UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-34620
IRONWOOD PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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04-3404176 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification Number) |
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301 Binney Street |
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Cambridge, Massachusetts |
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02142 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
(617) 621-7722
(Registrant’s telephone number, including area code)
320 Bent Street
Cambridge, Massachusetts, 02141
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): o Yes x No
As of July 30, 2010, there were 19,180,562 shares of Class A common stock outstanding and 78,850,764 shares of Class B common stock outstanding.
IRONWOOD PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010
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Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009 |
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4 |
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5 |
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6 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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33 |
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34 |
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35 |
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55 |
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PART I — FINANCIAL INFORMATION
Ironwood Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
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June 30,
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December 31,
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
35,384 |
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$ |
123,145 |
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Available-for-sale securities |
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236,221 |
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— |
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Accounts receivable |
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196 |
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12 |
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Related party accounts receivable, net |
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6,156 |
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5,222 |
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Prepaid expenses and other assets |
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4,202 |
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3,069 |
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Total current assets |
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282,159 |
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131,448 |
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Restricted cash |
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10,510 |
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8,431 |
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Property and equipment, net |
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29,117 |
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22,551 |
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Other assets |
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298 |
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21 |
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Total assets |
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$ |
322,084 |
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$ |
162,451 |
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Liabilities and Stockholders’ Equity (Deficit) |
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Current liabilities: |
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Accounts payable |
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$ |
5,202 |
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$ |
4,944 |
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Accrued research and development costs |
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8,573 |
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12,401 |
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Accrued expenses |
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5,523 |
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4,899 |
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Current portion of long-term debt |
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1,017 |
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1,310 |
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Current portion of capital lease obligations |
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246 |
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143 |
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Current portion of deferred rent |
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1,150 |
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180 |
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Current portion of deferred revenue |
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35,490 |
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32,560 |
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Total current liabilities |
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57,201 |
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56,437 |
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Long-term debt, net of current portion |
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1,288 |
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1,764 |
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Capital lease obligations, net of current portion |
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427 |
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112 |
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Deferred rent, net of current portion |
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16,330 |
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10,486 |
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Deferred revenue, net of current portion |
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73,288 |
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93,642 |
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Commitments and contingencies (Note 8) |
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Convertible preferred stock, $0.001 par value, no shares authorized at June 30, 2010 and 74,942,226 shares authorized at December 31, 2009, no shares issued and outstanding at June 30, 2010 and 69,904,843 shares issued and outstanding at December 31, 2009 (Note 3 and Note 9) |
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— |
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298,350 |
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Stockholders’ equity (deficit): |
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Preferred stock, $0.001 par value, 75,000,000 shares authorized, no shares issued and outstanding at June 30, 2010 and no shares authorized, issued or outstanding at December 31, 2009 |
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— |
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— |
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Class A common stock, $0.001 par value, 500,000,000 and 98,530,700 shares authorized at June 30, 2010 and December 31, 2009, respectively, and 19,180,562 shares issued and outstanding at June 30, 2010 and no shares issued and outstanding at December 31, 2009 |
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19 |
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— |
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Class B common stock, $0.001 par value, 100,000,000 and 98,530,700 shares authorized at June 30, 2010 and December 31, 2009, respectively, 78,850,764 and 7,854,602 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively |
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79 |
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8 |
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Additional paid-in capital |
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518,217 |
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12,999 |
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Accumulated deficit |
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(347,619 |
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(314,559 |
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Accumulated other comprehensive income |
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44 |
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— |
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Total Ironwood Pharmaceuticals, Inc. stockholders’ equity (deficit) |
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170,740 |
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(301,552 |
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Noncontrolling interest |
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2,810 |
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3,212 |
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Total stockholders’ equity (deficit) |
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173,550 |
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(298,340 |
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Total liabilities and stockholders’ equity (deficit) |
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$ |
322,084 |
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$ |
162,451 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Ironwood Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenue: |
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Collaborative arrangements |
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$ |
9,188 |
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$ |
6,210 |
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$ |
18,026 |
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$ |
10,660 |
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Services |
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1,771 |
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400 |
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1,985 |
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1,181 |
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Total revenue |
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10,959 |
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6,610 |
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20,011 |
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11,841 |
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Operating expenses: |
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Research and development |
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20,953 |
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19,397 |
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39,590 |
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38,004 |
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General and administrative |
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7,325 |
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5,790 |
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13,968 |
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10,984 |
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Total operating expenses |
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28,278 |
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25,187 |
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53,558 |
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48,988 |
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Loss from operations |
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(17,319 |
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(18,577 |
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(33,547 |
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(37,147 |
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Other income (expense): |
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Interest expense |
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(79 |
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(122 |
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(172 |
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(256 |
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Interest and investment income |
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189 |
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82 |
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257 |
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186 |
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Remeasurement of forward purchase contracts |
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— |
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(300 |
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— |
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(100 |
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Other income (expense), net |
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110 |
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(340 |
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85 |
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(170 |
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Net loss |
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(17,209 |
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(18,917 |
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(33,462 |
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(37,317 |
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Net loss attributable to noncontrolling interest |
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73 |
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532 |
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402 |
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964 |
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Net loss attributable to Ironwood Pharmaceuticals, Inc. |
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$ |
(17,136 |
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$ |
(18,385 |
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$ |
(33,060 |
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$ |
(36,353 |
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Net loss per share attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted |
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$ |
(0.18 |
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$ |
(2.61 |
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$ |
(0.41 |
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$ |
(5.18 |
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Weighted average number of common shares used in net loss per share attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted |
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97,642,330 |
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7,035,871 |
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80,893,200 |
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7,021,733 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Ironwood Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
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Six Months Ended June 30, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(33,462 |
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$ |
(37,317 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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2,805 |
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2,574 |
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Loss on disposal of property and equipment |
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227 |
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69 |
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Remeasurement of forward purchase contracts |
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— |
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100 |
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Share-based compensation expense |
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3,298 |
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1,927 |
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Accretion of discount/premium on investment securities |
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487 |
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148 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(1,118 |
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2,717 |
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Restricted cash |
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(2,079 |
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(446 |
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Prepaid expenses and other current assets |
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(1,133 |
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(1,851 |
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Other assets |
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(277 |
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25 |
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Accounts payable and accrued expenses |
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401 |
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(1,873 |
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Accrued research and development costs |
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(3,828 |
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(2,663 |
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Deferred revenue |
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(17,424 |
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27,505 |
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Deferred rent |
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6,814 |
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1,240 |
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Net cash used in operating activities |
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(45,289 |
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(7,845 |
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Cash flows from investing activities: |
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Purchases of available-for-sale securities |
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(274,131 |
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(8,981 |
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Sales and maturities of available-for-sale securities |
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37,467 |
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23,300 |
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Purchases of property and equipment |
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(8,604 |
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(2,279 |
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Proceeds from the sale of property and equipment |
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1 |
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10 |
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Net cash (used in) provided by investing activities |
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(245,267 |
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12,050 |
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Cash flows from financing activities: |
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Proceeds from initial public offering |
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203,167 |
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— |
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Proceeds from exercise of stock options and issuance of restricted stock |
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466 |
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11 |
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Proceeds from borrowings |
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— |
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2,597 |
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Payments on borrowings |
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(838 |
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(694 |
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Net cash provided by financing activities |
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202,795 |
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1,914 |
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Net (decrease) increase in cash and cash equivalents |
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(87,761 |
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6,119 |
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Cash and cash equivalents, beginning of period |
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123,145 |
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67,722 |
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Cash and cash equivalents, end of period |
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$ |
35,384 |
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$ |
73,841 |
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Supplemental cash flow disclosures: |
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Cash paid for interest |
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$ |
180 |
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$ |
233 |
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Fair value of forward purchase contract |
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$ |
— |
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$ |
6,000 |
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Purchases under capital leases |
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$ |
487 |
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$ |
— |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Business
Ironwood Pharmaceuticals, Inc. (the “Company”) is an entrepreneurial pharmaceutical company that discovers, develops and intends to commercialize innovative medicines targeting important therapeutic needs. The Company is focused on a portfolio of internally discovered drug candidates that currently includes one Phase 3 drug candidate (linaclotide), one Phase 1/Phase 2 pain drug candidate, and multiple preclinical candidates.
