# IRONWOOD PHARMACEUTICALS INC (IRWD) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from IRONWOOD PHARMACEUTICALS INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1446847/000155837022001368/irwd-20211231x10k.htm
Accession: 0001558370-22-001368
Filing date: 2022-02-18
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/IRWD/
All MD&A years: /company/IRWD/mda/
Next year: /company/IRWD/mda/fy2022/ (FY 2022)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Forward-Looking Information

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this 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 Item 1A of this Annual Report on Form 10 K, our actual results may differ materially from those anticipated in these forward-looking statements.

Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2020 compared to the fiscal year ended December 31, 2019 is included in Part II, Item 7 –"Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission on February 17, 2021.

Overview

We are a gastrointestinal, or GI, healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for GI patients. We are focused on the development and commercialization of innovative GI product opportunities in areas of significant unmet need, leveraging our demonstrated expertise and capabilities in GI diseases.

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LINZESS® (linaclotide), our commercial product, is the first product approved by the United States Food and Drug Administration, or U.S. FDA, in a class of GI medicines called guanylate cyclase type C agonists, or GC-C agonists, and is indicated for adult men and women suffering from irritable bowel syndrome with constipation, or IBS-C, or chronic idiopathic constipation, or CIC. LINZESS is available to adult men and women suffering from IBS-C or CIC in the United States, or the U.S., and Mexico and to adult men and women suffering from IBS-C in Japan and China. Linaclotide is available under the trademarked name CONSTELLA® to adult men and women suffering from IBS-C or CIC in Canada, and to adult men and women suffering from IBS-C in certain European countries.

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We have strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world, including with AbbVie Inc. (together with its affiliates), or AbbVie, in the U.S. and all countries worldwide other than China (including Hong Kong and Macau) and Japan, AstraZeneca AB (together with its affiliates), or AstraZeneca, in China (including Hong Kong and Macau) and Astellas Pharma Inc., or Astellas, in Japan. We also aim to leverage our leading capabilities in GI to bring additional treatment options to GI patients; for example, in November 2021, we entered into a collaboration and license option agreement, or the COUR Collaboration Agreement, with COUR Pharmaceutical Development Company, Inc., or COUR, which grants us an option to acquire an exclusive license, to research, develop, manufacture and commercialize, in the U.S., products containing CNP-104, a tolerizing immune modifying nanoparticle for the treatment of primary biliary cholangitis, or PBC. We are also advancing IW-3300, a GC-C agonist, which is in Phase I development for the potential treatment of visceral pain conditions, such as interstitial cystitis / bladder pain syndrome, or IC/BPS, and endometriosis.

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To date, we have dedicated a majority of our activities to the research, development and commercialization of linaclotide, as well as to the research and development of our other product candidates. Prior to the year ended December 31, 2019, we incurred net losses in each year since inception. For the years ended December 31, 2021, 2020 and 2019, we recorded net income of $528.4 million, $106.2 million, and $21.5 million, respectively. As of December 31, 2021, we had an accumulated deficit of $937.6 million. We are unable to predict the extent of any future losses or guarantee that our company will be able to maintain positive cash flows.

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We were incorporated in Delaware on January 5, 1998 as Microbia, Inc. On April 7, 2008, we changed our name to Ironwood Pharmaceuticals, Inc. We operate in one reportable business segment—human therapeutics.

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Key 2021 Financial Highlights

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[[GREPCENT_TABLE]]
[["","\u25cf","We recognized $413.8 million in total revenues during the year ended December 31 2021, compared to $389.5 million during the year ended December 31, 2020. The increase of 6% was primarily driven by an increase of $31.8 million in collaborative arrangements revenue related to sales of LINZESS in the U.S.,"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","partially offset by a decrease of $7.0 million in sales of active pharmaceutical ingredient, or API, to our collaboration partners as a result of the restructuring of our partnerships with AstraZeneca and Astellas in 2019."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","We recognized $400.4 million in collaborative arrangements revenue related to sales of LINZESS in the U.S. during the year ended December 31, 2021, compared to $368.6 million during the year ended December 31, 2020. The increase of 9% was primarily driven by an increase in LINZESS prescription demand in the U.S., partially offset by net price erosion."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","We generated income from operations of $200.7 million during the year ended December 31, 2021 compared to income from operations of $108.9 million during the year ended December 31, 2020. The increase was primarily driven by increased revenue from sales of LINZESS in the U.S., as well as decreases in costs primarily associated with the discontinuation of MD-7246 and IW-3718 development programs."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","We recognized a non-recurring, non-cash income tax benefit of $333.3 million related to the release of the valuation allowance on the majority of our deferred tax assets during the year ended December 31, 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","We generated $261.9 million in cash from operations during the year ended December 31, 2021, ending the year with $620.1 million in cash and cash equivalents."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","We repurchased 2.4 million shares of our Class A Common Stock at an aggregate purchase price of $27.1 million during the year ended December 31, 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","We entered into the COUR Collaboration Agreement with COUR, a biotechnology company developing novel immune-modifying nanoparticles to treat autoimmune diseases. This agreement grants us an option, or the Option, to acquire an exclusive license to research, develop, manufacture and commercialize, in the U.S., products containing CNP-104 for the treatment of PBC. Under the terms of the COUR Collaboration Agreement, we agreed to pay COUR $19.5 million in upfront and near-term payments. After reviewing the data from the CNP-104 clinical trial, we may exercise the Option at a cost of $35.0 million in exchange for the exclusive license. If we exercise our Option, COUR will be eligible to receive up to an additional $440.0 million in commercial milestone payments, as well as royalties in the high single digits to low double digits percentage of the aggregated annual net sales in the U.S. of products containing CNP-104."]]
[[/GREPCENT_TABLE]]

Financial Operations Overview

Revenues. Our revenues are generated primarily through our collaborative arrangements and license agreements related to research and development and commercialization of linaclotide.

