Ironwood(IRWD) - 2022 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Presents unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flow statements, with detailed notes Condensed Consolidated Balance Sheets Total assets and stockholders' equity decreased from December 2021 to June 2022, driven by reduced cash and paid-in capital Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Cash and cash equivalents | $504,365 | $620,129 | | Total current assets | $617,826 | $745,225 | | Total assets | $975,690 | $1,126,927 | | Total current liabilities | $23,298 | $161,698 | | Total stockholders' equity | $532,883 | $605,911 | - Total assets decreased by $151.2 million from $1,126.9 million at December 31, 2021, to $975.7 million at June 30, 2022[19] - Total current liabilities significantly decreased from $161.7 million to $23.3 million, largely due to the repayment of the current portion of convertible senior notes[19] Condensed Consolidated Statements of Income and Comprehensive Income Net income significantly decreased for Q2 and H1 2022 compared to 2021, due to a large prior-year income tax benefit Condensed Consolidated Statements of Income and Comprehensive Income (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $97,231 | $104,031 | $194,760 | $192,876 | | Total operating expenses | $41,576 | $38,933 | $81,259 | $82,380 | | Income from operations | $55,655 | $65,098 | $113,501 | $110,496 | | Income before income taxes | $53,785 | $54,372 | $110,250 | $94,730 | | Income tax (expense) benefit | $(16,705) | $336,931 | $(34,369) | $336,499 | | Net income | $37,080 | $391,303 | $75,881 | $431,229 | | Net income per share—basic | $0.24 | $2.42 | $0.49 | $2.67 | | Net income per share—diluted | $0.21 | $2.39 | $0.42 | $2.64 | - Net income for the three months ended June 30, 2022, decreased by 90.5% to $37.1 million from $391.3 million in the prior year, primarily due to a $336.9 million income tax benefit in Q2 2021[20] - Total revenues for the six months ended June 30, 2022, increased slightly by 1% to $194.8 million compared to $192.9 million in the prior year[20] Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased from December 2021 to June 2022, due to ASU 2020-06 adjustment and stock repurchases Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | December 31, 2021 | June 30, 2022 | | :-------------------- | :---------------- | :------------ | | Total Stockholders' Equity | $605,911 | $532,883 | | Cumulative-effect adjustment upon adoption of ASU 2020-06, net of tax | $(44,050) | | | Repurchases of common stock | | $(123,385) | | Net income | | $75,881 | - Total stockholders' equity decreased from $605.9 million at December 31, 2021, to $532.9 million at June 30, 2022[23] - The adoption of ASU 2020-06 resulted in a cumulative-effect adjustment of $(44.1) million to stockholders' equity[23] Condensed Consolidated Statements of Cash Flows Net cash decreased for H1 2022, driven by financing outflows from debt repayment and share repurchases, despite positive operating cash flow Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $125,489 | $122,262 | | Net cash used in investing activities | $(97) | $0 | | Net cash provided by (used in) financing activities | $(241,156) | $7,873 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $(115,764) | $130,135 | | Cash, cash equivalents and restricted cash, end of period | $506,100 | $494,919 | - Net cash provided by operating activities increased slightly to $125.5 million for the six months ended June 30, 2022, from $122.3 million in the prior year[26] - Financing activities resulted in a net cash outflow of $241.2 million for the six months ended June 30, 2022, compared to an inflow of $7.9 million in the prior year, mainly due to the repayment of $120.7 million in 2022 Convertible Notes and $126.4 million in share repurchases[26] Notes to Condensed Consolidated Financial Statements Detailed notes cover business, accounting policies, EPS, collaborations, financial instruments, debt, stock plans, repurchases, and income taxes 1. Nature of Business Ironwood is a GI healthcare company focused on LINZESS® commercialization and advancing pipeline candidates like CNP-104 and IW-3300 - Ironwood's core product, LINZESS® (linaclotide), is approved for adult IBS-C or CIC in the U.S. and Mexico, and for IBS-C in Japan and China[29] - The company has strategic partnerships with AbbVie (U.S., Canada, Mexico, Europe, Expanded Territory), Astellas (Japan), and AstraZeneca (China) for linaclotide[31][32] - Pipeline candidates include CNP-104 for primary biliary cholangitis (in collaboration with COUR Pharmaceutical) and IW-3300 