethattheTransfereewillassumecertainoftheTransferor’sliabilitiesandobligations,andenjoycertainofthe
Transferor’srightsandbenefits,undertheTransferredContractsinplaceofandtotheexclusionoftheTransferor,ineachcase,asoftheEffectiveTimeandontheothertermssetforthinandsubjecttothisAgreement.
IT IS AGREED asfollows:1. INTERPRETATION1.1CapitalizedtermsusedbutnotdefinedinthisAgreementshallhavethemeaninggiventothemintheLicenseAgreement.InthisAgreement,including
therecitals,thefollowingwordsandexpressionsshallhavethefollowingmeanings:
“Effective Time ”meansthedateofthisAgreementfirstabovewritten.
“Liabilities and Obligations ”meansallliabilitiesandobligations(andallclaimsarisingfromthem)whatsoever,wheneverandhowsoeverarisinginconnectionwiththeperformanceornon-performanceofaTransferredContractorRetainedContract,asapplicable,includingallindemnificationobligationspursuanttoaTransferredContractorRetainedContract,asapplicable(ineachcasewhetherknownorunknown,performedorunperformed,dischargedorundischarged,actual,accrued,future,contingent,orprospective,andwhetherarisingincontract,tortorotherwise).
“License Agreement ”meanstheLicenseAgreementdatedApril30,2009betweentheTransferorandtheLicensorregardingtheProductandLicensedCompound,asamendedorsupplementedby(a)[**],(b)[**],(c)[**],(d)[**],(e)anAmendmentdatedJune11,2013betweentheTransferorandtheLicensor,(f)[**],(g)[**]and(h)anAmendmentdatedFebruary26,2014betweentheTransferorandtheLicensor.
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[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
“Main Agreement ”meansthatcertainAgreementrelatingtoLinaclotidebetweentheTransferorandtheTransfereedatedasofOctober26,2015pursuanttowhichTransferorandTransfereehaveagreedtotransfersubstantiallyallrightsrelatingtoLinaclotidefromTransferortoTransferee,includingtheTransferredContractsassetforthinthisAgreement.
“Manufacturing and Supply Agreement ”meanstheManufacturingandSupplyAgreementdatedApril13,2010betweentheTransferorandtheLicensor,asamendedbyanAmendmentdatedJuly1,2013betweentheTransferorandtheLicensor.
“Pharmacovigilance Agreement ”meansthePharmacovigilanceAgreementdatedSeptember30,2010betweentheTransferorandtheLicensor,asamendedandrestatedbytheAmendedandRestatedPharmacovigilanceAgreementdatedJune11,2014betweentheTransferorandtheLicensor.
“Quality Agreements ”means(a)theQualityAgreementdatedAugust7,2009betweentheTransferorandtheLicensor,and(b)theQualityAgreementdatedMay7,2014betweentheTransferorandtheLicensor.
“Retained Contracts ”means[**].
“Rights ”meansallrightsandbenefits(andallclaimsarisingfromthem)whatsoever,wheneverandhowsoeverarisinginconnectionwiththeperformanceornon-performanceofaTransferredContractorRetainedContract,asapplicable,includingallindemnificationrightspursuanttoaTransferredContractorRetainedContract,asapplicable(ineachcasewhetherknownorunknown,actual,accrued,future,contingentorprospective,andwhetherarisingincontract,tortorotherwise).
“[**]”means[**].
“Transferred Contracts ”meanseachof(a)theLicenseAgreement[**].Fortheavoidanceofdoubt,theTransferredContractswillnotincludeanyRetainedContract.
1.2HeadingsareusedinthisAgreementforconvenienceonlyandshallnotaffectitsinterpretation.1.3InthisAgreement,unlessotherwisestatedorthecontextotherwiserequires,referencestoclauses,sub-clausesandschedulesare,respectively,to
clauses,sub-clausesandschedulesinortothisAgreement.1.4Unlessthecontextotherwiserequires,wordsdenotingthesingularshallincludethepluralandviceversaandreferencestoanygendershallincludeall
othergenders.Referencestoanypersonincludebodiescorporate,unincorporatedassociations,partnerships,governments,governmentalagenciesanddepartments,statutorybodiesorotherentities,ineachcasewhetherornothavingaseparatelegalpersonality.
