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IRWD > SEC Filings for IRWD > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for IRONWOOD PHARMACEUTICALS INC

Form 10-Q for IRONWOOD PHARMACEUTICALS INC


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2011 included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q, which are incorporated herein by reference, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are an entrepreneurial pharmaceutical company dedicated to the art and science of great drugmaking. To achieve our mission, we are building a team, a culture and processes centered on creating and marketing differentiated medicines that provide clear and meaningful therapeutic benefits to patients. Our lead product, linaclotide, will be marketed in the United States, or U.S., under the trademarked name of LINZESS. On August 30, 2012, the United States Food and Drug Administration, or FDA, approved LINZESS as a once-daily treatment for adult men and women suffering from irritable bowel syndrome with constipation, or IBS-C, or chronic idiopathic constipation, or CIC. LINZESS is the first FDA-approved guanylate cyclase type-C, or GC-C, agonist, and it was shown in clinical trials to help relieve abdominal pain and constipation associated with IBS-C and improve constipation symptoms associated with CIC. We believe that LINZESS presents patients and healthcare practitioners with a unique therapy for a major medical need not yet met by existing therapies. LINZESS is being commercialized in the U.S. by us and our collaboration partner, Forest Laboratories, Inc., or Forest. We expect that LINZESS, a prescription product, will be commercially available in the U.S. in December 2012.

In September 2011, our European partner, Almirall, S.A, or Almirall, submitted a Market Authorization Application, or MAA, to the European Medicines Agency, or EMA, for linaclotide for the treatment of patients with IBS-C, and Almirall continues to work with the EMA in its review. On September 21, 2012, the EMA's European Committee for Medicinal Products for Human Use, which provides non-binding recommendations for consideration by the EMA, issued a positive opinion recommending the marketing approval for linaclotide for the treatment of moderate to severe IBS-C in adults.

Astellas Pharma Inc., or Astellas, the Company's partner in Japan and certain other Asian countries, continues to develop linaclotide for the treatment of patients with IBS-C in its territory.

We continue to assess alternatives to bring linaclotide to IBS-C and CIC sufferers in the parts of the world outside of its partnered territories. In May 2012, we submitted a Clinical Trial Application, or CTA, to China's State Food and Drug Administration for a Phase 3 trial of linaclotide in patients with IBS-C. The CTA has been accepted for review. In October 2012, we also entered into a collaboration agreement with AstraZeneca AB, or AstraZeneca, to co-develop and co-commercialize linaclotide in China.

We continue to assess opportunities to expand the utility of linaclotide as well as the patient population who could benefit from linaclotide to ensure that we are maximizing the drug's potential value. As part of our long-term strategy, we and Forest initiated a Phase 3b clinical trial to further characterize the effect of linaclotide on abdominal symptoms in patients with CIC. In addition, we continue to explore the potential for linaclotide in other patient populations as well as in other gastrointestinal indications.

We also have a pipeline focused on both research and development of early development candidates and discovery research in multiple therapeutic areas, including gastrointestinal disease, central nervous system, or CNS, disorders, respiratory disease and cardiovascular disease.

We have pursued a partnering strategy for commercializing linaclotide that has enabled us to retain significant control over linaclotide's development and commercialization, share the costs with high-quality collaborators whose capabilities complement ours, and retain a significant portion of linaclotide's future long-term value in the major pharmaceutical markets, should linaclotide meet our sales expectations.

We were incorporated in Delaware as Microbia, Inc. on January 5, 1998. On April 7, 2008, we changed our name to Ironwood Pharmaceuticals, Inc.


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We currently operate in one reportable business segment-human therapeutics. Our human therapeutics segment consists of the commercialization of our lead product, linaclotide, and the development and commercialization of our product candidates.

To date, we have dedicated substantially all of our activities to the research and development of linaclotide and our product candidates. We have not generated any revenue to date from product sales and have incurred significant operating losses since our inception in 1998. We generated net income of approximately $47.6 million in the three months ended September 30, 2012, and incurred a net loss of approximately $28.8 million in the nine months ended September 30, 2012. We incurred net losses of approximately $20.6 million and $57.9 million in the three and nine months ended September 30, 2011, respectively. As of September 30, 2012, we had an accumulated deficit of approximately $461.2 million, and we expect to incur losses for the foreseeable future.

In February 2012, we sold 6,037,500 shares of our Class A common stock through a firm commitment, underwritten public offering at a price to the public of $15.09 per share. As a result of the offering, we received aggregate net proceeds, after underwriting discounts and commissions and other offering expenses, of approximately $85.2 million.