for visceral pain conditions (e.g., interstitial cystitis/bladder pain syndrome, endometriosis)[33][34] 2. Summary of Significant Accounting Policies Outlines accounting policies, including ASU 2020-06 adoption, simplifying convertible instrument accounting and impacting deferred tax assets and equity - The company adopted ASU 2020-06 on January 1, 2022, using the modified retrospective approach, which simplified accounting for convertible instruments by treating them as a single liability[44][45] Consolidated Balance Sheet (in thousands) | Consolidated Balance Sheet (in thousands) | December 31, 2021 (As Reported) | Effect of the Adoption of ASU 2020-06 | January 1, 2022 (As Adjusted) | | :---------------------------------------- | :------------------------------ | :------------------------------------ | :---------------------------- | | Deferred tax assets | $333,294 | $16,855 | $350,149 | | Current portion of convertible senior notes | $116,858 | $3,581 | $120,439 | | Long-term portion of convertible senior notes | $337,333 | $57,324 | $394,657 | | Additional paid-in-capital | $1,543,357 | $(110,217) | $1,433,140 | | Retained earnings | $(937,608) | $66,167 | $(871,441) | - The adoption of ASU 2020-06 is expected to reduce non-cash interest expense by $22.1 million during the year ended December 31, 2022, and does not impact liquidity or cash flows[45][46] 3. Net Income Per Share Details basic and diluted EPS, highlighting the change to the if-converted method for convertible notes following ASU 2020-06 adoption Net Income Per Share | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income per share—basic | $0.24 | $2.42 | $0.49 | $2.67 | | Net income per share—diluted | $0.21 | $2.39 | $0.42 | $2.64 | | Weighted average shares used in computing net income per share—diluted (thousands) | 184,876 | 163,495 | 187,315 | 163,134 | - Following ASU 2020-06 adoption, the dilutive impact of Convertible Senior Notes is determined using the if-converted method, assuming conversion at the beginning of the period and deducting interest charges from the numerator[51] - The 2022 Convertible Notes had no dilutive impact for the three and six months ended June 30, 2022, as the company elected a combination settlement of cash for principal and shares for conversion value in excess of principal[52] 4. Collaboration, License and Other Agreements Details revenue from linaclotide collaborations with AbbVie, AstraZeneca, and Astellas, plus the COUR collaboration for CNP-104 Revenue Source (in thousands) | Revenue Source (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | AbbVie (North America) | $95,061 | $101,038 | $189,962 | $187,537 | | AbbVie (Europe and other) | $528 | $574 | $1,138 | $1,174 | | AstraZeneca (China) | $148 | $200 | $340 | $410 | | Astellas (Japan) | $500 | $570 | $1,023 | $1,066 | | Alnylam (GIVLAARI) | $585 | $596 | $1,408 | $1,052 | | Total collaborative arrangements revenue | $97,231 | $103,386 | $194,760 | $192,051 | - Collaborative arrangements revenue from AbbVie (North America) decreased by $5.9 million (5.9%) for the three months ended June 30, 2022, primarily due to decreased net price and inventory fluctuations, partially offset by increased prescription demand[53][180] - The company has an option to acquire an exclusive license for CNP-104 from COUR Pharmaceutical for primary biliary cholangitis, with a data readout estimated in 2023. Upfront and milestone payments totaling $19.5 million were recognized as R&D expense in 2021[73][74][75] 5. Fair Value of Financial Instruments Provides fair value measurements for financial instruments, including cash, restricted cash, and derivatives, noting hedge termination Asset/Liability (in thousands) | Asset/Liability (in thousands) | June 30, 2022 (Fair Value) | December 31, 2021 (Fair Value) | | :----------------------------- | :------------------------- | :----------------------------- | | Money market funds | $211,355 | $595,233 | | Repurchase agreements | $277,007 | $0 | | Restricted cash (money market funds) | $1,735 | $1,735 | | Convertible note hedges | $0 | $1,115 | | Note hedge warrants | $152 | $1,316 | - Convertible Note Hedges, classified as Level 3 derivatives, terminated unexercised upon expiry in June 2022, resulting in a change in fair value of $(1.1) million for the six months ended June 30, 2022[83][85] - Note Hedge Warrants, also Level 3 derivatives, had a fair value of $152 thousand at June 30, 2022, down from $1.3 million at December 31, 2021[80][85] 6. Accrued Expenses and Other Current Liabilities Details accrued expenses and other current liabilities, which decreased from December 