1.5InthisAgreement,unlessotherwisestatedorthecontextotherwiserequires,referencestotheword“including”willbeconstruedas“includingwithout
limitation.”2. NOVATION OF TRANSFERRED CONTRACTS2.1WitheffectonandaftertheEffectiveTime:
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[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
2.1.1theLicensorshallreleasetheTransferorfromtheobservance,performanceanddischargeoftheLiabilitiesandObligationsarisingfromperformanceornon-performanceoftheTransferredContractsbyoronbehalfofTransfereeonandaftertheEffectiveTime(the“Post-Effective Time Liabilities and Obligations ”);
2.1.2theTransfereeshallbeentitledtotheRightsarisingfromtheTransferredContractsonandaftertheEffectiveTimethatwouldhavebeen
RightsofTransferorintheabsenceofthisAgreement(the“Post-Effective Time Rights ”)andinplaceofandtotheexclusionoftheTransferor;
2.1.3theTransfereeundertakesandcovenantsasaseparateobligationwitheachoftheTransferorandtheLicensortoassume,observe,perform,
dischargeandbeboundbythePost-EffectiveTimeLiabilitiesandObligationsarisingfromtheperformanceornon-performanceoftheTransferredContractsinplaceofandtotheexclusionoftheTransferor;
2.1.4eachoftheLicensorandtheTransferoracceptstheobservance,performanceanddischargeofthePost-EffectiveTimeLiabilitiesand
Obligationsarisingfromtheperformanceornon-performanceoftheTransferredContractsandtheacceptanceofthePost-EffectiveTimeRightsbytheTransfereeinplaceofandtotheexclusionoftheTransferor;
2.1.5eachoftheLicensorandTransferorherebyreleasestheTransfereefromtheobservance,performanceanddischargeoftheLiabilitiesand
Obligationsarisingfromperformanceornon-performanceoftheTransferredContractsbyoronbehalfofTransferorpriortotheEffectiveTime;
2.1.6TransferorherebyreleasesLicensorfromtheobservance,performanceanddischargeoftheLiabilitiesandObligationsarisingfrom
performanceornon-performanceoftheTransferredContractsbyoronbehalfofLicensoronoraftertheEffectiveTime;and
2.1.7TransfereeherebyreleasesLicensorfromtheobservance,performanceanddischargeoftheLiabilitiesandObligationsarisingfromperformanceornon-performanceoftheTransferredContractsbyoronbehalfofLicensorpriortotheEffectiveTime;
andtheTransferredContractsshallbereadandconstruedaccordingly.AsofandfollowingtheEffectiveTime,theterm“Partner,”“Almirall,”orotherdefinedtermsreferencingtheTransferorintheTransferredContractswillbedeemedtorefertotheTransferee.Forclarity,(a)neithertheLicensornortheTransferorreleasestheotherPartyfromtheobservance,performanceordischargeoftheLiabilitiesandObligations(i)thatarisefromperformanceornon-performanceoftheTransferredContractsbyoronbehalfoftheotherPartypriortotheEffectiveTime,and(ii)thatarisefromperformanceornon-performanceoftheRetainedContractsbyoronbehalfoftheotherPartyatanytime,and(b)LicensorandTransferorshallcontinuetobeentitledtotheRightsthatarisefrom(I)theTransferredContractspriortotheEffectiveTime,and(II)theRetainedContractsatanytime,inthecaseof(I)and(II),totheexclusionofTransferee.Further,forclarity,TransfereeisnotassumingandwillnotbeliableforanyLiabilitiesandObligationsarisingfromperformanceor
3
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
non-performanceof(x)theTransferredContractsbyoronbehalfofTransferorpriortotheEffectiveTimeor(y)theRetainedContractsbyoronbehalfoftheTransferorortheLicensoratanytime.