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The majority of our revenues are generated from the sales of LINZESS in the U.S. We record our share of the net profits and losses from the sales of LINZESS in the U.S. less commercial expenses on a net basis and present the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable. Net profits or losses consist of net sales to third-party customers and sublicense income in the U.S. less the cost of goods sold as well as selling, general and administrative expenses. Although we expect net sales to increase over time, the settlement payments between AbbVie and us, resulting in collaborative arrangements revenue or collaboration expense, are subject to fluctuation based on the ratio of selling, general and administrative expenses incurred by each party. In addition, our collaborative arrangements revenue may fluctuate as a result of the timing and amount of license fees and clinical and commercial milestones received and recognized under our current and future strategic partnerships as well as timing and amount of royalties from the sales of linaclotide in the European, Canadian or Mexican markets or any other markets where linaclotide receives approval and is commercialized.

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Cost of Revenues. Cost of revenues primarily includes costs related to the sales of linaclotide API, finished drug product, and finished goods to our partners, which generally occurs upon shipment for sales of API, finished drug product and finished goods after the material has passed all quality testing required for acceptance by the partner to certain of our partners outside of the U.S.

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Settlement on Non-cancelable Commercial Supply Purchase Commitments. During the year ended December 31, 2019, we recorded settlements related to reversals of certain previously accrued non-cancelable purchase commitments.

Research and Development Expense. The core of our research and development strategy is to leverage our demonstrated expertise and capabilities in GI diseases to bring multiple medicines to patients. Research and development expense consists of expenses incurred in connection with the research into and development of product candidates. These expenses consist primarily of compensation, benefits and other employee-related expenses, research and development related facility costs, third-party contract costs relating to nonclinical study and clinical trial activities, development of manufacturing processes, regulatory registration of third-party manufacturing facilities, and licensing fees for our product candidates.

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Research and development expenses include amounts owed to AbbVie on an ongoing basis, as well as AstraZeneca prior to September 2019 when we amended and restated our existing collaboration agreement with AstraZeneca, or the Amended AstraZeneca Agreement, under cost-sharing provisions in our respective collaboration agreements for linaclotide. Reimbursements received for research and development activities under these agreements are netted against research and development expenses.

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Linaclotide. Our commercial product, LINZESS, is commercially available in the U.S. for the treatment of IBS-C or CIC in adults. Linaclotide is also available to adult men and women suffering from IBS-C or CIC in certain countries of the world, including China, Japan, and in a number of E.U. countries.

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We and AbbVie continue to explore ways to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions. In January 2017, the U.S. FDA approved a 72 mcg dose of LINZESS for adults with CIC, which became available in the U.S. in March 2017. In June 2019, we announced positive topline data from our Phase IIIb trial demonstrating the efficacy and safety of linaclotide 290 mcg on the overall abdominal symptoms of bloating, pain and discomfort in adult patients with IBS-C. In September 2020, based on the Phase IIIb data, the U.S. FDA approved our Supplemental New Drug Application to include a more comprehensive description of the effects of LINZESS in its approved label.

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In connection with the U.S. FDA approval of LINZESS, we were required to conduct certain nonclinical and clinical studies including those aimed at further understanding the safety profile of linaclotide. We and AbbVie completed additional studies and determined that: (a) orally administered linaclotide was not detected in breast milk, (b) there is little or no evidence of any potential for antibodies to be developed to linaclotide, and (c) there were no signs or symptoms of an immunogenic response to linaclotide. The results observed do not alter the known safety profile for linaclotide based on the clinical studies and post-marketing experience to-date. In addition, we and AbbVie have established a nonclinical and clinical post-marketing plan with the U.S. FDA to understand the safety and efficacy of LINZESS in pediatric patients. In August 2021, the U.S. FDA approved a revised label for LINZESS based on clinical safety data that had been generated thus far in pediatric studies. The updated label modified the boxed warning for risk of serious dehydration and contraindication against use in children to those less than two years of age. The boxed warning and contraindication previously applied to all children less than 18 years of age and less than 6 years of age, respectively. The safety and effectiveness of LINZESS in patients less than 18 years of age have not been established. Clinical pediatric programs in IBS-C and functional constipation are ongoing.

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MD-7246. We and AbbVie were developing MD-7246, a delayed release formulation of linaclotide. In May 2020, we and AbbVie announced topline data from a Phase II trial evaluating MD-7246 in adult patients with abdominal pain associated with IBS-D. The Phase II trial did not meet its primary or key secondary endpoints. Based on these findings, we and AbbVie discontinued the development of MD-7246.

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IW-3718. We were developing IW-3718, a gastric retentive formulation of a bile acid sequestrant, for the potential treatment of refractory gastroesophageal reflux disease, or refractory GERD. In September 2020, we announced that one of our two identical Phase III trials evaluating IW-3718 in refractory GERD did not meet the pre-specified criteria associated with a planned early efficacy assessment and, based on these findings, we discontinued development of IW-3718.

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IW-3300. We are developing IW-3300, a GC-C agonist, for the potential treatment of visceral pain conditions, including interstitial cystitis / bladder pain syndrome and endometriosis. In December 2021, the U.S. FDA accepted our

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Investigational New Drug Application and the Phase I clinical program for IC/BPS commenced in the first quarter of 2022.

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CNP-104. Through the COUR Collaboration Agreement, we and COUR are developing CNP-104 for the treatment of PBC, a rare autoimmune disease targeting the liver. In December 2021, COUR received U.S. Fast Track Designation for CNP-104 and initiated a clinical study for CNP-104 to evaluate the safety, tolerability, pharmacodynamic effects and efficacy of CNP-104 in PBC patients.

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Early research and development. Our early research and development efforts have been focused on supporting our development stage GI programs, including exploring strategic options for further development of certain of our internal programs, as well as evaluating external development-stage GI programs.