Financial Overview

Revenue. Revenue is generated primarily through our collaboration agreement with Forest, and our license agreements with Almirall and Astellas. The terms of these agreements contain multiple deliverables which may include (i) licenses,
(ii) research and development activities, and (iii) the manufacture of active pharmaceutical ingredient, or API, and development materials for the collaborative partner. Payments to us may include one or more of the following:
nonrefundable license fees; payments for research and development activities, payments for the manufacture of API and development materials, payments based upon the achievement of certain milestones and royalties on product sales. Additionally, we will receive 50% of the net profits or bear 50% of the net losses from the sale of LINZESS in the U.S, expected to begin in December 2012. We expect our revenue to fluctuate in the short term based on clinical and commercial milestones and based on the potential variability of demand for LINZESS upon commercial launch.

Research and development expense. Research and development expense consists of expenses incurred in connection with the discovery, development, manufacture and distribution of our product candidates. These expenses consist primarily of compensation, benefits and other employee related expenses, research and development related facility costs and third-party contract costs relating to research, formulation, manufacturing, non-clinical study and clinical trial activities. We charge all research and development expenses to operations as incurred. Under our Forest collaboration agreement, we are reimbursed for certain research and development expenses, and we net these reimbursements against our research and development expenses as incurred.

Our lead product is linaclotide, and it represents the largest portion of our research and development expense for our product candidates. Linaclotide is the first FDA-approved GC-C agonist and is indicated for the treatment of IBS-C and CIC and is our only product, or product candidate, that has demonstrated clinical proof of concept. An NDA for LINZESS with respect to both IBS-C and CIC was approved by the FDA in August 2012.

We continue to assess opportunities to expand the utility of linaclotide as well as the patient population who could benefit from linaclotide to ensure that we are maximizing the drug's potential value. As part of our long-term strategy, we and Forest initiated a Phase 3b clinical trial to further characterize the effect of linaclotide on abdominal symptoms in patients with CIC. In addition, we continue to explore the potential for linaclotide in other patient populations as well as in other gastrointestinal indications.

We also have a pipeline focused on both research and development of early development candidates and discovery research in multiple therapeutic areas, including gastrointestinal disease, CNS disorders, respiratory disease and cardiovascular disease.

The following table sets forth our research and development expenses related to our product pipeline for the three and nine months ended September 30, 2012 and 2011. These expenses relate primarily to external costs associated with manufacturing, including supply chain development, non-clinical studies and clinical trial costs. Costs related to facilities, depreciation, share-based compensation and research and development support services are not directly charged to programs.


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                                           Three Months Ended       Nine Months Ended
                                             September 30,            September 30,
                                            2012         2011        2012        2011
                                             (in thousands)          (in thousands)
Demonstrated clinical proof of concept   $    7,150    $  6,290   $   24,451   $ 15,241
Early stage, pre-proof of concept             4,788       3,916       16,833      9,328
Early stage, non-clinical                     2,509       3,606        7,928     10,813

Since 2004, the date we began tracking costs by program, we have incurred approximately $169.3 million of research and development expenses related to linaclotide. The expenses for linaclotide include both reimbursements to us by Forest as well as our portion of research and development costs incurred by Forest for linaclotide and invoiced to us under the cost-sharing provisions of our collaboration agreement.

The lengthy process of securing regulatory approvals for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. In August 2012, the FDA approved our NDA for LINZESS as a once-daily treatment for adult men and women suffering from IBS-C and CIC. In connection with the FDA approval, we are required to conduct certain non-clinical and clinical studies aimed at understanding: (a) whether orally administered linaclotide can be detected in breast milk, (b) the potential for antibodies to be developed to linaclotide, and if so, (c) whether antibodies specific for linaclotide could have any therapeutic or safety implications. In addition, we and Forest established a non-clinical and clinical post-marketing plan with the FDA to understand LINZESS's efficacy and safety in pediatric patients. In October 2012, we entered into a collaboration agreement with AstraZeneca under which we will jointly develop and commercialize linaclotide in China. We also are exploring the expansion of linaclotide in other parts of the world outside of our currently partnered territories, as well as the potential for linaclotide in other indications. Therefore, we cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on linaclotide in pediatrics, for other geographic markets or additional indications. We also continue to advance our pipeline focused on early development candidates and discovery research in multiple therapeutic areas, including gastrointestinal disease, CNS disorders, respiratory disease and cardiovascular disease. Given the inherent uncertainties that come with the development of pharmaceutical products, we cannot estimate with any degree of certainty how these programs will evolve, and therefore the amount of time or money that would be required to obtain regulatory approval to market them. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate precisely when, if ever, linaclotide will be developed in pediatrics or for other indications or markets, or any of our other product candidates will generate revenues and cash flows.