2.2(a)EachoftheLicensorandtheTransfereeseverallyundertakesandcovenantswiththeTransferorthatitshallreleasetheTransferorandnotmakeany
claim,counterclaim,demand,actionorproceeding(includingarbitration)ofanynaturewhatsoever,orseektoenforceanyrightorinterest,againsttheTransferor,withrespecttothePost-EffectiveTimeLiabilitiesandObligations,and(b)theTransferorundertakesandcovenantswiththeLicensorthatitshallreleasetheLicensorandnotmakeanyclaim,counterclaim,demand,actionorproceeding(includingarbitration)ofanynaturewhatsoever,orseektoenforceanyrightorinterest,againsttheLicensor,withrespecttotheLiabilitiesandObligationsarisingfromperformanceornon-performanceoftheTransferredContractsand/ortheexploitationofanyRight(includingtoTechnologyorotherintellectualproperty)undertheTransferredContracts,ineachcase,onoraftertheEffectiveTime.TransferorundertakesandcovenantswiththeTransfereethatitshallreleasetheTransfereeandnotmakeanyclaim,counterclaim,demand,actionorproceeding(includingarbitration)ofanynaturewhatsoever,orseektoenforceanyrightorinterest,againsttheTransferee,withrespecttothePost-EffectiveTimeLiabilitiesandObligations.
2.3AsoftheEffectiveTime,eachoftheTransfereeandtheLicensormakestotheothertherepresentationsandwarrantiessetforthin[**]oftheLicense
Agreement(withrespecttothisAgreementandeachTransferredContract).AsoftheEffectiveTime,theTransfereemakestotheLicensortherepresentationsandwarrantiesin[**]oftheLicenseAgreement,andtheLicensormakestotheTransfereetherepresentationsandwarrantiesin[**]oftheLicenseAgreement.EachoftheTransfereeandtheLicensoradditionallyherebyrepresents,warrantsandcovenantstotheotherthatitwillcomplywithApplicableLawinconnectionwithexercisingitsrightsandcomplyingwithitsobligationsundertheTransferredContractsfromandaftertheEffectiveTime.
2.4TheLicensorandtheTransferoreachrepresentsandwarrantstotheTransfereethatthedocumentsattachedheretoasExhibitAaretrue,correctand
completecopiesoftheTransferredContracts.2.5Clauses2.1and2.2aresubjectinallrespectstoclause3below.3. SURVIVAL OF OBLIGATIONS3.1Notwithstandingtheprovisionsofclause2:
3.1.1Subjecttotheremainderofthisclause3.1.1,theTransferorundertakestotheLicensor,andtheLicensorundertakestotheTransferor,thatitshallobserveandperformthedutiesofconfidentialityandnon-disclosureitwouldhaveowedtotheotherundertheTransferredContractsonoraftertheEffectiveTimeintheabsenceofthisAgreement,includingpursuanttoSection5.1(Confidentiality)oftheLicenseAgreement.TheTransferorandtheLicensormayeachdisclosetotheTransfereeinformationinitspossessionrelatingtothesubjectmatteroftheTransferredContractstotheextentitisreasonablyrequiredbytheTransfereeinordertoexercisethePost-EffectiveTimeRightsordischargethePost-EffectiveTimeLiabilitiesandObligationsassumedbytheTransfereeunderclause2.Additionally,unlessotherwiseagreedtoinwriting,theParties
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[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
agreetokeepconfidentialtheexistenceandcontentsofthisAgreement;provided,thattherestrictionsofthisclause3.1.1willnotprohibit(a)anyPartyfrommakinganydisclosurethatisrequiredbyapplicablelaw,ruleorregulation,ortherequirementsofanationalsecuritiesexchangeoranothersimilarregulatorybody,or(b)theLicensororTransfereefromdisclosingtheexistenceandcontentsofthisAgreementtoanyThirdPartysupplier,partnerorlicenseeoftheLicensedCompoundortheProduct,subjecttotherestrictionsofSection5.7(CommunicationswithotherLinaclotidePartners)oftheLicenseAgreementandtoconfidentialityobligationsnolessrestrictivethanthosesetforthinSection5.1(Confidentiality)oftheLicenseAgreement.
3.1.2[**]oftheLicenseAgreementwillcontinuetoapplyto[**]foraperiodof[**].
3.1.3[**]oftheLicenseAgreementwillcontinuetoapplyto[**]foraperiodof[**].
3.1.4[**]oftheLicenseAgreementwillcontinuetoapplyto[**]foraperiodof[**].
3.1.5[**]oftheLicenseAgreementwillcontinuetoapplyto[**]solongastheLicenseAgreementremainsineffect,andthereafterinaccordance
with[**]oftheLicenseAgreement.