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The following table sets forth our research and development expenses related to our product pipeline for the years ended December 31, 2021, 2020, and 2019, respectively. These expenses relate primarily to compensation, benefits and other employee-related expenses and external costs associated with nonclinical studies and clinical trial costs for our product candidates. We allocate costs related to facilities, depreciation, share-based compensation, research and development support services and certain other costs directly to programs.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["\u200b","\u200b","2021","\u200b","2020","\u200b","2019"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","(in thousands)","\u200b","\u200b","\u200b","\u200b"],["Linaclotide(1)","","$","21,075","\u200b","$","25,531","\u200b","$","39,061"],["Lesinurad(2)","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","524","\u200b"],["IW-3718","\u200b","\u200b","8,002","\u200b","\u200b","52,183","\u200b","\u200b","65,771","\u200b"],["IW-3300","\u200b","\u200b","11,687","\u200b","\u200b","3,810","\u200b","\u200b","102","\u200b"],["CNP-104","\u200b","\u200b","19,500","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b"],["Early research and development","\u200b","","10,141","\u200b","\u200b","6,538","\u200b","\u200b","9,586","\u200b"],["Total research and development expenses","\u200b","$","70,405","\u200b","$","88,062","\u200b","$","115,044","\u200b"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Includes linaclotide in all indications, populations and formulations."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Includes lesinurad in all indications, populations and formulations, which we stopped developing and commercializing in January 2019."]]
[[/GREPCENT_TABLE]]

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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.

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We and AbbVie are exploring development opportunities to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions. 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 for additional indications, populations or formulations.

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Given the inherent uncertainties that come with the development of pharmaceutical products, we cannot estimate with any degree of certainty how our programs will evolve, and therefore the amount of time or money that would be required to obtain regulatory approval to market them.

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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’s utility will be expanded within its currently approved indications; if or when linaclotide will be developed outside of its current markets, indications, populations or formulations; or when, if ever, any of our other product candidates will generate revenues and cash flows.

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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 intend to access externally discovered drug candidates that fit within our core strategy. In evaluating these potential assets, we apply the same investment criteria as those used for investments in internally discovered assets.

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

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[[GREPCENT_TABLE]]
[["","\u25cf","The duration of clinical trials may vary substantially according to the type, complexity and novelty of the product candidate;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","The U.S. FDA and comparable agencies in foreign countries impose substantial and varying 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;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Data obtained from nonclinical 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;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","The duration and cost of early research and development, including nonclinical studies and clinical trials may vary significantly over the life of a product candidate and are difficult to predict;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","The costs, timing and outcome of regulatory review of a product candidate may not be favorable, and, even if approved, a product may face post-approval development and regulatory requirements;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","There may be substantial costs, delays and difficulties in successfully integrating externally developed product candidates into our business operations; and"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","The emergence of competing technologies and products and other adverse market developments may negatively impact us."]]
[[/GREPCENT_TABLE]]

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As a result of the factors discussed above, including the factors discussed under “Risk Factors” in Item 1A of this Annual Report on Form 10-K, we are unable to determine the duration and costs to complete current or future nonclinical 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.

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We expect to invest in our development programs for the foreseeable future. We will continue to invest in linaclotide, including the investigation of ways to enhance the clinical profile within its currently approved indications, and the exploration of its potential utility in other indications, populations and formulations. We will continue to invest in our GI-focused product candidates as we advance them through pre-clinical and clinical trials, in addition to funding research and development activities under our external collaboration and license agreements.

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Selling, General and Administrative Expense. Selling, 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, sales, marketing, communications and human resource functions. Other costs include legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs, insurance costs and professional fees for accounting, tax, consulting, legal and other services. As we continue to invest in the commercialization of LINZESS, we expect our selling, general and administrative expenses will be substantial for the foreseeable future.

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Prior to the execution of the Amended AstraZeneca Agreement, we were reimbursed for certain selling, general and administrative expenses and netted these reimbursements against selling, general and administrative expenses as incurred. AstraZeneca is responsible for all costs and expenses incurred under the Amended AstraZeneca Agreement. We include AbbVie’s selling, general and administrative cost-sharing payments in the calculation of the net profits and net losses from the sale of LINZESS in the U.S. and present the net payment to or from AbbVie as collaboration expense or collaborative arrangements revenue, respectively.

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Gain on Lease Modification. During the year ended December 31, 2019, we recorded a gain on lease modification related to a modification of our prior headquarters lease in April 2019. For additional information relating

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to the gain, see Note 7, Leases, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

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Restructuring Expenses. Restructuring expenses pertain to workforce reduction and restructuring initiatives and are more fully described in Note 17, Workforce Reduction and Restructuring, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

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Interest Expense. Interest expense consists primarily of cash and non-cash interest costs related to our convertible senior notes. Non-cash interest expense consists of amortization of the debt discount and debt issuance costs.

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Interest and Investment Income. Interest and investment income consists of interest earned on our cash and cash equivalents, as well as significant financing components of payments due from collaboration partners.

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Gain (Loss) on Derivatives. In June 2015, we issued 2.25% Convertible Senior Notes due June 15, 2022, or the 2022 Convertible Notes, and in August 2019, we issued 0.75% Convertible Senior Notes due 2024, or the 2024 Convertible Notes, and 1.50% Convertible Senior Notes due 2026, or the 2026 Convertible Notes (together with the 2022 Convertible Notes and the 2024 Convertible Notes, the Convertible Senior Notes). In connection with the issuance of our 2022 Convertible Notes, we entered into convertible note hedge transactions, or the Convertible Note Hedges, and separate note hedge warrant transactions, or the Note Hedge Warrants, with certain financial institutions. Gain (loss) on derivatives consists of the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, which are recorded at fair value at each reporting date and changes in fair value are recorded in our consolidated statements of income. The Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 10, Notes Payable, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

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Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt during the year ended December 31, 2019 related to the redemption of the 8.375% Notes due 2026, and the partial repurchase of the 2022 Convertible Notes. These transactions are more fully described in Note 10, Notes Payable, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

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Income Taxes. We prepare our income tax provision based on our interpretation of the income tax accounting rules and each jurisdiction’s enacted tax laws and regulations. For additional information refer to Note 14, Income Taxes, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