2021 to June 2022 due to reduced compensation and repurchases Accrued Expense (in thousands) | Accrued Expense (in thousands) | June 30, 2022 | December 31, 2021 | | :----------------------------- | :------------ | :---------------- | | Accrued compensation and benefits | $8,762 | $17,115 | | Stock repurchase | $0 | $3,009 | | Other | $4,663 | $3,442 | | Total accrued expenses and other current liabilities | $13,425 | $23,566 | - Total accrued expenses and other current liabilities decreased by $10.1 million (42.9%) from $23.6 million at December 31, 2021, to $13.4 million at June 30, 2022[89] 7. Leases Details the company's lease portfolio, including costs, remaining term, discount rate, and future minimum lease payments Lease Cost (in thousands) | Lease Cost (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $627 | $630 | $1,256 | $1,261 | | Short-term lease cost | $264 | $214 | $523 | $428 | | Total lease cost | $891 | $844 | $1,779 | $1,689 | Lease Metric | Lease Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Weighted-average remaining lease term (years) | 7.8 | 8.8 | | Weighted-average discount rate | 5.8% | 5.8% | - Future minimum lease payments under non-cancelable operating leases total $25.8 million as of June 30, 2022, with operating lease liabilities of $20.6 million[92] 8. Notes Payable Details convertible senior notes, including 2022 repayment, outstanding 2024/2026 notes, and accounting changes from ASU 2020-06 - The company repaid the remaining $120.7 million aggregate principal amount of its 2022 Convertible Notes upon maturity in June 2022[97] Convertible Senior Notes (in thousands) | Convertible Senior Notes (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------------------------- | :------------ | :---------------- | | 2022 Convertible Notes (Principal) | $0 | $120,699 | | 2024 Convertible Notes (Principal) | $200,000 | $200,000 | | 2026 Convertible Notes (Principal) | $200,000 | $200,000 | | Net carrying amount | $395,451 | $454,191 | | Total interest expense (Six Months Ended June 30, 2022) | $4,548 | | | Total interest expense (Six Months Ended June 30, 2021) | | $15,358 | - Total interest expense related to convertible senior notes decreased by $10.8 million for the six months ended June 30, 2022, compared to the same period in 2021, primarily due to the adoption of ASU 2020-06, which eliminated non-cash interest expense from debt discount amortization[109][115][192] 9. Employee Stock Benefit Plans Summarizes share-based compensation expense under employee stock benefit plans, including stock options, RSAs, and RSUs Share-based Compensation Expense (in thousands) | Share-based Compensation Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $1,133 | $1,134 | $2,291 | $2,377 | | Selling, general and administrative | $5,468 | $3,455 | $10,399 | $7,498 | | Total share-based compensation expense | $6,601 | $4,589 | $12,690 | $9,985 | - Total share-based compensation expense increased by $2.1 million (45.6%) for the three months ended June 30, 2022, and by $2.7 million (27.1%) for the six months ended June 30, 2022, compared to the respective prior periods[131] 10. Share Repurchase Plan Details the completed $150.0 million Class A Common Stock repurchase program, finished in May 2022, with all shares retired - The company completed its $150.0 million share repurchase program in May 2022[132] Share Repurchase Program | Period | Shares Repurchased | Aggregate Cost (in thousands) | | :-------------------------- | :----------------- | :---------------------------- | | Three months ended June 30, 2022 | 2.8 million | $32,900 | | Six months ended June 30, 2022 | 10.8 million | $123,400 | | Overall program (since Dec 2021) | 13.1 million | $150,000 | - The average price per share for the overall repurchase program was $11.47[133][238] 11. Income Taxes Explains income tax provision, including the 2021 valuation allowance release and 2022 non-cash tax expense from NOL utilization Income Tax (in thousands) | Income Tax (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax (expense) benefit | $(16,705) | $336,931 | $(34,369) | $336,499 | - In Q2 2021, the company recorded a significant income tax benefit of $336.9 million due to the release of the valuation allowance on the majority of its tax attributes and other deferred tax assets[136][139] - For the three and six months ended June 30, 2022, the company recorded income tax expense of $16.7 million and $34.4 million, respectively, with the majority being non-cash due to the utilization of net operating losses[135][196] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on financial condition