The Company holds a majority ownership interest in Microbia, Inc. (formerly known as Microbia Precision Engineering), a subsidiary formed in September 2006. Microbia, Inc. (“Microbia”) engages in a specialty biochemicals business based on a proprietary strain-development platform.
The Company was incorporated in Delaware on January 5, 1998. On April 7, 2008, the Company changed its name from Microbia, Inc. to Ironwood Pharmaceuticals, Inc. The Company operates in two reportable business segments: human therapeutics and biomanufacturing (Note 12).
The Company has generated an accumulated deficit as of June 30, 2010 of approximately $347.6 million since inception. In February 2010, the Company completed its initial public offering of Class A common stock and raised a total of approximately $203.2 million in net proceeds (Note 3). At June 30, 2010, the Company believes that based on its current business plan, its unrestricted cash, cash equivalents and available-for-sale securities totaling approximately $271.6 million are sufficient to fund operations through the anticipated commercialization of linaclotide in the U.S.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Statements
The accompanying condensed consolidated financial statements and the related disclosures as of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (‘‘SEC’’) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2010. The December 31, 2009 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP for complete financial statements.
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company’s financial position as of June 30, 2010 and results of its operations for the three and six months ended June 30, 2010 and 2009, and its cash flows for the six months ended June 30, 2010 and 2009. The interim results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
Basis of Presentation
In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (“Codification”). The Codification became the single source for all authoritative GAAP recognized by the FASB and is required to be applied to financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP and did not impact the Company’s financial position or results of operations.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Principles of Consolidation
During 2006, the Company formed Microbia as a 100% wholly owned subsidiary of the Company. In September 2006, Microbia sold additional equity interests to a third party, which reduced the Company’s ownership interest in Microbia to 85% (Note 13). The accompanying condensed consolidated financial statements of Ironwood Pharmaceuticals, Inc. include the assets, liabilities, revenue, and expenses of Microbia, over which the Company exercises control. The Company records noncontrolling interest in its condensed consolidated statements of operations for the ownership interest of the minority owners of Microbia. All intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company’s management evaluates its estimates, including those related to revenue recognition, available-for-sale securities, impairment of long-lived assets, income taxes including the valuation allowance for deferred tax assets, valuation of forward purchase contracts, research and development, contingencies, and share-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds and U.S. Treasury securities. The carrying amount of cash equivalents approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $28.0 million and $120.6 million at June 30, 2010 and December 31, 2009, respectively.
Available-for-Sale Securities
The Company classifies all short-term investments with an original maturity when purchased of greater than three months as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in other comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest and investment income. Realized gains and losses, and declines in value judged to be other than temporary on available-for-sale securities, are included in interest and investment income.
The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest and investment income. To determine whether an other-than-temporary impairment exists, the Company considers whether it has the ability and intent to hold the investment until a market price recovery, and whether evidence indicating the recoverability of the cost of the investment outweighs evidence to the contrary. There were no other-than-temporary impairments for the three and six months ended June 30, 2010.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, restricted cash, available-for-sale securities, and accounts receivable. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company’s available-for-sale investments potentially subject the Company to concentrations of credit risk. The Company has adopted an investment policy which limits the amounts the Company may invest in any one type of investment, and requires all investments held by the Company to be A+ rated, thereby reducing credit risk concentration.
Accounts receivable primarily consist of amounts due under the collaboration agreement with Forest Laboratories, Inc. (“Forest”) and license agreements with Almirall, S.A. (“Almirall”) and Astellas Pharma Inc. (“Astellas”) (Note 5) and from Tate &
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Lyle Investments, Ltd. (“T&L”) (Note 13) for which the Company does not obtain collateral. Effective September 1, 2009, Forest became a related party when the Company sold to Forest 2,083,333 shares of the Company’s Series G convertible preferred stock and effective November 2, 2009, Almirall became a related party when the Company sold to them 681,819 shares of its Series I convertible preferred stock.
Forest accounted for approximately 50% and 54% of the Company’s revenue for the three and six months ended June 30, 2010, respectively, and approximately 67% and 75% for the three and six months ended June 30, 2009, respectively. Almirall accounted for approximately 25% and 29% of the Company’s revenue for the three and six months ended June 30, 2010, respectively, and approximately 27% and 15% for the three and six months ended June 30, 2009, respectively. T&L accounted for approximately 16% and 10% of the Company’s revenue for the three and six months ended June 30, 2010, respectively and approximately 6% and 10% for the three and six months ended June 30, 2009, respectively. For the three and six months ended June 30, 2010 and 2009, no additional customers accounted for more than 10% of the Company’s revenue.
At June 30, 2010 and December 31, 2009, accounts receivable from Forest, net of any payables due Forest, accounted for approximately 67% and 94%, respectively, of the Company’s total accounts receivable. At June 30, 2010 and December 31, 2009, Almirall accounted for approximately 2% and 6%, respectively, of the Company’s total accounts receivable. At June 30, 2010 and December 31, 2009, accounts receivable from T&L, accounted for approximately 28% and 0%, respectively, of the Company’s total accounts receivable.
Revenue Recognition
The Company’s revenue is generated primarily through collaborative research and development and licensing agreements. The terms of these agreements typically include payment to the Company of one or more of the following: nonrefundable, up-front license fees; milestone payments; sale of drug substance to its collaborators; and royalties on product sales. In addition, the Company generates services revenue through agreements that generally provide for fees for research and development services rendered, and may include additional payments at the conclusion of the research period upon achieving specified events. These service agreements also contemplate royalty payments to the Company on future sales of its customers’ products. To date the Company has earned no royalty revenue as a result of product sales.
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, services have been rendered or delivery has occurred, the price is fixed and determinable, and collection is reasonably assured. The Company evaluates revenue from agreements that have multiple elements and accounts for the components as separate elements when the following criteria are met:
· the delivered items have value to the customer on a stand-alone basis;
· there is objective and reliable evidence of fair value of the undelivered items; and
· if there is a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and within the Company’s control.
Collaborative Arrangements Revenue
Up-front License Fees
The Company recognizes revenues from nonrefundable, up-front license fees for which the separation criteria were not met due to continuing involvement in the performance of research and development services on a straight-line basis over the contracted or estimated period of performance, which is typically the research or development term.
Milestones
At the inception of each agreement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific and other risks that must be overcome to achieve the milestone, as well as the level of effort and investment required.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Milestones that are not considered substantive are accounted for as license payments and recognized on a straight-line basis over the remaining period of performance.
In those circumstances where a substantive milestone is achieved, collection of the related receivable is reasonably assured and the Company has remaining obligations to perform under the collaboration arrangement, the Company recognizes as revenue on the date the milestone is achieved an amount equal to the applicable percentage of the performance period that has elapsed as of the date the milestone is achieved, with the balance being deferred and recognized on a straight-line basis over the remaining period of performance.
Payments received or reasonably assured after performance obligations are fully satisfied are recognized as earned.
Services Revenue
The Company recognizes services revenue when there is persuasive evidence that an arrangement exists, services have been rendered or delivery has occurred, the price is fixed and determinable, and collection is reasonably assured. Revenue from research and development services rendered is recognized as services are performed. Bonus payments are recognized as revenue when achieved and the bonus payments are due and collectible. Royalty revenue related to research and development services is recognized in the period the sales occur.
The Company receives research and development funding under the Forest collaboration agreement and considers the factors or indicators within this arrangement to determine whether reporting such funding on a gross or net basis is appropriate. The Company records revenue transactions gross in the condensed consolidated statements of operations if it is deemed the principal in the transaction, which includes being the primary obligor and having the risks and rewards of ownership. The Company produces clinical materials for its collaborators and is reimbursed for its costs to produce such clinical materials. The Company recognizes revenue on clinical materials when the materials have passed all quality testing required for collaborator acceptance and title and risk of loss have transferred to the collaborator.
For certain of the Company’s arrangements, particularly the Company’s license agreement with Almirall, it is required that taxes be withheld on payments made to the Company. The Company has adopted a policy to recognize revenue net of these tax withholdings.
Research and Development Costs
The Company expenses research and development costs to operations as incurred. The Company defers and capitalizes nonrefundable advance payments made by the Company for research and development activities until the related goods are received or the related services are performed.