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Discontinued Operations. On April 1, 2019, we completed the separation, or the Separation, of our soluble guanylate cyclase, or sGC, business, and certain other assets and liabilities, into a separate, independent publicly traded company, Cyclerion Therapeutics, Inc., or Cyclerion. The Separation was effected by means of a distribution of all the outstanding shares of common stock, with no par value, of Cyclerion, through a dividend of Cyclerion’s common stock to our stockholders of record as of the close of business on March 19, 2019. In connection with the Separation, we recast all historical expenses directly associated with our sGC business as discontinued operations in accordance with ASC Subtopic 250-20, Discontinued Operations. For additional information refer to Note 3, Cyclerion Separation, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

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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 U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the consolidated financial statements, and the amounts of revenues and expenses during the reported periods. We base our estimates on our historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from our estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

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We believe that our application of the following accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our

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

Derivative Assets and Liabilities

In June 2015, in connection with the issuance of the 2022 Convertible Notes, we entered into the Convertible Note Hedges. Concurrently with entering into the Convertible Note Hedges, we also entered into certain warrant transactions in which we sold Note Hedge Warrants to the Convertible Note Hedge counterparties to acquire shares of our Class A Common Stock, subject to customary anti-dilution adjustments. In connection with the partial repurchase of the 2022 Convertible Notes in August 2019, we terminated our Convertible Note Hedges and Note Hedge Warrants proportionately.

These derivatives are recorded as assets or liabilities at fair value at the end of each reporting period and the fair value is determined using the Black-Scholes option-pricing model. The changes in fair value are recorded as a component of other (expense) income in the consolidated statements of income. Significant inputs used to determine the fair value as of December 31, 2021 included the price per share of our Class A Common Stock, expected terms of the derivative instruments, strike prices of the derivative instruments, risk-free interest rates, and expected volatility of our Class A Common Stock. Changes to these inputs could materially affect the valuation of the Convertible Note Hedges and Note Hedge Warrants in future periods.

Revenue Recognition

Upon executing a revenue generating arrangement, we assess whether it is probable we will collect consideration in exchange for the good or service it transfers to the customer and perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligations. We must develop assumptions that require significant judgment to determine the standalone selling price for each performance obligation identified in the contract. The assumptions that are used to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Our revenues are generated primarily through collaborative arrangements and license agreements related to the development and commercialization of linaclotide. The terms of the collaborative arrangements and other agreements contain multiple performance obligations which may include (i) licenses, (ii) research and development activities, including participation on joint steering committees, (iii) the manufacture of finished drug product, API, or development materials for a partner, which are reimbursed at a contractually determined rate, and (iv) education or co-promotion activities by our clinical sales specialists. Non-refundable payments to us under these agreements may include (i) up-front license fees, (ii) payments for research and development activities, (iii) payments for the manufacture of finished drug product, API, or development materials, (iv) payments based upon the achievement of certain milestones, (v) payments for sales detailing, promotional support services and medical education initiatives, and (vi) royalties on product sales. Additionally, we receive our share of the net profits or bear our share of the net losses from the sale of linaclotide in the U.S. We have adopted a policy to recognize revenue net of tax withholdings, as applicable.

Collaboration, License, and Other Agreements

Upon licensing intellectual property, we determine if the license is distinct from the other performance obligations identified in the arrangement. We recognize revenues from the transaction price, including non-refundable, up-front fees allocated to the license when the license is transferred to the customer if the license has distinct benefit to the customer. For licenses that are combined with other promises, we assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. For performance obligations that are satisfied over time, we evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Our license and collaboration agreements include milestone payments, such as development and other milestones. We evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method at the inception of the agreement. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.

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Milestone payments that are not within our control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. We re-evaluate the probability of achievement of such milestones and any related constraint at each reporting period, and any adjustments are recorded on a cumulative catch-up basis.

Agreements that include the supply of API or drug product for either clinical development or commercial supply at the customer’s discretion are generally considered as options. We assess if these options provide a material right to our partner, and if so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the customer exercises these options, any additional payments are recorded as revenue when the customer obtains control of the goods, which is typically upon shipment for sales of API and finished drug product.

For agreements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue when the related sales occur.

Net Profit or Net Loss Sharing

In accordance with ASC 808 Topic, Collaborative Arrangements, or ASC 808, we considered the nature and contractual terms of the arrangement and the nature of our business operations to determine the classification of payments under our collaboration agreements. While ASC 808 provides guidance on classification, the standard is silent on matters of separation, initial measurement, and recognition. Therefore, we apply the separation, initial measurement, and recognition principles of ASC Topic 606, Revenue from Contracts with Customers, or ASC 606, to our collaboration agreements.

Our collaborative arrangements revenue generated from sales of LINZESS in the U.S. are considered akin to sales-based royalties. We recognize our share of the pre-tax commercial net profit or net loss generated from the sales of LINZESS in the U.S. in the period the product sales are earned, as reported by AbbVie, and related cost of goods sold and selling, general and administrative expenses as incurred by us and our collaboration partner. These amounts are partially determined based on amounts provided by AbbVie and involve the use of estimates and judgments, such as product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and contractual rebates, wholesaler fees, product returns, and co-payment assistance costs, which could be adjusted based on actual results in the future. We are highly dependent on AbbVie for timely and accurate information regarding any net revenues realized from sales of LINZESS in the U.S. in accordance with ASC 808, and the related costs, in order to accurately report its results of operations. If we do not receive timely and accurate information or incorrectly estimate activity levels associated with the collaboration at a given point in time, we could be required to record adjustments in future periods.

We record revenue transactions as net product revenue in our consolidated statements of income if we are deemed the principal in the transaction, which includes being the primary obligor, retaining inventory risk, and control over pricing. Given that we are not the primary obligor and do not have the inventory risks in the collaboration agreement with AbbVie for North America, we record our share of the net profits or net losses from the sales of LINZESS in the U.S. on a net basis and present the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable. We and AbbVie settle the cost sharing quarterly, such that our consolidated statements of income reflect 50% of the pre-tax net profit or loss generated from sales of LINZESS in the U.S.