3.1.6WithrespecttoanyTechnologyorotherintellectualpropertywhichtheTransferorlicensedrightstoLicensorpriortotheEffectiveTimepursuanttoanyTransferredContract,thelicenseofsuchrightspursuanttosuchTransferredContractwillremainineffectwithrespecttotheTransferoruntilownershipofsuchTechnologyorotherintellectualproperty(includingallrights,title,andintereststherein)istransferredtotheTransferee.Withoutlimitingthegeneralityoftheforegoing,[**]oftheLicenseAgreementwillremainineffectwithrespectto[**]until[**].
3.1.7Forclarity,paymentobligationsaccruedbytheTransferorunderanyTransferredContractpriortotheEffectiveTimewillremainthe
responsibilityoftheTransferor,andtheTransferorwillmakesuchpaymentsdirectlytotheLicensorinaccordancewiththeTransferredContracts.TheTransferorwillprovidetotheLicensorafinalreportrequiredbySection4.4oftheLicenseAgreementwithin45daysaftertheendoftheCalendarQuarterduringwhichtheEffectiveTimeoccurs.Fortheavoidanceofdoubt,theTransfereeshallalsohaveanobligationtoprovideareportwithrespecttotheperiodaftertheEffectiveTimepursuanttoSection4.4oftheLicenseAgreementatsuchtime.Withoutlimitingthegeneralityoftheforegoing,[**]oftheLicenseAgreementwillremainbindingandineffectbetweentheTransferorandtheLicensorwithrespecttoTransferor’sactivitiesandobligationspriortotheEffectiveTimeuntil[**],andinthecaseof[**]oftheLicenseAgreement,[**]followingtheYearinwhichtheEffectiveTimeoccurs.
4. GENERAL4.1EachParty,fromtimetotimeonbeingrequiredtodosobyanotherParty,shall[**]doorprocurethedoingofallsuchactsand/orexecuteorprocure
theexecutionofallsuchdocumentsinsuchform
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[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.asthePartywhichhasrequireditmayreasonablyconsidernecessaryforgivingfulleffecttothisAgreementandsecuringtothatPartythefullbenefitof
therights,powersandremediesconferreduponthatPartyinthisAgreement.Withoutlimitingthegeneralityoftheforegoing,theTransferorwill(a)transfertotheTransfereeownershipofallTechnologyandotherintellectualproperty(includingallrights,title,andintereststherein)withrespecttowhichtheTransferorlicensedrightstotheLicensorpriortotheEffectiveTimepursuanttoanyTransferredContract,(b)transfertotheTransfereeallRegulatorySubmissions,otherregulatoryfilingsandrelatedmaterialrelatingtotheTransferredContracts,and(c)transfertotheTransfereeownershipofanyotherasset,record,andagreement(includingallrights,title,andintereststherein)heldbytheTransferorthatisreasonablyrequiredfortheTransfereetoassume,observe,perform,dischargeandbeboundbythePost-EffectiveTimeLiabilitiesandObligations,orisotherwiseprimarilyrelatedtotheTransferredContracts.