We invest carefully in our pipeline, and the commitment of funding for each subsequent stage of our development programs is dependent upon the receipt of clear, supportive data. In addition, we are actively engaged in evaluating externally-discovered drug candidates at all stages of development. In evaluating potential assets, we apply the same criteria as those used for investments in internally-discovered assets.

The successful development of our product candidates is highly uncertain and subject to a number of risks including, but not limited to:

The duration of clinical trials may vary substantially according to the type, complexity and novelty of the product candidate.

The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures.

Data obtained from non-clinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activity. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval.

The duration and cost of discovery, non-clinical studies and clinical trials may vary significantly over the life of a product candidate and are difficult to predict.


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The costs, timing and outcome of regulatory review of a product candidate may not be favorable.

The emergence of competing technologies and products and other adverse market developments may negatively impact us.

As a result of the uncertainties discussed above, we are unable to determine the duration and costs to complete current or future non-clinical and clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of our product candidates. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the data of each product candidate, the competitive landscape and ongoing assessments of such product candidate's commercial potential. As a result of the FDA's approval of our NDA in August 2012, we expect that LINZESS will begin generating sales in the fourth quarter of 2012 upon commercial launch in the U.S.

We expect our research and development costs will be substantial for the foreseeable future. We will continue to invest in linaclotide including the areas of its supply chain and the exploration of its utility in other gastrointestinal and pain indications and other patient populations. We will also invest in our other product candidates as we advance them through non-clinical studies and clinical trials, in addition to funding full-time equivalents for research and development activities under our external collaboration and license agreements.

General and administrative expense. General and administrative expense consists primarily of compensation, benefits and other employee related expenses for personnel in our administrative, finance, legal, information technology, business development, commercial and human resource functions. Other costs include the legal costs of pursuing patent protection of our intellectual property, general and administrative related facility and IT infrastructure costs and professional fees for accounting and legal services. We anticipate substantial increases in expenses related to developing the organization necessary to commercialize linaclotide. We charge all general and administrative expenses to operations as incurred. Under our Forest collaboration agreement, we are reimbursed for certain general and administrative expenses, and we net these reimbursements against our general and administrative expenses as incurred.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the U.S., or GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions, including those related to revenue recognition, inventory valuation and related reserves, research and development expenses and share-based compensation are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. These critical estimates and assumptions are based on our historical experience, our observance of trends in the industry, and various other factors that are believed to be reasonable under the circumstances and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions.

During the nine months ended September 30, 2012, we adopted Accounting Standards Update, or ASU, No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, or ASU 2011-04, ASU No. 2011-05, Presentation of Comprehensive Income, or ASU 2011-05, and ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, or ASU 2011-12, as discussed in Note 2, Summary of Significant Accounting Policies, to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There have been no significant changes to our critical accounting policies and estimates, including as a result of the adoption of these standards, with the exception of the development of the accounting estimates and assumptions inherent in inventory valuation and related reserves. Inventory is stated at the lower of cost or market with cost determined under the first-in, first-out basis. We evaluate inventory levels quarterly and any inventory that has a cost basis in excess of its expected net realizable value, inventory that becomes obsolete, inventory in excess of expected sales requirements or inventory that fails to meet commercial sale specifications is written down with a corresponding charge to cost of revenues in the period that the impairment is first identified. See Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 29, 2012 for additional information about these critical accounting policies, as well as a description of our other significant accounting policies.


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Results of Operations



The following discussion summarizes the key factors our management believes are
necessary for an understanding of our condensed consolidated financial
statements.