Research and development expenses comprise costs incurred in performing research and development activities, including salaries and benefits, share-based compensation expense, laboratory supplies and other direct expenses, facilities expenses, overhead expenses, contractual services, including clinical trial and related clinical manufacturing expenses, and other outside expenses. Also included in research and development expenses are the costs of revenue related to the Microbia services contracts.
The Company has entered into a collaboration agreement in which it shares research and development expenses with a collaborator. The Company records the expenses for such work as research and development expense. Because the collaboration arrangement is a cost-sharing arrangement, the Company concluded that when there is a period during the collaboration arrangement during which the Company receives payments from the collaborator, the Company records the payments by the collaborator for their share of the development effort as a reduction of research and development expense.
Share-Based Compensation
Share-based compensation is recognized as an expense in the financial statements based on the grant date fair value. Compensation expense recognized relates to stock awards, restricted stock and stock options granted, modified, repurchased or cancelled on or after January 1, 2006. Stock options granted to employees prior to that time continue to be accounted for using the intrinsic value method. Under the intrinsic value method, compensation associated with share-based awards to employees was
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
determined as the difference, if any, between the fair value of the underlying common stock on the date compensation was measured, generally the grant date, and the price an employee must pay to exercise the award. For awards that vest based on service conditions, the Company uses the straight-line method to allocate compensation expense to reporting periods. The grant date fair value of options granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term and the fair value of the underlying common stock, among others.
The Company records the expense for stock option grants subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date.
The Company records the expense of services rendered by non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of unvested non-employee awards are remeasured at each reporting period and expensed over the vesting term of the underlying stock options.
Noncontrolling Interest
Effective January 1, 2009, the Company adopted a newly issued accounting standard for noncontrolling interests. In accordance with the accounting standard, the Company changed the accounting and reporting for its noncontrolling interest in its condensed consolidated financial statements.
Noncontrolling interest represents the noncontrolling stockholder’s proportionate share of equity and net income or net loss of the Company’s consolidated subsidiary, Microbia. The noncontrolling stockholder’s proportionate share of the equity in Microbia, of approximately $2.8 million and $3.2 million as of June 30, 2010 and December 31, 2009, respectively, is reflected as noncontrolling interest in the Company’s condensed consolidated balance sheets as a component of stockholders’ equity (deficit).
The proportionate share of the net loss attributable to noncontrolling interest is reflected in the accompanying condensed consolidated statements of operations. The following table is a roll-forward of the noncontrolling interest (in thousands):
|
Balance at December 31, 2009 |
|
$ |
3,212 |
|
|
Net loss attributable to noncontrolling interest |
|
(402 |
) |
|
|
Balance at June 30, 2010 |
|
$ |
2,810 |
|
Net Loss Per Share
The Company calculates basic and diluted net loss per common share by dividing the net loss by the weighted average number of common shares outstanding during the period. The Company has excluded all shares that are subject to repurchase by the Company from the weighted average number of common shares outstanding. The Company’s potentially dilutive shares, which include convertible preferred stock, outstanding common stock options and unvested shares of restricted stock, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.
Income Taxes
The Company provides for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.
Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Management has considered the Company’s history of operating losses and concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of its deferred tax assets. Accordingly, the deferred tax assets have been fully reserved at June 30, 2010 and December 31, 2009. Management reevaluates the positive and negative evidence on a quarterly basis.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The Company accounts for uncertain tax positions recognized in the condensed consolidated financial statements by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. There were no income tax provisions or benefits for the three and six months ended June 30, 2010 and 2009 given the Company’s continued net operating loss position.
The statute of limitations for assessment by the Internal Revenue Service (“IRS”) and state tax authorities is open for tax years ending December 31, 2006, 2007 and 2008, although carryforward attributes that were generated prior to tax year 2006 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. The Company is aware of no federal or state audits currently in progress.
Impairment of Long-Lived Assets
The Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value. There were no indicators of impairment at June 30, 2010.
Comprehensive Income (Loss)
All components of comprehensive income (loss) are required to be disclosed in the condensed consolidated financial statements. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources and currently consists of net loss and changes in unrealized gains and losses on available-for-sale securities. Comprehensive loss from operations was calculated as follows (in thousands):
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Net loss attributable to Ironwood Pharmaceuticals, Inc. |
|
$ |
(17,136 |
) |
$ |
(18,385 |
) |
$ |
(33,060 |
) |
$ |
(36,353 |
) |
|
Unrealized gain (loss) on investments |
|
143 |
|
(15 |
) |
44 |
|
(21 |
) |
||||
|
Comprehensive loss attributable to Ironwood Pharmaceuticals, Inc. |
|
$ |
(16,993 |
) |
$ |
(18,400 |
) |
$ |
(33,016 |
) |
$ |
(36,374 |
) |
Segment Information
Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision-maker in deciding how to allocate resources and in assessing performance.
The Company has two reportable business segments: human therapeutics and biomanufacturing (Note 12). Revenue from the Company’s human therapeutics segment is presented in the condensed consolidated statements of operations as collaborative arrangements revenue. Revenue from the Company’s biomanufacturing segment is presented as services revenue.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Recently Issued Accounting Standards
In April 2010, the FASB issued Accounting Standards Update “ASU” No. 2010-17, Revenue Recognition — Milestone Method (“ASU 2010-017”). ASU 2010-017 provides guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This ASU is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010. Early adoption is permitted; however, adoption of this guidance as of a date other than January 1, 2011 will require the Company to apply this guidance retrospectively effective as of January 1, 2010 and will require disclosure of the effect of this guidance as applied to all previously reported interim periods in the fiscal year of adoption. As the Company plans to implement ASU No. 2010-17 prospectively, the effect of this guidance will be limited to future transactions.
In October 2009, the FASB issued ASU No. 2009-13, Multiple- Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13, amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB Accounting Standards Codification Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). The consensus to ASU 2009-13 provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. EITF 00-21 previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. Under EITF 00-21, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and allows for retrospective application. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.
3. Initial Public Offering
In February 2010, the Company completed its initial public offering of Class A common stock pursuant to a registration statement that was declared effective on February 2, 2010. The Company sold 19,166,667 shares of its Class A common stock, which included 2,500,000 shares of the Company’s Class A common stock sold pursuant to an over-allotment option granted to the underwriters, at a price to the public of $11.25 per share. As a result of the initial public offering, the Company raised a total of $215.6 million in gross proceeds, and approximately $203.2 million in net proceeds after deducting underwriting discounts and commissions of $10.5 million and estimated offering expenses of $1.9 million. Costs directly associated with the Company’s initial public offering were capitalized and recorded as deferred offering costs prior to the closing of the initial public offering. These costs have been recorded as a reduction of the proceeds received in arriving at the amount to be recorded in additional paid-in capital.
Upon the closing of the initial public offering, 69,904,843 shares outstanding of the Company’s convertible preferred stock automatically converted into 70,391,620 shares of its Class B common stock.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Net Loss Per Share
Basic and diluted net loss per share is calculated as follows (in thousands, except share and per share amounts):
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
||||
|
Net loss attributable to Ironwood Pharmaceuticals, Inc. |
|
$ |
(17,136 |
) |
$ |
(18,385 |
) |
$ |
(33,060 |
) |
$ |
(36,353 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
||||
|
Weighted average number of common shares used in net loss per share attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted |
|
97,642,330 |
|
7,035,871 |
|
80,893,200 |
|
7,021,733 |
|
||||
|
Net loss per share attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted |
|
$ |
(0.18 |
) |
$ |
(2.61 |
) |
$ |
(0.41 |
) |
$ |
(5.18 |
) |
The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as of June 30, 2010 and 2009, as they would be anti-dilutive:
|
|
|
At June 30, |
|
||
|
|
|
2010 |
|
2009 |
|
|
Convertible preferred stock |
|
— |
|
67,118,858 |
|
|
Options to purchase common stock |
|
14,888,833 |
|
12,890,489 |
|
|
Shares subject to repurchase |
|
338,556 |
|
44,146 |
|
|
|
|
15,227,389 |
|
80,053,493 |
|
5. Collaboration and License Agreements
Forest Laboratories, Inc.