4.2InaccordancewithSection10.8oftheLicenseAgreement,LicensorherebygivesitswrittenconsenttoTransfereetosubcontract(but,forclarity,notto
sublicense)toTransferorobligationsundertheLicenseAgreementpursuanttoandonthetermssetforthintheTransitionalServicesAgreementbetweenTransfereeandTransferordatedOctober26,2015(the“Transitional Services Agreement ”)andtheTransitionalTollManufacturingAgreementbetweenTransfereeandTransferordatedOctober26,2015(the“Transitional Toll Manufacturing Agreement ”),true,accurateandcompletecopiesofwhich(otherthanfortheredactionofthefinancialterms)havebeenprovidedtoLicensorpriortotheEffectiveTime.TotheextentthattheTransferorprovidesgoodsorservicesto,orconductsworkonbehalfof,theTransfereepursuanttotheTransitionalServicesAgreementorTransitionalTollManufacturingAgreementonoraftertheEffectiveTime,andsubjecttotherightsandobligationsofLicensorandTransfereeundertheTransferredContractswithrespectthereto:
4.2.1Transfereeshallensurethatthegoodsorservicesprovided,ortheperformanceofsuchwork,byTransferorshallbeconsistentwiththe
TransferredContracts;
4.2.2TransfereeshallpromptlynotifyLicensorof(a)anyclaimofbreachundertheTransitionalServicesAgreementorTransitionalTollManufacturingAgreement,(b)theexecutionofanyamendmentoftheTransitionalServicesAgreementorTransitionalTollManufacturingAgreement,orthemakingofanymaterialchangestotheservicesprovidedthereunder,whetherbyamendmentorothermeans(subjecttotherightsandobligationsofLicensorandTransfereeundertheTransferredContractswithrespectthereto,including,forclarity,delegationspursuanttoSection10.8oftheLicenseAgreement),or(c)anynoticeofterminationoftheTransitionalServicesAgreementorTransitionalTollManufacturingAgreementpriortotheexpirationthereof;
4.2.3theTransferee(andnotLicensor)shallberesponsibleforallofthefinancialandotherobligationsfortheprovisionofsuchgoodsorservices
ortheperformanceofsuchworkbyTransferor;
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[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
4.2.4thesubcontractedanddelegatedobligationsunderthisclause4.2maynotbefurthersubcontractedordelegatedtoanythirdpartywithout
furthercompliancewithSection10.8oftheLicenseAgreementwithrespecttosuchsubcontractingordelegating;
4.2.5theTransfereeshallremainfullyresponsibletoLicensorfortheperformanceofthoseobligationsundertheTransferredContractswhichitdelegatestoTransferor(includingtheobligationsunderSection3.2.1andSection3.2.2oftheLicenseAgreement)andLicensormayproceeddirectlyagainstTransfereeforanybreachofTransferee’sobligationsundertheTransferredContractsthataredelegatedtoTransferor;and
4.2.6theTransferorwillpromptlydisclosetotheTransfereeallTechnologyandotherintellectualpropertyconceivedorreducedtopracticebythe
Transferorduringtheprovisionofsuchgoodsorservicesortheperformanceofsuchwork,andtheTransferorwillandherebydoesassigntotheTransfereeallrights,title,andinterestsinandtoallsuchTechnologyandotherintellectualproperty.
4.3Transferorherebycovenantsandagreesitshallnot,withoutLicensor’spriorwrittenconsent,[**].4.4(a)NotwithstandingSection12.5ofthe[**],the[**]shallnot,asoftheEffectiveTime,[**],and(b)[**]shallnot,asoftheEffectiveTime,[**].
NotwithstandingSection10.1ofthe[**]andSection15ofeachofthe[**],LicensorandTransferorherebyagreethatthe[**]and[**]shallterminateasoftheEffectiveTimewithnofurtherforceandeffect;providedthatSection10.2ofthe[**]shallcontinuetoapply.
4.5ThisAgreementmaybeexecutedinanynumberofcounterpartsandbythePartiesonseparatecounterparts.Eachcounterpartshallconstitutean
originalofthisAgreementbutallthecounterpartstogethershallconstituteoneandthesameAgreementandanyPartymayexecutethisAgreementbysigninganyoneormoreofsuchcounterparts.SignaturepagesofthisAgreementmaybeexchangedbyemail/pdforotherelectronicmeanswithoutaffectingthevaliditythereof.
4.6NovariationofthisAgreementshallbebindingonanyPartyunlessandtotheextentthatitisrecordedinawrittendocumentexecutedbythatParty.4.7NothinginthisAgreementisintendedtoconferonanythirdpartyanyrighttoenforceanytermofthisAgreement.4.8ThisAgreement,andanynon-contractualrightsorobligationsarisingoutoforinconnectionwithitoritssubjectmatter,shallbegovernedbyand
construedinaccordancewiththelawsoftheStateofNewYork,withoutreferencetoanyrulesofconflictoflaws,andthePartiesirrevocablyagreethat
anydisputewhichmayariseoutoforinconnectionwiththisAgreementoritssubjectmattershallberesolvedthrougharbitrationinaccordancewithSections10.1.2and10.1.3intheLicenseAgreement,whichforpurposeshereofaredeemedrepeatedinthisAgreement,mutatismutandis.
4.9AnoticeunderthisAgreementshallonlybeeffectiveifitisinwritinganddeliveredpersonallyorsentbycourier(reputableexpressinternational
courierifoverseas).