Sale of Active Pharmaceutical Ingredient

During the years ended December 31, 2020, and 2019, we produced linaclotide API, finished drug product, finished goods, and/or development materials for certain of our partners. As of December 31, 2020, we were no longer responsible for the supply of linaclotide API, finished drug product, finished goods or development materials to such partners. After December 31, 2020, we have occasionally provided development materials from time to time to certain of our partners and we may continue to do so. Sales of such development materials have been and are expected to continue to be immaterial.

We recognize revenue on linaclotide API, finished drug product, finished goods, and development materials when control has transferred to the partner, which generally occurs upon shipment after the material has passed all quality testing required for acceptance by the partner.

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Other

Our deferred revenue balance consists of advance billings and payments received from customers in excess of revenue recognized.

Research and Development Expense

We have committed significant resources into the research and development of our product candidates and intend to continue to do so for the foreseeable future. Research and development expenses are generally expensed as incurred. We capitalize nonrefundable advance payments we make for research and development activities and defer expense recognition until the related goods are received or the related services are performed.

Research and development expenses are comprised of costs incurred in performing research and development activities, including salary, benefits, share-based compensation, and other employee-related expenses; laboratory supplies and other direct expenses; facilities expenses; overhead expenses; third-party contractual costs relating to nonclinical studies and clinical trial activities and related contract manufacturing expenses, development of manufacturing processes and regulatory registration of third-party manufacturing facilities; licensing fees for our product candidates; and other outside expenses.

Clinical trial expenses include expenses associated with contract research organizations, or CROs. The invoicing from CROs for services rendered can lag several months. We accrue the cost of services rendered in connection with CRO activities based on our estimate of site management, monitoring costs, project management costs, and investigator fees. We maintain regular communication with our CRO vendors to gauge the reasonableness of our estimates. Differences between actual clinical trial expenses and estimated clinical trial expenses recorded have not been material and are adjusted for in the period in which they become known. However, if we incorrectly estimate activity levels associated with the CRO services at a given point in time, we could be required to record material adjustments in future periods. Under our collaboration agreement with AbbVie for North America, we are reimbursed for certain research and development expenses and we net these reimbursements against our research and development expenses as incurred. Nonrefundable advance payments for research and development activities are capitalized and expensed over the related service period or as goods are received.

Research and development expense also includes up-front payment, non-contingent payment, and milestone payment obligations under the COUR Collaboration Agreement. Recognition of expense for such payments requires judgment with respect to when the obligation is probable.

Share-Based Compensation Expense

We grant awards under our share-based compensation programs, including stock awards, restricted stock awards, or RSAs, restricted stock units, or RSUs (including performance-based RSUs, or PSUs), stock options, and shares issued under our employee stock purchase plan, or ESPP. Share-based compensation is recognized as expense in the consolidated statements of income based on the grant date fair value over the requisite service period, net of estimated forfeitures. We estimate forfeitures over the requisite service period using historical forfeiture activity and record share-based compensation expense only for those awards that are expected to vest.

We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility and expected term, among others. The fair value of stock awards, RSAs, and RSUs is based on the market value of our Class A Common Stock on the date of grant, with the exception of PSUs with market conditions, which are measured using the Monte Carlo simulation method. Discounted stock purchases under our ESPP are valued on the first date of the offering period using the Black-Scholes option-pricing model to compute the fair value of the lookback provision plus the purchase discount.

For awards that vest based on service conditions and market conditions, we use the straight-line method to recognize compensation expense over the respective service period. For awards that contain performance conditions, we determine the appropriate amount to expense based on the anticipated achievement of performance targets, which requires judgment, including forecasting the achievement of future specified targets. At the date performance conditions are determined to be probable of achievement, we record a cumulative expense catch-up, with remaining expense amortized over the remaining service period. Throughout the performance period, we re-assess the estimated

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performance and update the number of performance-based awards that we believe will ultimately vest. Discounted stock purchases under our ESPP are recognized over the offering period.

​

Compensation expense related to modified awards is measured based on the fair value for the awards as of the modification date. Any incremental compensation expense arising from the excess of the fair value of the awards on the modification date compared to the fair value of the awards immediately before the modification date is recognized at the modification date or ratably over the requisite remaining service period, as appropriate.

While the assumptions used to calculate and account for share-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if revisions are made to our underlying assumptions and estimates, our share-based compensation expense could vary significantly from period to period.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. We provide a valuation allowance when it is more likely than not that deferred tax assets will not be realized.

Prior to 2021, we maintained a valuation allowance on the majority of our net operating losses and other deferred tax assets. On a periodic basis, we reassess the valuation allowance on our deferred tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. During the year ended December 31, 2021, we reassessed the valuation allowance noting the shift of positive evidence outweighing negative evidence, including: continued strong prescription demand growth of LINZESS, continued profitability of a GI-focused business since completing the tax-free spin-off of Cyclerion, and expectations regarding future profitability. After assessing both the positive evidence and negative evidence, we determined it was more likely than not that we will realize the majority of our deferred tax assets and therefore released the majority of our valuation allowance for the deferred tax assets that are expected to be utilized in future years. We will continue to maintain a valuation allowance for deferred tax assets that are unlikely to be realized, primarily certain tax credits that are expected to expire prior to utilization.

Significant judgment is required in making these assessments to maintain or reverse our valuation allowances and, to the extent our future expectations change we would have to assess the recoverability of these deferred tax assets at that time. If we determine that our net deferred tax assets are not realizable in a future period, we would record material changes to income tax expense or benefit in that period.