In September 2007, the Company entered into a collaboration agreement with Forest to jointly develop and commercialize linaclotide, a drug candidate for the treatment of irritable bowel syndrome with constipation (“IBS-C”), chronic constipation (“CC”) and other lower gastrointestinal conditions, in North America. Under the terms of this collaboration agreement, the Company shares equally with Forest all development costs, as well as potential future profits and losses from the development and sale of linaclotide in the United States. The Company will receive royalties from Forest for sales in Canada and Mexico. The Company retained the rights to commercialize linaclotide outside of North America. Forest made non-refundable, up-front payments totaling $70.0 million to the Company in order to obtain rights to linaclotide in North America. Because of the Company’s continuing involvement in the development program, the Company is recognizing the up-front license fee as revenue on a straight-line basis over five years, which is the Company’s estimate of the period over which linaclotide will be jointly developed under the collaboration. The collaboration agreement also includes contingent milestone payments, as well as a contingent equity investment based on the achievement of specific clinical and commercial milestones. These payments, including the up-front license fee, could total up to $330.0 million, of which $125.0 million has already been received, if certain development and sales milestones are achieved for linaclotide. In September 2008, the Company achieved a clinical milestone which triggered a $10.0 million milestone payment from Forest. At June 30, 2010, approximately $30.9 million and $4.4 million of the up-front license fee and milestone payment, respectively, remain deferred and are being recognized on a straight-line basis over the remaining estimated development period.
The collaboration agreement included a contingent equity investment, in the form of a forward purchase contract, which required Forest to purchase 2,083,333 shares of the Company’s convertible preferred stock, when a specific clinical milestone was met, at a price of $12.00 per share. The Company evaluated this financial instrument and determined that because the Company may be required to settle the instrument by transferring assets to Forest due to “deemed liquidation” provisions of the preferred stock, it should be considered an asset or liability, which is required to be carried at fair value. The changes in fair value are recorded as other income or expense.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The Company valued the contingent equity investment at September 12, 2007 at $9.0 million, which represented the value of the premium that Forest would pay for shares of the Company’s stock should the milestone be achieved. The $9.0 million was recorded as an asset and incremental deferred revenue at the inception of the arrangement. The $9.0 million of incremental deferred revenue is being recognized as revenue on a straight-line basis over the period of the Company’s continuing involvement, which was estimated to be five years from the inception of the arrangement. At June 30, 2010, approximately $4.0 million of the incremental deferred revenue remains deferred and is being recognized on a straight-line basis over the remaining estimated development period.
At June 30, 2009, the Company remeasured the fair value of the contingent equity investment using current assumptions resulting in a fair value of $8.4 million. For the three and six months ended June 30, 2009, the Company recorded a decrease of approximately $0.5 million and $0.3 million, respectively, in the fair value of the forward purchase contract related to this remeasurement.
On July 22, 2009, the Company achieved the clinical milestone under the Forest collaboration agreement, triggering the equity investment. As a result, the Company remeasured the fair value of the contingent equity investment as of July 22, 2009 using assumptions as of that date. The resulting final fair value of the contingent equity investment was $8.8 million. The increase in the fair value of the contingent equity investment was recorded to other income (expense) at that time and the Company reclassified the forward purchase contract as a reduction to convertible preferred stock. The Company issued the 2,083,333 shares to Forest on September 1, 2009. Additionally, the achievement of the clinical milestone triggered a $20.0 million milestone payment from Forest that was received on August 20, 2009, of which approximately $8.8 million remains deferred at June 30, 2010 and is being recognized on a straight-line basis over the remaining estimated development period.
The Company recognized in revenue from the Forest collaboration agreement approximately $5.5 million and $10.9 million during the three and six months ended June 30, 2010, respectively, and approximately $4.5 million and $8.9 million during the three and six months ended June 30, 2009, respectively.
Further, because the Company shares development costs equally with Forest, payments from Forest with respect to research and development costs incurred by the Company are recorded as a reduction to expense, and not as revenue. As a result of the cost-sharing arrangements under the collaboration, the Company offset approximately $4.3 million and $8.1 million during the three and six months ended June 30, 2010 and approximately $1.8 million and $4.8 million during the three and six months ended June 30, 2009, respectively against research and development expense.
Almirall, S.A.
In April 2009, the Company entered into a license agreement with Almirall for European rights to develop and commercialize linaclotide for the treatment of IBS-C, CC and other lower gastrointestinal conditions. Under the terms of the license agreement, Almirall is responsible for the expenses associated with the development and commercialization of linaclotide in the European territory. The license agreement requires the Company to participate on a joint development committee over linaclotide’s development period. The Company will receive escalating royalties from the sales of linaclotide in the European territory. In May 2009, the Company received a $38.0 million payment from Almirall representing a $40.0 million non-refundable up-front payment net of foreign withholding taxes. The Company elected to record the non-refundable up-front payment on a net basis. Because of the Company’s continuing involvement in the development program, the Company is recognizing the up-front license fee as revenue on a straight-line basis over fifty months, which is the Company’s estimate of the period over which linaclotide will be developed under the license agreement for the European territory. At June 30, 2010, approximately $27.4 million of the up-front license fee remains deferred. The license agreement also includes contingent milestone payments, as well as a contingent equity investment based on the achievement of specific clinical and sales milestones. These payments could total up to $55.0 million, including the contingent equity investment discussed below, of which $15.0 million has already been received, if certain development and sales milestones are achieved for linaclotide.
The license agreement included a contingent equity investment, in the form of a forward purchase contract, which required Almirall to purchase 681,819 shares of the Company’s convertible preferred stock, when a specific clinical milestone was met, at a price of $22.00 per share. The Company evaluated this financial instrument and determined that because the Company may be required to settle the instrument by transferring assets to Almirall, it should be considered an asset or liability. The contingent equity investment was valued at inception at its fair value. The Company valued the contingent equity investment at April 30, 2009 at $6.0 million, which represented the value of the premium that Almirall would pay for shares of the Company’s stock should the milestone
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
be achieved. The $6.0 million was recorded as an asset and incremental deferred revenue at the inception of the arrangement. The $6.0 million of incremental deferred revenue is being recognized as revenue on a straight-line basis over the period of the Company’s continuing involvement, which is estimated to be fifty months. At June 30, 2010, approximately $4.3 million of the incremental deferred revenue remains deferred.
At June 30, 2009, the Company remeasured the fair value of the contingent equity investment using current assumptions resulting in a fair value of $6.2 million. For both the three and six months ended June 30, 2009, the Company recorded an increase of approximately $0.2 million in the fair value of the forward purchase contract related to this remeasurement.
On November 2, 2009, the Company achieved the clinical milestone under the Almirall license agreement, triggering the equity investment. As a result, the Company remeasured the fair value of the contingent equity investment as of November 2, 2009 using assumptions as of that date. The resulting final fair value of the contingent equity investment was $6.5 million. The increase in the fair value of the contingent equity investment was recorded to other income (expense) at that time, and the Company reclassified the forward purchase contract as a reduction to convertible preferred stock. On November 13, 2009, the Company received $15.0 million from Almirall for the purchase of 681,819 shares of convertible preferred stock.
The Company recognized approximately $2.8 million and $5.7 million in revenue from the Almirall license agreement during the three and six months ended June 30, 2010, respectively, including approximately $0.1 million and $0.4 million from the sale of clinical materials to Almirall. During both the three and six months ended June 30, 2009 the Company recognized approximately $1.8 million in revenue from the Almirall license agreement.
Astellas Pharma Inc.
On November 9, 2009, the Company entered into a license agreement with Astellas. Astellas has the right to develop and commercialize linaclotide for the treatment of IBS-C and other gastrointestinal conditions in Japan, South Korea, Taiwan, Thailand, Philippines, and Indonesia. Under the terms of the agreement, Astellas paid the Company an up-front licensing fee of $30.0 million on November 16, 2009. The license agreement requires the Company to participate on a joint development committee over linaclotide’s development period. The agreement includes additional development milestone payments that could total up to $45.0 million. In addition, the Company will receive escalating royalties on linaclotide sales should Astellas receive approval to market and sell linaclotide in the Asian market. Astellas will be responsible for activities relating to regulatory approval and commercialization. Because of the Company’s continuing involvement in the development program, the Company is recognizing the up-front license fee as revenue on a straight-line basis over 115 months, which is the Company’s estimate of the period over which linaclotide will be developed under the license agreement for the Asian market. At June 30, 2010, approximately $29.0 million of the up-front license fee remains deferred. During the three and six months ended June 30, 2010, the Company recognized approximately $1.0 million and $1.4 million, respectively, in revenue from the Astellas license agreement, including approximately $0.2 million and $0.4 million, respectively, from the sale of clinical materials to Astellas.