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[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
NoticegivenunderthisAgreementshallbe(a)inwritingandinEnglish,and(b)senttotherelevantPartyfortheattentionofthecontactandtotheaddressspecifiedbelow,orsuchotheraddress,orpersonasthatPartymaynotifytotheotherinaccordancewiththeprovisionsofthisclause4.9.
4.9.1Theaddressesforserviceofnoticesandcommunicationsare:
(a) Transferor: Almirall,S.A.
RondaGeneralMitre,151
08022Barcelona
Spain
Attention:HeadLegalDepartment (b) Transferee: AllerganPharmaceuticalsInternationalLtd.
ClonshaughBusiness&TechnologyPark
Coolock
Dublin,D17E400
Ireland
Attention:ManagingDirector
Withacopyto: Allerganplc
MorrisCorporateCenterIII
400InterpaceParkway
Parsippany,NJ07054
UnitedStates
Attention:ChiefLegalOfficer (c) Licensor: IronwoodPharmaceuticals,Inc.
301BinneyStreet
Cambridge,MA02142
UnitedStates
Attention:ChiefLegalOfficer
Withacopyto: Ropes&GrayLLP
800BoylstonStreet
Boston,MA02199
UnitedStates
Attention:MarcA.Rubenstein
APartymaychangeitsdetailsforserviceofnoticesasspecifiedinthisclause4.9bygivingnoticeinwritingtotheotherPartiesinaccordancewiththisclause4.9.
Thisclause4.9doesnotapplytotheserviceofanyproceedingsorotherdocumentsinanylegalactionorproceedings.
4.10EachPartyshallpayitsowncostsandexpensesincurredinconnectionwiththenegotiation,preparation,executionandimplementationofthis
Agreement.
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[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.4.11ThisAgreement(togetherwiththeTransferredContracts),embodiesalloftheunderstandingsandobligationsbetweenthePartiesconcerningthe
subjectmatterhereof,andsupersedes,replacesandcancelsanyandallpriorarrangements,agreementsorunderstandings,whetheroralorwritten,betweenthePartieswithrespecttothesubjectmatterhereof.Forclarity,theRetainedContractsshallnotbesuperseded,replacedorcanceledbytheforegoingsentenced.
[BalanceofPageisIntentionallyBlank-SignaturePageFollows]
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[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
INWITNESSofwhichthepartieshaveexecutedthisAgreementonthedatessetforth.ALMIRALL,S.A. ALLERGANPHARMACEUTICALS
INTERNATIONALLTD. By: /s/EduardoSanchiz
By: /s/AlexNesbittName: EduardoSanchiz Name: AlexNesbittTitle: ChiefExecutiveOfficer Title: DirectorDate:
Date:
IRONWOODPHARMACEUTICALS,INC.
By: /s/ThomasGraney
Name: T.Graney
Title: CFO
Date:
[NovationAgreementSignaturePage]
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
EXHIBIT A
TransferredContracts
(Seeattached.)
[**]=Portionsofthisexhibithavebeenomittedpursuanttoaconfidentialtreatmentrequest.AnunredactedversionofthisexhibithasbeenfiledseparatelywiththeCommission.
EXHIBIT A
TRANSFERREDCONTRACTSLicenseAgreement:
1.LicenseAgreementdatedApril30,2009betweentheTransferorandtheLicensorregardingtheProductandLicensedCompound
2.[**]
3.[**]
4.[**]
5.[**]
6.[**]
7.[**]
8.AmendmenttotheLicenseAgreementdatedJune11,2013betweentheTransferorandtheLicensor
9.[**]
10.[**]
11.AmendmenttotheLicenseAgreementdatedFebruary26,2014betweentheTransferorandtheLicensor[**]
12.[**]
13.[**]
Exhibit 21.1
List of Registrant’s SubsidiariesIronwoodPharmaceuticalsSecuritiesCorporation,incorporatedinMassachusetts,awhollyownedsubsidiary.IronwoodPharmaceuticalsGmbH,incorporatedinSwitzerland,awhollyownedsubsidiary.