We record uncertain tax positions on the basis of a two-step process. First, we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position. Second, for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the relevant tax authority. Significant judgment is required in evaluating whether our tax positions meet this two-step process. The nature of the uncertain tax positions is often very complex and subject to change, and the amounts at issue can be substantial. We re-evaluate these uncertain tax positions on a quarterly basis based on a number of factors including, but not limited to, changes in facts or circumstances, changes in tax law, and effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

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Results of Operations

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["\u200b","","2021","\u200b","2020"],["\u200b","\u200b","(in thousands)","\u200b"],["Revenues:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Collaborative arrangements revenue","","$","412,784","","$","381,545"],["Sale of active pharmaceutical ingredient","\u200b","\u200b","969","\u200b","\u200b","7,978","\u200b"],["Total revenues","\u200b","\u200b","413,753","\u200b","\u200b","389,523","\u200b"],["Cost and expenses:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Cost of revenues","\u200b","","\u2014","\u200b","","3,136","\u200b"],["Research and development","\u200b","","70,405","\u200b","","88,062","\u200b"],["Selling, general and administrative","\u200b","","111,133","\u200b","","140,003","\u200b"],["Restructuring expenses","\u200b","\u200b","(44)","\u200b","\u200b","15,382","\u200b"],["Total cost and expenses","\u200b","","181,494","\u200b","","246,583","\u200b"],["Income from operations","\u200b","","232,259","\u200b","","142,940","\u200b"],["Other (expense) income:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest expense","\u200b","","(31,150)","\u200b","","(29,478)","\u200b"],["Interest and investment income","\u200b","","726","\u200b","","1,504","\u200b"],["Loss on derivatives","\u200b","","(1,178)","\u200b","","(6,129)","\u200b"],["Other income","\u200b","","\u2014","\u200b","","24","\u200b"],["Other expense, net","\u200b","","(31,602)","\u200b","","(34,079)","\u200b"],["Income from operations, before income taxes","\u200b","\u200b","200,657","\u200b","\u200b","108,861","\u200b"],["Income tax (expense) benefit","\u200b","\u200b","327,791","\u200b","","(2,685)","\u200b"],["Net income","\u200b","$","528,448","\u200b","$","106,176","\u200b"]]
[[/GREPCENT_TABLE]]

​

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Revenues

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","Change"],["\u200b","\u200b","2021","\u200b","2020","\u200b","$","\u200b","%"],["\u200b","\u200b","(dollars in thousands)"],["Revenues:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Collaborative arrangements revenue","","$","412,784","","$","381,545","","$","31,239","","8","%"],["Sale of active pharmaceutical ingredient","\u200b","\u200b","969","\u200b","\u200b","7,978","\u200b","\u200b","(7,009)","\u200b","(88)","%"],["Total revenues","\u200b","$","413,753","\u200b","$","389,523","\u200b","$","24,230","\u200b","6","%"]]
[[/GREPCENT_TABLE]]

​

Collaborative arrangements revenue. The increase in collaborative arrangements revenue of $31.2 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily related to a $31.8 million increase in our share of net profits from the sale of LINZESS in the U.S., which was driven by increased prescription demand, partially offset by net price erosion.

Sale of active pharmaceutical ingredient. The decrease in sale of API of $7.0 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to a decrease in sales of API, finished drug product, and finished goods to AstraZeneca in China in connection with the Amended AstraZeneca Agreement, under which commercial supply obligations transitioned to AstraZeneca in the second quarter of 2020.

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Cost and Expenses

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","Change"],["\u200b","","2021","","2020","","$","","%"],["\u200b","\u200b","(dollars in thousands)"],["Cost and expenses:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Cost of revenues","\u200b","$","\u2014","\u200b","$","3,136","\u200b","$","(3,136)","\u200b","(100)","%"],["Research and development","\u200b","","70,405","\u200b","","88,062","\u200b","","(17,657)","\u200b","(20)","%"],["Selling, general and administrative","\u200b","","111,133","\u200b","","140,003","\u200b","","(28,870)","\u200b","(21)","%"],["Restructuring expenses","\u200b","\u200b","(44)","\u200b","\u200b","15,382","\u200b","\u200b","(15,426)","\u200b","(100)","%"],["Total cost and expenses","\u200b","$","181,494","\u200b","$","246,583","\u200b","$","(65,089)","\u200b","(26)","%"]]
[[/GREPCENT_TABLE]]

Cost of revenues. The decrease in cost of revenues of $3.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily related to a decrease in sales of API, finished drug product, and finished goods to AstraZeneca in China, in connection with the Amended AstraZeneca Agreement.

Research and development. The decrease in research and development expense of $17.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily related to a decrease of $32.3 million in external development costs related to IW-3718; a decrease of $3.6 million in compensation, benefits, and other employee-related expenses; a decrease of $2.4 million related to linaclotide development; and a decrease of $1.0 million in temporary labor costs. These decreases in expenses were partially offset by $19.5 million of expenses recognized for up-front payment, non-contingent payment, and milestone payment obligations in connection with the COUR Collaboration Agreement; and a $3.2 million increase in external development costs related to IW-3300.

​

Selling, general and administrative. Selling, general and administrative expenses decreased $28.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to a $18.1 million decrease in compensation, benefits, and other employee-related expenses; a $3.4 million decrease in professional fees for consulting and other services; a $2.2 million decrease in legal fees; a $2.1 million decrease in sales and marketing activities; and a $1.6 million decrease in fleet vehicle expenses.

​

Restructuring expenses. Restructuring expenses related to the workforce reduction resulting from our decision to discontinue IW-3718 development were an insignificant amount and $15.4 million during the years ended December 31, 2021 and 2020, respectively, as the workforce reduction was substantially completed during the fourth quarter of 2020.

​

Other (Expense) Income, Net

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","Change"],["\u200b","","2021","","2020","","$","","%"],["\u200b","\u200b","(dollars in thousands)"],["Other (expense) income:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest expense","\u200b","$","(31,150)","\u200b","$","(29,478)","\u200b","$","(1,672)","\u200b","6","%"],["Interest and investment income","\u200b","","726","\u200b","","1,504","\u200b","","(778)","\u200b","(52)","%"],["Loss on derivatives","\u200b","","(1,178)","\u200b","","(6,129)","\u200b","","4,951","\u200b","(81)","%"],["Other income","\u200b","","\u2014","\u200b","","24","\u200b","","(24)","\u200b","(100)","%"],["Total other expense, net","\u200b","$","(31,602)","\u200b","$","(34,079)","\u200b","$","2,477","\u200b","(7)","%"]]
[[/GREPCENT_TABLE]]

​

Interest expense. Interest expense increased by $1.7 million during the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to an increase in non-cash interest expense associated with the Senior Convertible Notes.