6. Fair Value of Financial Instruments
The table below presents information about the Company’s assets that are measured at fair value on a recurring basis as of June 30, 2010 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the Company to develop its own assumptions for the asset or liability.
The Company’s investment portfolio includes many fixed income securities that do not always trade on a daily basis. As a result, the pricing services used by the Company applied other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. In addition, model processes were used to assess interest rate impact and develop prepayment scenarios. These models take into consideration relevant credit information, perceived market movements, sector news and economic events. The inputs into these models may include benchmark yields, reported trades, broker-dealer quotes, issuer spreads and other relevant data.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The Company has classified assets measured at fair value on a recurring basis as follows (in thousands):
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
||||||||
|
Description |
|
June 30,
|
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
||||
|
Money market funds (included in cash and cash equivalents) |
|
$ |
18,013 |
|
$ |
18,013 |
|
$ |
— |
|
$ |
— |
|
|
U.S. Treasury securities (included in cash and cash equivalents) |
|
9,999 |
|
9,999 |
|
— |
|
— |
|
||||
|
U.S. government-sponsored entities |
|
144,276 |
|
— |
|
144,276 |
|
— |
|
||||
|
U.S. Treasury securities |
|
91,945 |
|
91,945 |
|
— |
|
— |
|
||||
|
Total |
|
$ |
264,233 |
|
$ |
119,957 |
|
$ |
144,276 |
|
$ |
— |
|
Cash, cash equivalents, accounts receivable, prepaid expenses and other current assets, restricted cash, accounts payable, accrued expenses, current portion of capital lease obligations and the current portion of long-term debt are carried at amounts that approximate fair value at June 30, 2010 and December 31, 2009 due to their short-term maturities.
Capital lease obligations and long-term debt approximate fair value at June 30, 2010 and December 31, 2009, as they bear interest at a rate approximating a market interest rate.
7. Available-for-Sale Investments
The following is a summary of available-for-sale securities at June 30, 2010 (in thousands):
|
|
|
Amortized Cost |
|
Gross
|
|
Gross
|
|
Fair Value |
|
||||
|
June 30, 2010: |
|
|
|
|
|
|
|
|
|
||||
|
U.S. government-sponsored entities |
|
$ |
144,260 |
|
$ |
33 |
|
$ |
(17 |
) |
$ |
144,276 |
|
|
U.S. Treasury securities |
|
91,917 |
|
28 |
|
— |
|
91,945 |
|
||||
|
Total |
|
$ |
236,177 |
|
$ |
61 |
|
$ |
(17 |
) |
$ |
236,221 |
|
The Company did not have any available-for-sale securities at December 31, 2009.
The contractual maturities of all securities held at June 30, 2010 are one year or less. There were seven investments in an unrealized loss position having an aggregate fair value of approximately $32.8 million at June 30, 2010. The Company reviews its investments for other-than-temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.
The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. Gross realized gains and losses on the sales of investments have not been material to the Company’s consolidated results of operations.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
8. Commitments and Contingencies
The Company leases various facilities and equipment under leases that expire at varying dates through 2016. Certain of these leases contain renewal options, and require the Company to pay operating costs, including property taxes, insurance, and maintenance.
On February 9, 2010, the Company entered into a Second Lease Amendment for its 301 Binney Street facility. Under the amended lease, the Company, effective as of February 9, 2010, leased an additional 50,000-60,000 square feet of the 301 Binney Street facility, comprised of (a) an initial phase of at least 30,000 square feet (the “Initial Phase”), with rent for such space in the Initial Phase commencing no later than July 1, 2010, and (b) a second phase of up to an additional 30,000 square feet (for total additional space of no less than 50,000 square feet and no more than 60,000 square feet) (the “Second Phase”), with rent for such space in the Second Phase commencing no later than July 1, 2011. The final square footage will be mutually agreed upon based on actual constructed space. The rent for the space in the Initial Phase will be $42.00 per rentable square foot per year, and the rent for the space in the Second Phase will be $42.50 per rentable square foot per year. The base rent for the additional space in each of the Initial Phase and the Second Phase will increase annually by $0.50 per rentable square foot. Under the terms of the Second Lease Amendment, the landlord will provide the Company with a finish work allowance of $55.00 per rentable square foot of additional space rented in the Initial Phase and the Second Phase. The Amendment does not change the January 31, 2016 expiration date of the original lease. As a result of this amendment, the Company increased their letter of credit by approximately $2.1 million and disposed of leasehold improvements resulting in a loss of approximately $0.2 million. In conjunction with the 301 Binney Street amendment, the Company elected not to renew its lease of approximately 39,000 square feet of space at its 320 Bent Street facility when the lease expires in December 2010.
On November 3, 2009, Microbia amended its facility lease to include an early termination option. In consideration for an up-front payment of approximately $0.3 million, the landlord gave Microbia an option to terminate the lease, which was exercised on January 18, 2010. As a result, the lease will terminate on September 30, 2010. Under the terms of the amended lease, the landlord has agreed to defer the monthly base rent for the seven months beginning March 2010 and ending September 2010. Additionally, Microbia may be required to issue a warrant to the landlord, which is exercisable into shares of Microbia common stock. The number of shares issuable will be determined at the time of issuance in accordance with the terms of the warrant and the price per share will be the fair value of Microbia’s common stock at that time. The Company calculated the fair value of the warrant at June 30, 2010 and at December 31, 2009, which was de minimus . The Company will continue to remeasure the fair value of the warrant at each reporting period and will record the resulting changes in its fair value as other income or expense.
In connection with Microbia’s November 2009 restructuring, Microbia may incur approximately $0.8 million of additional costs if Microbia implements an additional reduction in force prior to the earlier of November 5, 2010 or the date that Microbia closes on a new round of financing.
9. Stockholders’ Equity (Deficit)
Common Stock
At June 30, 2010, the Company is authorized to issue 675,000,000 shares of stock, of which 600,000,000 shares have been authorized for the issuance of common stock, with a par value of $0.001 per share, which consist of Class A common stock and Class B common stock, and 75,000,000 shares have been authorized for the issuance of preferred stock, with a par value of $0.001 per share.
All shares of common stock that were outstanding immediately prior to the initial public offering were shares of Class B common stock and all shares of common stock sold in the initial public offering were shares of Class A common stock. Prior to the closing of the Company’s initial public offering, the Company had outstanding nine series of convertible preferred stock with various rights and preferences. In conjunction with the closing of the Company’s initial public offering, all of the Company’s 69,904,843 outstanding convertible preferred shares automatically converted on a one-for-one basis, except for Series C convertible preferred stock, which converted on a one-for-1.076 basis, into 70,391,620 shares of Class B common stock. At June 30, 2010, the Company had no preferred shares outstanding.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Restricted Stock
In 2009, the Company sold an aggregate of 515,549 shares of common stock to independent members of the Board of Directors under restricted stock agreements in accordance with the terms of the Company’s 2005 Stock Incentive Plan (“2005 Plan”) and the Company’s director compensation program. 115,549 shares of restricted common stock sold in 2009 vested on December 31, 2009 and the remainder vest ratably over four years beginning in January 2010. In the event that a member of the Board of Directors ceases to serve on the Company’s Board prior to December 31, 2013, the member shall forfeit all unvested shares in accordance with the terms of the restricted stock agreement.
A summary of the unvested shares of restricted stock as of June 30, 2010 is presented below:
|
|
|
Shares |
|
Weighted Average
|
|
|
|
Unvested at December 31, 2009 |
|
400,000 |
|
$ |
5.67 |
|
|
Granted |
|
— |
|
$ |
— |
|
|
Vested |
|
(45,000 |
) |
$ |
5.69 |
|
|
Forfeited |
|
(40,000 |
) |
$ |
5.48 |
|
|
Unvested at June 30, 2010 |
|
315,000 |
|
$ |
5.69 |
|
10. Stock Option Plans
The Company has several share-based compensation plans. Under the 1998 Amended and Restated Stock Option Plan (“1998 Plan”), options to purchase 3,405,000 shares of common stock were available for grant to employees, directors, and consultants of the Company. The options were granted under the 1998 Plan at fair market value on the grant date, generally vest over a period of four years, and expire ten years from the grant date. There are no shares available for future grant under this plan, as it expired in accordance with its terms in 2008. At June 30, 2010 and December 31, 2009, options for 498,883 and 550,633 shares, respectively, were outstanding under the 1998 Plan.