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EXHIBIT23.1
CONSENTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM
WeconsenttotheincorporationbyreferenceinthefollowingRegistrationStatements(FormS-3Nos.333-179430and333-199885andFormS-8Nos.333-165227,333-165228,333-165229,333-165230,333-165231,333-184396,333-189339,333-189340,333-197874,333-197875,333-206227,and333-206228)ofIronwoodPharmaceuticals,Inc.andintherelatedProspectusesofourreportsdatedFebruary19,2016,withrespecttotheconsolidatedfinancialstatementsofIronwoodPharmaceuticals,Inc.,andtheeffectivenessofinternalcontroloverfinancialreportingofIronwoodPharmaceuticals,Inc.,includedinthisAnnualReport(Form10-K)fortheyearendedDecember31,2015.
Boston,MassachusettsFebruary19,2016
/s/Ernst&YoungLLP
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EXHIBIT31.1
CERTIFICATIONPURSUANTTORULE13a-14(a)UNDER
THESECURITIESEXCHANGEACTOF1934
I,PeterM.Hecht,certifythat:
1. IhavereviewedthisAnnualReportonForm10-KofIronwoodPharmaceuticals,Inc.(the"registrant");
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave:
a. Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
b. Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;
c. Evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
d. Disclosedinthisreportanychangeintheregistrant'sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant'smostrecentfiscalquarter(theregistrant'sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant'sinternalcontroloverfinancialreporting;and
5. Theregistrant'sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunctions):
a. Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialinformation;and
b. Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontroloverfinancialreporting.
Date:February19,2016
/s/PETERM.HECHT
PeterM.Hecht,Ph.D.ChiefExecutiveOfficer
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EXHIBIT31.2
CERTIFICATIONPURSUANTTORULE13a-14(a)UNDER
THESECURITIESEXCHANGEACTOF1934
I,ThomasGraney,certifythat:
1. IhavereviewedthisAnnualReportonForm10-KofIronwoodPharmaceuticals,Inc.(the"registrant");
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave:
a. Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
b. Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;
c. Evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
d. Disclosedinthisreportanychangeintheregistrant'sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant'smostrecentfiscalquarter(theregistrant'sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant'sinternalcontroloverfinancialreporting;and
5. Theregistrant'sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunctions):
a. Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialinformation;and
b. Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontroloverfinancialreporting.
Date:February19,2016
/s/THOMASGRANEY
ThomasGraneyChiefFinancialOfficer
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EXHIBIT32.1
CERTIFICATIONPURSUANTTO18U.S.C.SECTION1350,
ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002
InconnectionwiththeAnnualReportofIronwoodPharmaceuticals,Inc.(the"Company")onForm10-KfortheperiodendedDecember31,2015asfiledwiththeSecuritiesandExchangeCommissiononthedatehereof(the"Report"),I,PeterM.Hecht,ChiefExecutiveOfficeroftheCompany,certify,pursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002,tomyknowledgethat:
(1) TheReportfullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934,asamended;and
(2) TheinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
AsignedoriginalofthiswrittenstatementrequiredbySection906hasbeenprovidedtotheCompanyandwillberetainedbytheCompanyandfurnishedtotheSecuritiesandExchangeCommissionoritsstaffuponrequest.
/s/PETERM.HECHT
PeterM.Hecht,Ph.D.ChiefExecutiveOfficerFebruary19,2016
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EXHIBIT32.1
CERTIFICATIONPURSUANTTO18U.S.C.SECTION1350,ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002
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EXHIBIT32.2
CERTIFICATIONPURSUANTTO18U.S.C.SECTION1350,
ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002
InconnectionwiththeAnnualReportofIronwoodPharmaceuticals,Inc.(the"Company")onForm10-KfortheperiodendedDecember31,2015asfiledwiththeSecuritiesandExchangeCommissiononthedatehereof(the"Report"),I,ThomasGraney,ChiefFinancialOfficeroftheCompany,certify,pursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002,tomyknowledgethat:
(1) TheReportfullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934,asamended;and
(2) TheinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
AsignedoriginalofthiswrittenstatementrequiredbySection906hasbeenprovidedtotheCompanyandwillberetainedbytheCompanyandfurnishedtotheSecuritiesandExchangeCommissionoritsstaffuponrequest.
/s/THOMASGRANEY
ThomasGraneyChiefFinancialOfficerFebruary19,2016
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