and results, analyzing revenues, expenses, taxes, liquidity, capital, and COVID-19 impact Overview Ironwood is a GI healthcare company focused on LINZESS® and pipeline, with Q2 2022 net income decreasing due to a prior-year tax benefit - Ironwood's commercial product, LINZESS, is a GC-C agonist indicated for adult IBS-C or CIC, available in the U.S., Mexico, Japan, and China[142] - The company is developing CNP-104 for primary biliary cholangitis (PBC) and IW-3300 for visceral pain conditions like IC/BPS and endometriosis[144] Net Income (in millions) | Metric (in millions) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $37.1 | $391.3 | $75.9 | $431.2 | Financial Operations Overview Outlines financial operations: linaclotide revenues, R&D, SG&A, interest expense, and ASU 2020-06 impact on reporting - Revenues are primarily generated from collaborative arrangements and license agreements related to linaclotide, with the majority from U.S. LINZESS sales (50% net profit/loss share with AbbVie)[147][148] - Research and development expenses are focused on linaclotide enhancements, CNP-104, and IW-3300, with IW-3718 development discontinued in September 2020[149][154][155][156] - Interest expense primarily relates to convertible senior notes, with non-cash interest expense now solely from amortization of debt issuance costs following the ASU 2020-06 adoption[171] Results of Operations Compares financial performance for Q2 and H1 2022 vs. 2021, noting stable revenues, decreased net income, and expense shifts Financial Performance (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $97,231 | $104,031 | $194,760 | $192,876 | | Research and development | $11,452 | $12,163 | $22,274 | $27,647 | | Selling, general and administrative | $30,124 | $27,052 | $58,985 | $54,704 | | Net income | $37,080 | $391,303 | $75,881 | $431,229 | - Collaborative arrangements revenue decreased by $6.2 million (6%) for the three months ended June 30, 2022, but increased by $2.7 million (1%) for the six months ended June 30, 2022, primarily driven by LINZESS U.S. sales[180][181] - Research and development expense decreased by $0.7 million (6%) for the three months and $5.4 million (19%) for the six months ended June 30, 2022, mainly due to reduced IW-3718 and linaclotide costs, partially offset by increased IW-3300 development[184][185] - Selling, general and administrative expenses increased by $3.1 million (11%) for the three months and $4.3 million (8%) for the six months ended June 30, 2022, due to higher compensation and sales/marketing activities[186][187] - Interest expense decreased significantly by $5.5 million (71%) for the three months and $10.8 million (70%) for the six months ended June 30, 2022, primarily due to the adoption of ASU 2020-06[191][192] Critical Accounting Policies and Estimates No material changes to critical accounting policies were reported for Q2 and H1 2022 compared to the 2021 Annual Report - No material changes to critical accounting policies were reported for the three and six months ended June 30, 2022[176] Liquidity and Capital Resources Discusses liquidity, capital resources, and funding needs, highlighting cash, debt repayment, and share repurchase completion - As of June 30, 2022, the company had $504.4 million in unrestricted cash and cash equivalents[198] - The company expects its cash balance and net cash inflows from operations to be sufficient to meet obligations for at least the next twelve months[199][209] - In June 2022, the company repaid the $120.7 million remaining principal of its 2022 Convertible Notes upon maturity[200][206] - The $150.0 million Class A Common Stock repurchase program, authorized in May 2021, was completed in May 2022, with 13.1 million shares repurchased[201][206] Sources of Liquidity Historically financed by stock and debt, the company holds $400.0 million in convertible notes and has generated net income since 2019 - As of June 30, 2022, the company had an accumulated deficit of $795.6 million[202] - Current debt consists of $400.0 million in convertible notes, maturing between 2024 and 2026[202] Summary of Cash Flows Operating cash flows were positive, but financing outflows from debt repayment and share repurchases led to an overall cash decrease Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $61,365 | $48,568 | $125,489 | $122,262 | | Net cash used in investing activities | $(88) | $0 | $(97) | $0 | | Net cash provided by (used in) financing activities | $(150,283) | $5,662 | $(241,156) | $7,873 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $(89,006) | $54,230 | $(115,764) | $130,135 | - Net cash