Under the Company’s 2002 Stock Incentive Plan (“2002 Plan”) and 2005 Plan, stock awards may be granted to employees, officers, directors, consultants, or advisors of the Company. The 2002 Plan and 2005 Plan provide for the granting of stock options, restricted stock, restricted stock units, and other share-based awards. At June 30, 2010, 4,700,000 shares of common stock are reserved for issuance under the 2002 Plan and 12,200,000 shares are reserved under the 2005 Plan. The 2002 Plan allows for the transfer of unused shares from the 1998 Plan. At June 30, 2010, there were 61,831 shares available for future grant under the 2002 Plan and 284,157 shares available for future grant under the 2005 Plan.
On January 21, 2010, the Company’s stockholders approved the 2010 Employee, Director and Consultant Equity Incentive Plan (“2010 Plan”) (together with the 2002 Plan and 2005 Plan, the “Plans”) which became effective upon the closing of the Company’s initial public offering. Under the 2010 Plan, stock awards may be granted to employees, officers, directors, or consultants of the Company. There were 6,000,000 shares of common stock initially reserved for issuance under the 2010 Plan. The number of shares available for future grant under the 2010 Plan may be increased on the first day of each fiscal year by an amount equal to the lesser of (i) 6,600,000; (ii) 4% of the number of outstanding shares of common stock on the first day of each fiscal year; and (iii) an amount determined by the Board of Directors. Awards that are returned to the Company’s 1998 Plan, 2002 Plan and 2005 Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for issuance under the 2010 Plan. At June 30, 2010, there were 6,040,781 shares available for future grant under the 2010 Plan.
On January 21, 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan (“Purchase Plan”) which became effective upon the closing of the Company’s initial public offering. The Purchase Plan allows eligible employees the right to purchase shares of common stock at the lower of 85% of the fair market value of a share of common stock on the first or last day of an offering period. Each offering period is six months. There were 400,000 shares of common stock initially reserved for issuance pursuant to the Purchase Plan. The number of shares available for future grant under the Purchase Plan may be increased on the first day of each fiscal year by an amount equal to the lesser of (i) 1,000,000 shares, (ii) 1% of the shares of common stock outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of shares as is determined by the
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Board. At June 30, 2010, there were 400,000 shares available for future grant under the Purchase Plan. The initial offering period began on July 1, 2010 and runs through December 31, 2010.
Each plan, other than the Purchase Plan, provides for the granting of stock awards whereby the Company’s Class B common stock is issuable upon exercise of options granted before the closing of the Company’s initial public offering and Class A common stock is issuable upon exercise of options granted after the Company’s initial public offering. At June 30, 2010, options exercisable into 12,998,652 shares of Class B common stock and 1,890,181 shares of Class A common stock were outstanding.
The option price at the date of grant is determined by the Board of Directors and, in the case of incentive stock options, may not be less than the fair market value of the common stock at the date of grant. Due to the absence of an active market for the Company’s common stock, prior to the pricing of the Company’s initial public offering on February 2, 2010, the Board of Directors was required to determine the fair value of the common stock for consideration in setting exercise prices for the options granted and in valuing the options granted. In determining the fair value, the Board of Directors considered both quantitative and qualitative factors including prices at which the Company sold shares of its convertible preferred stock, the rights, preferences and liquidity of the Company’s convertible preferred and common stock, the Company’s historical operating and financial performance and the status of its research and product development efforts, achievement of enterprise milestones, including the Company entering into collaboration agreements where third parties agree to purchase shares of the Company’s convertible preferred stock at fixed prices sometime in the future, external market conditions affecting the biotechnology industry sector, and financial market conditions and, commencing in 2006, contemporaneous valuations provided by management.
The option exercise period may not extend beyond ten years from the date of grant. The 2002 Plan and 2005 Plan provide that, subject to approval by the Board of Directors, option grantees may have the right to exercise an option prior to vesting. Shares purchased upon the exercise of unvested options will be subject to the same vesting schedule as the underlying options, and are subject to repurchase at the original exercise price by the Company should the employee be terminated or leave the Company prior to becoming fully vested in such shares. At June 30, 2010 and December 31, 2009, there were 23,556 and 34,156 shares, respectively, that had been issued pursuant to the exercise of unvested options that remain unvested and subject to repurchase by the Company. Upon stock option exercise, the Company issues restricted shares and delivers them to the participant. The number of these early-exercised shares is not substantive. The cash paid for the exercise prices is recorded as a liability and was not material to the consolidated financial statements at June 30, 2010 and December 31, 2009. At June 30, 2010, the Company does not hold any treasury shares.
The Company, from time to time, issues certain time-accelerated stock options to certain employees under the Plans. The vesting of these time-accelerated stock options accelerates upon the achievement of certain performance-based milestones, such as the filing of a New Drug Application (“NDA”) with the Food and Drug Administration (“FDA”), the first commercial sale of a Company product, the successful completion of an initial public offering, or achieving a specified market capitalization target, among others. If these criteria are not met, such options will vest between six and ten years after the date of grant, and expire at the end of ten years. During the six months ended June 30, 2010, 45,000 shares vested as a result of milestone achievements, and the Company recorded related share-based compensation of approximately $0.1 million for these options. In the three months ended June 30, 2010, no shares vested as a result of milestone achievements. At June 30, 2010 and December 31, 2009, there were 2,286,500 and 2,481,500 shares, respectively, issuable under outstanding and unvested time-accelerated options. When achievement of the milestone is not deemed probable, the Company recognizes compensation expense associated with time-accelerated stock options initially over the vesting period of the respective stock option. When deemed probable of achievement, the Company expenses the remaining unrecognized compensation for the respective stock option over the implicit service period.
During 2005, the Company granted to employees options to purchase 97,500 shares of common stock at an exercise price of $0.60 per share, which represented the fair value of the stock at that time. These options are subject to performance-based milestone vesting and expire ten years from the date of grant. The options were deemed to be variable upon grant because the number of shares that will vest were not fixed on the date of grant. The options are therefore remeasured at each reporting period until settlement of the option. During the year ended December 31, 2006, 37,500 shares vested as a result of milestone achievements. In the year ended December 31, 2008, it became probable that the remaining 60,000 unvested options would vest and ultimately vested in February 2009. In April 2010, 30,000 shares were exercised and therefore will no longer be remeasured. For the three and six months ended June 30, 2010, the Company recorded related share-based compensation expense of approximately $(0.1) million and $0.1 million, respectively, for these options and none for the three and six months ending June 30, 2009.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
During 2009, the Company granted to employees options to purchase a total of 1,060,000 shares of common stock subject to performance-based milestone vesting. During the three and six months ended June 30, 2010, the Company granted additional options to purchase a total of 12,500 shares and 57,500 shares, respectively of common stock subject to performance-based milestone vesting. The vesting of these stock options will occur upon the achievement of certain performance-based milestones, such as the filing of a second NDA with the FDA, the first commercial sale of a Company product, or achieving a specified sales target. During the six months ended June 30, 2010, 5,000 shares vested as a result of milestone achievements and the Company recorded related share-based compensation expense of approximately $31,000 for these options. During the three months ended June 30, 2010, no shares vested as a result of milestone achievements. The Company has concluded that for the remaining shares of common stock subject to performance-based milestone vesting the performance-based milestones are not probable of achievement; as such, no compensation expense has been recorded related to these options. At June 30, 2010, the unrecognized share-based compensation expense related to these options was approximately $3.9 million.
The Company also grants options to external consultants. 25,000 options were granted to external consultants during the three and six months ended June 30, 2010. The weighted average grant date fair value per share of these options was $7.22. During the three and six months ended June 30, 2009, the Company granted options for the purchase of 5,000 shares and 37,000 shares, respectively to external consultants. The weighted average grant date fair value per share of options granted to external consultants during the three and six months ended June 30, 2009 was $3.06 and $2.97, respectively. Most grants made to external consultants vest over a period of one year, and the expense related to these options is charged to share-based compensation expense over the vesting period of the options. The amount of share-based compensation expense that may be recognized for outstanding, unvested options as of June 30, 2010 was approximately $0.3 million. The amount of share-based compensation expense that will ultimately be recorded will depend on the remeasurement of the outstanding awards through their vesting date. This remaining compensation expense will be recognized over a weighted average amortization period of 1.63 years at June 30, 2010.