​

Interest and investment income. Interest and investment income decreased by $0.8 million in the year ended December 31, 2021 compared to the year ended December 31, 2020, resulting primarily from a decrease in investment interest rates.

​

Loss on derivatives. For the year ended December 31, 2021, we recorded a loss on derivatives of $1.2 million resulting from a $12.0 million decrease in the fair value of the Convertible Note Hedges and a $10.8 million decrease in the fair value of the Note Hedge Warrants. For the year ended December 31, 2020, we recorded a loss on derivatives of

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$6.1 million resulting from a $18.3 million decrease in the fair value of the Convertible Note Hedges and a $12.2 million decrease in the fair value of the Note Hedge Warrants. 

​

Other income. For the year ended December 31, 2021 compared to the year ended December 31, 2020, other income decreased by an insignificant amount due to a transition service agreement with Cyclerion that terminated during the first quarter of 2020.

​

Income taxes. During the year ended December 31, 2021, we recorded income tax benefit of $327.8 million, which primarily pertained to the non-cash income tax benefit of $333.3 million related to the release of the valuation allowance on the majority of our tax attributes and other deferred tax assets, partially offset by state income taxes of $5.5 million in certain states in which we are unable to utilize net operating losses to fully offset taxable income. During the year ended December 31, 2020, we recorded state income tax expense of $2.7 million in certain states which had temporarily disallowed or only partially allow the use of net operating losses to offset taxable income.

​

Until the second quarter of 2021, we maintained a valuation allowance on our net operating losses and other deferred tax assets. Thereafter, we have continued to utilize our net operating losses to offset federal taxable income and taxable income in most states but will begin to record a significant portion of income taxes reflecting the utilization of the deferred tax assets. The majority of this provision for income taxes will be a non-cash expense until our net operating losses are fully utilized. Further information on the release of the valuation allowance and significant judgments related to its release can be found below in Note 14, Income Taxes, in the accompanying notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K.

​

Liquidity and Capital Resources

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and had an accumulated deficit of $937.6 million as of December 31, 2021. We have financed our operations to date primarily through both the private sale of our preferred stock and the public sale of our common stock, debt financings, and cash generated from our operations. As of December 31, 2021, our debt is comprised of $520.7 million aggregate principal amount of convertible notes, due at various dates between 2022 and 2026. Refer to Note 10, Notes Payable, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for information related to our debt obligations.

As of December 31, 2021, we had $620.1 million of unrestricted cash and cash equivalents. Our cash equivalents include amounts held in money market funds. We invest cash in excess of immediate requirements in accordance with our investment policy, which limits the amounts we may invest in certain types of investments and requires all investments held by us to be at least AA- rated, with a remaining final maturity when purchased of less than twenty-four months, so as to primarily achieve liquidity and capital preservation objectives.

During the year ended December 31, 2021, our balances of cash and cash equivalents increased by $257.1 million. Net cash provided by operating activities totaled $261.9 million as a result of profitable operations driven primarily by the sales of LINZESS in the U.S. Additionally, cash provided by financing activities totaled $19.6 million in proceeds from the exercise of stock options and our employee stock purchase plan. These cash inflows were partially offset by $24.1 million of share repurchases and $0.3 million in capital expenditures. We expect to pay $120.7 million in aggregate principal amount of our 2022 Convertible Notes within the next 12 months.

We anticipate our cash balance, which was $620.1 million as of December 31, 2021, and our expected net cash inflows from operations to allow us to meet our near-term and long-term cash obligations, which are reflected in our consolidated balance sheets. Our most significant fixed obligations are debt obligations and lease commitments, for which annual payments are disclosed in Note 10, Notes Payable, and Note 7, Leases, respectively, to our financial statements included elsewhere in this Annual Report on Form 10-K.

We may from time to time seek to retire, redeem or repurchase all or part of our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases, redemptions or exchanges, if any, of our debt will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.

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In May 2021, our board of directors authorized a program to repurchase up to $150.0 million of our Class A Common Stock. Unless it is terminated or suspended prior to its expiration, the stock repurchase program will remain in effect until December 31, 2022. The timing and amount of any repurchases will be determined based on market conditions, stock price and other factors. The stock repurchase program may be modified, suspended or discontinued at any time without notice. Repurchases may be made through a variety of methods, including open market purchases, privately negotiated transactions, block trades, exchange transactions, accelerated share repurchase transactions, or any combination of such methods. As of December 31, 2021, $122.9 million remained available for share repurchases under this stock repurchase program.

Cash Flows From Operating Activities

Net cash provided by operating activities totaled $261.9 million for the year ended December 31, 2021. The cash provided by operations primarily related to cash flows from our net income of $528.4 million, net of non-cash items of $284.4 million and net changes in operating assets and liabilities of $17.7 million. Net cash inflows are derived primarily from collaboration arrangements revenue related to sales of LINZESS in the U.S.

Net cash provided by operating activities totaled $168.8 million for the year ended December 31, 2020. The cash provided by operations primarily related to cash flows from our net income of $106.2 million, net of non-cash items of $63.6 million and net changes in operating assets and liabilities of $0.9 million. Net cash inflows are derived primarily from collaboration arrangements revenue related to sales of LINZESS in the U.S.

Cash Flows From Investing Activities

Cash used in investing activities for the year ended December 31, 2021 totaled $0.3 million and pertained to the purchase of property and equipment.

Cash used in investing activities for the year ended December 31, 2020 totaled $1.8 million and pertained to the purchase of property and equipment.

Cash Flows From Financing Activities

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

Cash provided by financing activities for the year ended December 31, 2020 totaled $18.5 million and resulted from proceeds from the exercise of stock options and the issuance of shares under our ESPP.