provided by operating activities increased by $3.2 million for the six months ended June 30, 2022, compared to the same period in 2021[204] - Cash used in financing activities for the six months ended June 30, 2022, was $241.2 million, driven by $120.7 million in 2022 Convertible Notes repayment and $126.4 million in share repurchases[206] Funding Requirements Aims for positive cash flows from LINZESS sales but anticipates substantial expenses, with future funding subject to various risks - The company's goal is to generate and maintain positive cash flows, driven by LINZESS sales and financial discipline[208] - Substantial expenses are expected for the foreseeable future for linaclotide development and commercialization, other product development, and pipeline investments, including potential payments for the CNP-104 option[209] - Future funding requirements are highly uncertain and depend on factors such as LINZESS revenue, R&D progress, regulatory approvals, and intellectual property costs[211] New Accounting Pronouncements Refers to Note 2 for recent accounting pronouncements, indicating no new material adoptions beyond those already discussed - For a discussion of recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies[214] Trends and Uncertainties Discusses the ongoing impact of the COVID-19 pandemic on business, operations, and financial results, particularly on revenue - The COVID-19 pandemic has impacted, and may continue to impact, the company's business, operations, and financial results, particularly in day-to-day operations and the collaboration agreement with AbbVie[215] - The pandemic has not caused significant disruptions to manufacturing or supply of LINZESS in the U.S. as of the report date[217] - Fluctuations in quarterly settlement payments and potential negative impacts on future net sales of LINZESS in the U.S. may occur due to changes in selling activities (in-person vs. remote) and patient access to healthcare[218] Item 3. Quantitative and Qualitative Disclosures About Market Risk Outlines market risk exposure, including minimal interest rate risk and equity price risk from convertible notes and derivatives - The company's primary market risk exposure is interest income sensitivity, but due to short-term, low-risk investments (U.S. government securities, money market instruments), an immediate 1% interest rate change would not materially affect its portfolio's fair value[221][222] - Convertible senior notes bear fixed interest rates, limiting exposure to interest rate changes, but may result in paying higher rates relative to the market if credit rating improves[224] - Equity price risk stems from convertible notes and derivatives (Convertible Note Hedges, Note Hedge Warrants, Capped Calls) whose fair values are dependent on the price and volatility of the Class A Common Stock[225][226] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022[229][231] - No changes materially affected, or were reasonably likely to materially affect, the company's internal control over financial reporting during the period covered by the report[233] PART II — OTHER INFORMATION Item 1A. Risk Factors No material changes to risk factors were reported compared to the 2021 Annual Report on Form 10-K - No material changes from the risk factors previously disclosed in the 2021 Annual Report on Form 10-K[237] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports the completion of the $150.0 million Class A Common Stock repurchase program in May 2022, with all shares retired - The $150.0 million Class A Common Stock repurchase program was completed in May 2022[238] Shares Purchased Under Repurchase Program | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------- | :------------------------------- | :--------------------------- | | April 1, 2022 - April 30, 2022 | 1,305,881 | $12.14 | | May 1, 2022 - May 31, 2022 | 1,451,200 | $11.74 | | June 1, 2022 - June 30, 2022 | 0 | $0 | | Total (Q2 2022) | 2,757,081 | $11.93 | - A total of 13.1 million shares were repurchased under the program at an average price of $11.47 per share, and all were retired[238] Item 6. Exhibits Lists exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, certifications, and XBRL documents - The exhibit index includes corporate documents (Certificate of Incorporation, Bylaws), certifications (CEO, CFO), and XBRL taxonomy documents[242] Signatures Contains signatures of the CEO and VP, Corporate Controller, certifying the filing of the report - The report is signed by Thomas McCourt, Chief Executive Officer, and Ronald Silver, Vice President, Corporate Controller, on August 4, 2022[247]