                                          Three Months Ended       Nine Months Ended
                                            September 30,            September 30,
                                           2012        2011        2012        2011
                                            (in thousands)          (in thousands)
Collaborative arrangements revenue      $   96,413   $  12,218   $ 123,265   $  33,717
Operating expenses:
Research and development                    23,453      22,905      85,201      61,869
General and administrative                  25,352      10,929      66,926      30,958
Total operating expenses                    48,805      33,843     152,127      92,827
Income (loss) from operations               47,608     (21,616 )   (28,862 )   (59,110 )
Other income (expense):
Interest expense                               (14 )       (16 )       (41 )       (49 )
Interest and investment income                  41         105         134         384
Other income                                     -         897           -         900
Other income (expense), net                     27         986          93       1,235
Net income (loss) before income taxes       47,635     (20,630 )   (28,769 )   (57,875 )
Income tax expense                               -           3           -           3
Net income (loss)                       $   47,635   $ (20,633 ) $ (28,769 ) $ (57,878 )

Three and Nine Months Ended September 30, 2012 Compared to Three and Nine Months Ended September 30, 2011

Revenue

Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2012 2011 $ % 2012 2011 $ %
(dollars in thousands) (dollars in thousands)

Collaborative
arrangements revenue $ 96,413 $ 12,218 $ 84,195 689.1 % $ 123,265 $ 33,717 $ 89,548 265.6 %

Collaborative Arrangements Revenue. The increase in revenue from collaborative arrangements of approximately $84.2 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 was primarily related to the Forest collaboration agreement. In August 2012, the Company achieved two milestones totaling $85.0 million under the Forest collaboration agreement due to the FDA's approval of the linaclotide NDA for both IBS-C and
CIC. This increase was offset by an approximately $1.0 million decrease in the amortization of Forest's deferred revenue associated with the development phase of the collaboration as the performance period ended midway through September 2012.

The increase in revenue from collaborative arrangements of approximately $89.5 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 also was primarily related to the $85.0 million in milestone payments we earned under the Forest collaboration agreement. In June 2011, we revised our estimate of the development period associated with the Almirall license agreement which resulted in approximately $3.5 million in additional revenue recognized during the nine months ended September 2012. Additionally, during the nine months ended September 30, 2012, we recognized approximately $2.0 million more in shipments of linaclotide API to Almirall in anticipation of a potential commercial launch in


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Europe. These increases were offset by an approximately $1.0 million decrease in the amortization of Forest's deferred revenue associated with the development phase of the collaboration as the performance period ended midway through September 2012.

Operating Expenses



                       Three Months Ended                           Nine Months Ended
                         September 30,             Change             September 30,            Change
                        2012         2011        $         %         2012        2011        $         %
                              (dollars in thousands)                       (dollars in thousands)
Operating
Expenses:
Research and
development          $    23,453   $ 22,905   $    548     2.4 %  $   85,201   $ 61,869   $ 23,332    37.7 %
General and
administrative            25,352     10,929     14,423   132.0 %      66,926     30,958     35,968   116.2 %
Total operating
expenses             $    48,805   $ 33,834   $ 14,971    44.2 %  $  152,127   $ 92,827   $ 59,300    63.9 %

Research and Development Expense. The increase in research and development expense of approximately $0.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 was primarily related to an increase of approximately $2.4 million in compensation, benefits, and employee related expenses associated mainly with increased headcount; an increase of approximately $1.2 million in research and development related facilities costs, including rent and amortization of leasehold improvements associated with additional space we leased in our 301 Binney Street facility; and an increase of approximately $1.0 million in share-based compensation expense primarily related to our new hire grants and our annual stock option grant made in February 2012; partially offset by a decrease of approximately $3.6 million due to linaclotide development, consisting of lower expenses associated with clinical trials as our Phase 3 trials were completed, decreased contract manufacturing costs associated with validation of batches of linaclotide API as we began capitalizing API in the third quarter of 2012 and decreased reimbursements from Forest, partially offset by a decrease of approximately $0.5 million in research costs related to our other pipeline candidates.

The increase in research and development expense of approximately $ 23.3 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 was primarily related to an increase of approximately $8.5 million in compensation, benefits, and employee related expenses associated mainly with increased headcount; an increase of approximately $6.3 million associated with linaclotide development, consisting of increased contract manufacturing costs associated with validation of batches of linaclotide API in anticipation of a potential commercial launch, higher collaboration expenses from Forest and decreased reimbursements from Forest, partially offset by a decrease in contract research associated with lower clinical trial expenses; an increase of approximately $3.3 million in research and development related facilities costs, including rent and amortization of leasehold improvements, associated with additional space we leased and improved in our 301 Binney Street facility; an increase of approximately $3.0 million in research costs related to our other pipeline candidates, including research and development fees, and upfront and milestone payments associated with our licensing agreements; and an increase of approximately $2.2 million in share-based compensation expense . . .

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