Funding Requirements

​

We began commercializing LINZESS in the U.S. with our collaboration partner, AbbVie, in the fourth quarter of 2012, and we currently derive a significant portion of our revenue from this collaboration. In addition, we are deploying significant resources to fulfill U.S. FDA requirements for linaclotide. Our goal is to generate and maintain positive cash flows, driven by increased revenue generated through sales of LINZESS and other commercial activities and financial discipline.

​

Under our collaboration with AbbVie for North America, total net sales of LINZESS in the U.S., as recorded by AbbVie, are reduced by commercial costs incurred by each party, and the resulting amount is shared equally between us and AbbVie. Additionally, we receive royalties from AbbVie based on sales of linaclotide in its licensed territories outside of the U.S. We believe revenues from our LINZESS partnership for the U.S. with AbbVie will continue to constitute a significant portion of our total revenue for the foreseeable future and we cannot be certain that such revenues, as well as the revenues from our other commercial activities, will continue to enable us to generate positive cash flows, or to do so in the timeframes we expect. We also anticipate that we will continue to incur substantial expenses for the next several years as we further develop and commercialize linaclotide in the U.S., develop and commercialize other products, and invest in building our pipeline through internal or external opportunities, including potential payments associated with exercising the Option under the COUR Collaboration Agreement. We believe that

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our cash on hand as of December 31, 2021 will be sufficient to meet our projected operating needs at least through the next twelve months from the issuance of these financial statements.

​

Our forecast of the period of time through which our financial resources will be adequate to support our operations, including the underlying estimates regarding the costs to develop, obtain regulatory approval for, and commercialize linaclotide in the U.S., as well as our expectations regarding revenue from Astellas for Japan and AstraZeneca for China (including Hong Kong and Macau), and our goal to generate and maintain positive cash flows, are forward-looking statements that involve risks and uncertainties. Our actual results could vary materially and negatively from these and other forward-looking statements as a result of a number of factors, including the factors discussed in the “Risk Factors” section of this Annual Report on Form 10-K. We have based our estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

​

Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate precisely the amounts of capital outlays and operating expenditures necessary to develop, obtain regulatory approval for, and commercialize linaclotide and our other product candidates, in each case, for all of the markets, indications, populations and formulations for which we believe each is suited. Our funding requirements will depend on many factors, including, but not limited to, the following:

​

[[GREPCENT_TABLE]]
[["","\u25cf","the revenue generated by sales of LINZESS and CONSTELLA and from any other sources;"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","the rate of progress and cost of our commercialization activities, including the expense we incur in marketing and selling LINZESS in the U.S. and from any other sources;"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","the success of our third-party manufacturing activities;"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","the time and costs involved in developing, and obtaining regulatory approvals for, our product candidates, as well as the timing and cost of any post-approval development and regulatory requirements;"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","the success of our research and development efforts;"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","the emergence of competing or complementary products;"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","the terms and timing of any collaborative, licensing or other arrangements that we may establish, including milestones, royalties or other payments due or payable under such agreements;"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","the settlement method used for our outstanding convertible notes; and"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","the acquisition of businesses, products and technologies and the impact of other strategic transactions, as well as the cost and timing of evaluating, acquiring, and, if completed, integrating into our business operations any such assets."]]
[[/GREPCENT_TABLE]]

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Financing Strategy

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We may, from time to time, consider additional funding through a combination of new collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources. We will continue to manage our capital structure and to consider all financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile. Any such capital transactions may or may not be similar to transactions in which we have engaged in the past. There can be no assurance that any such financing opportunities will also be available on acceptable terms, if at all.

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Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of

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facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries.

New Accounting Pronouncements

For a discussion of recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. We did not otherwise adopt any new accounting pronouncements during the fiscal year ended December 31, 2021 that had a material effect on our consolidated financial statements included in this report.

Trends and Uncertainties

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Impact of the COVID-19 Pandemic

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

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Since the beginning of the pandemic, we have monitored the impact of the COVID-19 pandemic in the territories where our customer-facing employees are located. While our customer-facing employees have generally resumed in-person work practices, they may be limited in the number of in-person details and other activities they are able to conduct due to containment and mitigation measures related to the COVID-19 pandemic. Our headquarters have re-opened, but all headquarters employees have the option to work primarily remotely.

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We and our partner, AbbVie, are focused on maintaining the availability of LINZESS for adult men and women suffering from IBS-C or CIC. As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has not caused significant disruptions to manufacturing operations or supply of LINZESS in the U.S.

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We include our and AbbVie’s collaboration-related selling, general, and administrative expenses, which have historically included expenses from in-person selling activities, in the calculation of net profits from the sale of LINZESS in the U.S. and present net payments to us as collaborative arrangements revenue. As a result of the COVID-19 pandemic, since 2020, we and AbbVie agreed to include certain costs associated with remote selling activities performed by our and AbbVie’s customer-facing employees in collaboration-related selling, general and administrative expenses in our calculation of net profits from the sale of LINZESS in the U.S. In 2020, we experienced fluctuations in our settlement payments based on the ratio of selling, general and administrative expenses incurred by each party throughout 2020 and may continue to experience such fluctuations in the future as a result of the reimbursement of costs associated with remote selling activities and potential limitations in the number of in-person details we or AbbVie may be able to conduct due to containment and mitigation measures related to the COVID-19 pandemic. The COVID-19 pandemic may negatively impact future net sales of LINZESS in the U.S., including as a result of reduced and/or restricted in-person promotion or potential changes in patient access to healthcare (including due to unemployment or modifications in insurance coverage) and payor reimbursement levels.

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Given the uncertainties surrounding the extent and duration of the impact of the pandemic on our business and operations, we continue to evaluate the impact of the COVID-19 pandemic on our operating results and financial condition, and we may incur additional expenses in future periods as a result. Refer to “Risk Factors” in Item 1A of this Annual Report on Form 10-K for additional information on risks associated with COVID-19 that could impact our operations and results.

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