In calculating share-based compensation costs, the Company estimated the fair value of stock options using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived, exchange-traded options that have no vesting restrictions and are fully transferable. The Company estimates the number of awards that will be forfeited in calculating compensation costs. Such costs are then recognized over the requisite service period of the awards on a straight-line basis.
Determining the fair value of share-based awards using the Black-Scholes option-pricing model requires the use of highly subjective assumptions, including the expected term of the award and expected stock price volatility. The weighted average assumptions used to estimate the fair value of the stock options using the Black-Scholes option-pricing model were as follows for the three and six months ended June 30, 2010 and 2009:
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
Expected volatility |
|
57.3 |
% |
62.5 |
% |
57.7 |
% |
62.6 |
% |
|
Expected term (in years) |
|
6.5 |
|
6.5 |
|
6.5 |
|
6.5 |
|
|
Risk-free interest rate |
|
3.1 |
% |
2.7 |
% |
3.1 |
% |
2.2 |
% |
|
Expected dividend yield |
|
— |
% |
— |
% |
— |
% |
— |
% |
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The following table summarizes the expense recognized for these share-based compensation arrangements in the condensed consolidated statements of operations (in thousands):
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Ironwood: |
|
|
|
|
|
|
|
|
|
||||
|
Employee stock options |
|
$ |
1,407 |
|
$ |
850 |
|
$ |
2,865 |
|
$ |
1,708 |
|
|
Restricted stock awards |
|
119 |
|
— |
|
227 |
|
— |
|
||||
|
Non-employee stock options |
|
46 |
|
3 |
|
58 |
|
110 |
|
||||
|
Stock awards |
|
93 |
|
— |
|
103 |
|
— |
|
||||
|
|
|
1,665 |
|
853 |
|
3,253 |
|
1,818 |
|
||||
|
Microbia Stock Plan |
|
25 |
|
57 |
|
45 |
|
109 |
|
||||
|
|
|
$ |
1,690 |
|
$ |
910 |
|
$ |
3,298 |
|
$ |
1,927 |
|
Share-based compensation is reflected in the condensed consolidated statements of operations as follows for the three and six months ended June 30, 2010 and 2009 (in thousands):
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Research and development |
|
$ |
1,040 |
|
$ |
558 |
|
$ |
1,769 |
|
$ |
1,287 |
|
|
General and administrative |
|
650 |
|
352 |
|
1,529 |
|
640 |
|
||||
At June 30, 2010, there were 6,386,769 shares, available for future grant under the Plans.
The following table summarizes stock option activity under the share-based compensation plans, including performance-based options:
|
|
|
Shares of
|
|
Weighted
|
|
Weighted
|
|
Aggregate
|
|
||
|
|
|
|
|
|
|
(in years) |
|
(in thousands) |
|
||
|
Outstanding at December 31, 2009 |
|
13,691,579 |
|
$ |
2.45 |
|
6.24 |
|
$ |
131,459 |
|
|
Granted |
|
1,894,000 |
|
$ |
11.49 |
|
|
|
|
|
|
|
Exercised |
|
(650,200 |
) |
$ |
0.72 |
|
|
|
|
|
|
|
Cancelled |
|
(46,546 |
) |
$ |
4.62 |
|
|
|
|
|
|
|
Outstanding at June 30, 2010 |
|
14,888,833 |
|
$ |
3.67 |
|
|
|
$ |
123,103 |
|
|
Vested or expected to vest at June 30, 2010 |
|
13,531,458 |
|
$ |
3.55 |
|
6.37 |
|
$ |
113,411 |
|
|
Exercisable at June 30, 2010 (1) |
|
7,149,576 |
|
$ |
1.75 |
|
4.91 |
|
$ |
72,694 |
|
(1) All stock options granted under the 1998 Plan, 2002 Plan and 2005 Plan contain provisions allowing for the early exercise of such options into restricted stock. The exercisable shares disclosed above represent those that are vested as of June 30, 2010.
The weighted average grant date fair value per share of options granted to employees during the three and six months ended June 30, 2010 was $7.26 and $6.69, respectively, and $3.06 and $2.95 during the three and six months ended June 30, 2009, respectively. The total intrinsic value of options exercised during the three and six months ended June 30, 2010 was approximately $2.0 million and $8.4 million, respectively, and approximately $0.1 million and $0.2 million during the three and six months ended June 30, 2009, respectively. Prior to the closing of the Company’s initial public offering, the intrinsic value was calculated as the difference between the estimated fair value of the Company’s common stock and the exercise price of the option.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The grant date fair value of the options granted to employees during the three and six months ended June 30, 2010 was approximately $2.4 million and $12.5 million, respectively, and approximately $0.1 million and $4.4 million, respectively during the three and six months ended June 30, 2009.
As of June 30, 2010, there was approximately $1.6 million and $15.8 million of unrecognized share-based compensation, net of estimated forfeitures, related to restricted stock awards and unvested stock option grants with time-based vesting, respectively, which are expected to be recognized over a weighted average period of 3.57 years. The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures.
11. Related Party Transactions
The Company has and currently obtains legal services from a law firm that is an investor of the Company. The Company paid approximately $41,000 and $100,000 in legal fees to this investor during the three and six months ended June 30, 2010 and approximately $3,000 and $5,000 in legal fees to this investor during the three and six months ended June 30, 2009, respectively.
In September 2009, Forest became a related party when the Company sold to Forest 2,083,333 shares of the Company’s convertible preferred stock and in November 2009, Almirall became a related party when the Company sold to Almirall 681,819 shares of the Company’s convertible preferred stock (Note 5). Additional related party disclosure related to Microbia and T&L is included in Note 13.
12. Segment Reporting
The Company has two reportable business segments: human therapeutics and biomanufacturing. The Company has no inter-segment revenues.
The following table reports revenue and loss from operations for the Company’s reportable segments for the three and six months ended June 30, 2010 and 2009 (in thousands):
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
||||
|
Human therapeutics |
|
$ |
9,188 |
|
$ |
6,210 |
|
$ |
18,026 |
|
$ |
10,660 |
|
|
Biomanufacturing |
|
1,771 |
|
400 |
|
1,985 |
|
1,181 |
|
||||
|
Total |
|
$ |
10,959 |
|
$ |
6,610 |
|
$ |
20,011 |
|
$ |
11,841 |
|
|
Loss from operations: |
|
|
|
|
|
|
|
|
|
||||
|
Human therapeutics |
|
$ |
(17,310 |
) |
$ |
(15,285 |
) |
$ |
(31,806 |
) |
$ |
(31,162 |
) |
|
Biomanufacturing |
|
(9 |
) |
(3,292 |
) |
(1,741 |
) |
(5,985 |
) |
||||
|
Total |
|
$ |
(17,319 |
) |
$ |
(18,577 |
) |
$ |
(33,547 |
) |
$ |
(37,147 |
) |
|
|
|
June 30,
|
|
December 31,
|
|
||
|
Total assets: |
|
|
|
|
|
||
|
Human therapeutics |
|
$ |
319,290 |
|
$ |
160,105 |
|
|
Biomanufacturing |
|
2,794 |
|
2,346 |
|
||
|
Total |
|
$ |
322,084 |
|
$ |
162,451 |
|
At June 30, 2010 and December 31, 2009, approximately $1.8 million and $15,000, respectively, of the Company’s accounts receivable related to the Company’s biomanufacturing segment and approximately $4.6 million and $5.2 million, respectively, of the Company’s accounts receivable related to the human therapeutics segment.
Ironwood Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
13. Microbia, Inc.
Tate & Lyle Investments, Ltd.
In September 2006, the Company entered into a collaboration agreement with T&L. The collaboration agreement has a five-year term with a one-year notice of termination. In connection with the execution of the collaboration agreement, the Company also issued T&L 1,823,529 shares of common stock of Microbia, at the aggregate purchase price of approximately $2,000, and issued 7,000,000 shares of convertible preferred stock of Microbia at the aggregate purchase price of $7.0 million. After the sale of stock to T&L, the Company retained an 85% majority ownership interest, and T&L had a 15% noncontrolling interest in Microbia. The Company’s ownership interest in Microbia is comprised entirely of convertible preferred stock with the same preferences to that held by T&L. The ownership of the convertible preferred and common stock by T&L is recorded as noncontrolling interest in the consolidated financial statements.
On June 15, 2010, T&L and Microbia entered into an agreement to terminate their collaboration. The terms and conditions of the agreement include an exchange of intellectual property and a one-time payment to Microbia of approximately $1.8 million. All current and future obligations between Microbia and T&L are terminated as a result of this agreement.
Revenue earned from the T&L collaboration agreement totaled approximately $1.8 million and $1.9 million during the three and six months ended June 30, 2010 and approximately $0.4 million and $1.2 million during the three and six months ended June 30, 2009, respectively. Accounts receivable from T&L was approximately $1.8 million and $10,000 at June 30, 2010 and December 31, 2009, respectively.
Strategic Restructuring Plan
In November 2009, Microbia implemented a strategic restructuring plan that included an immediate reduction of Microbia’s workforce by approximately 40% of its existing workforce, and a reduced workweek for an additional 12% of its existing workforce. Microbia took this action to focus on its proprietary strain-development platform and existing service agreements.
In connection with the strategic restructuring plan, Microbia recorded restructuring charges of $1.2 million in the year ended December 31, 2009, relating primarily to one-time termination benefits and asset impairment charges, which were included in operating expenses. As of June 30, 2010, Microbia had paid in cash all remaining termination benefits. Additionally, Microbia may incur approximately $0.8 million of additional restructuring costs if Microbia implements an additional reduction in force prior to the earlier of November 5, 2010 or the date that Microbia closes on a new round of financing.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2009 included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, which are incorporated herein by reference, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are an entrepreneurial pharmaceutical company that discovers, develops and intends to commercialize innovative medicines targeting important therapeutic needs. To achieve this, we are building a sustainable culture centered on creating and marketing important new drugs. Our experienced team of researchers is focused on a portfolio of internally discovered drug candidates that includes one Phase 3 drug candidate (linaclotide), one Phase 1/Phase 2 pain drug candidate, and multiple preclinical programs. We have pursued a partnering strategy for the commercialization of linaclotide that has enabled us to retain significant control over linaclotide’s development and commercialization, share the costs of drug development and commercialization with collaborators whose capabilities complement ours, and retain approximately half of the future long-term value of linaclotide in the major pharmaceutical markets, should linaclotide meet our sales expectations.
We were incorporated in Delaware as Microbia, Inc., or Microbia (which is now the name of our majority-owned subsidiary), on January 5, 1998. On April 7, 2008, we changed our name to Ironwood Pharmaceuticals, Inc.
We operate in two reportable business segments—human therapeutics and biomanufacturing. Our human therapeutics segment comprises the vast majority of our business, and it consists of the development and commercialization of our product candidates, including linaclotide. Our biomanufacturing segment, which comprises a much smaller part of our business, consists of our majority ownership interest in Microbia, which focuses on building a specialty biochemicals business based on a proprietary strain-development platform. Our human therapeutics segment represented approximately 99% and our biomanufacturing segment represented approximately 1% of our total assets at June 30, 2010 and December 31, 2009. Our human therapeutics segment represented approximately 100% and 95%, and our biomanufacturing segment represented approximately 0% and 5%, of our loss from operations for the three and six months ended June 30, 2010, respectively. Our human therapeutics segment represented approximately 82% and 84% and our biomanufacturing segment represented approximately 18% and 16% of our loss from operations for the three and six months ended June 30, 2009, respectively. We expect our human therapeutics segment to continue to represent substantially all of our total assets and our consolidated operating loss.
To date we have dedicated substantially all of our activities to the research and development of our product candidates. We have not generated any revenue to date from product sales and have incurred significant operating losses since our inception in 1998. We incurred net losses attributable to Ironwood Pharmaceuticals, Inc. of approximately $17.1 million and $33.1 million in the three and six months ended June 30, 2010, respectively, and approximately $18.4 million and $36.4 million in the three and six months ended June 30, 2009, respectively. As of June 30, 2010, we had an accumulated deficit of approximately $347.6 million and we expect to incur losses for the foreseeable future.
Financial Overview
Revenue. Revenue to date from our human therapeutics segment is generated primarily through our collaboration agreement with Forest Laboratories, Inc., or Forest, and our license agreements with Almirall, S.A., or Almirall, and Astellas Pharma Inc., or Astellas. The terms of these agreements typically include payment to us of one or more of the following: nonrefundable, up-front license fees; milestone payments; and royalties on product sales. Revenue from our human therapeutics segment is shown in our consolidated statements of operations as collaborative arrangements revenue. Revenue from our biomanufacturing segment is generated by our subsidiary, Microbia, which has entered into research and development service agreements with various third parties. These agreements generally provide for fees for research and development services rendered, and may include additional payments at the conclusion of the research period upon achieving specified events. These service agreements also contemplate royalty payments to us on future sales of Microbia’s customers’ products. Revenue from our biomanufacturing segment is shown as services revenue. We expect our revenue to fluctuate for the foreseeable future as our collaborative arrangements revenue is principally based on the
achievement of clinical and commercial milestones. Additionally, we expect our services revenue to decline as existing Microbia customer contracts are completed and no new services contracts are anticipated.
Research and development expense. Research and development expense consists of expenses incurred in connection with the discovery and development of our product candidates. These expenses consist primarily of compensation, benefits and other employee related expenses, facility costs and third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities. Also included in research and development expenses are the costs of revenue related to the Microbia services contracts. We charge all research and development expenses to operations as incurred. Under our Forest collaboration agreement we are reimbursed for certain research and development expenses and we net these reimbursements against our research and development expenses as incurred.
Our lead product candidate is linaclotide and it represents the largest portion of our research and development expense for our product candidates. Linaclotide is a first-in-class compound currently in confirmatory Phase 3 trials evaluating its safety and efficacy for the treatment of patients with irritable bowel syndrome with constipation, or IBS-C, or chronic constipation, or CC. Our other clinical stage program is IW-6118, an inhibitor of Fatty Acid Amide Hydrolase, or FAAH, being evaluated for the treatment of pain and inflammation. IW-6118 is a novel small molecule inhibitor of FAAH, that decreased inflammation and pain and elevated fatty acid amides in preclinical models. We have an active investigational new drug application, or IND, for IW-6118 and are currently investigating the safety, tolerability, and pharmacokinetic properties of this molecule in Phase 1/Phase 2 studies.
The following table sets forth our research and development expenses related to linaclotide and IW-6118 for the three and six months ended June 30, 2010 and 2009. We began tracking program expenses for linaclotide in 2004, and program expenses from inception to June 30, 2010 were approximately $111.9 million. We began tracking program expenses for IW-6118 in 2008, and program expenses from inception to June 30, 2010 were approximately $10.5 million. These expenses relate primarily to external costs associated with manufacturing, preclinical studies and clinical trial costs. The expenses for linaclotide include both reimbursements to us by Forest as well as our portion of costs incurred by Forest for linaclotide and invoiced to us under the cost-sharing provisions of our collaboration agreement. Costs related to facilities, depreciation, share-based compensation and research and development support services are not directly charged to programs.
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
|
(in thousands) |
|
(in thousands) |
|
||||||||
|
Linaclotide |
|
$ |
7,216 |
|
$ |
8,427 |
|
$ |
15,209 |
|
$ |
15,307 |
|
|
IW-6118 |
|
1,696 |
|
$ |
1,440 |
|
2,560 |
|
$ |
3,393 |
|
||
The lengthy process of securing Food and Drug Administration, or FDA, 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. Accordingly, 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 or IW-6118 prior to their regulatory approval, if such approval is ever granted. 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, IW-6118 or any of our other product candidates will generate revenues and cash flows.
We have multiple product candidates in earlier stages of development, and are pursuing various therapeutic opportunities. We invest carefully in our pipeline, and the commitment of funding for each subsequent stage of our development programs is typically dependent upon the receipt of clear, positive data. In addition, we are actively engaged in identifying externally-discovered drug candidates at various stages of clinical development and accessing them through in-licensing or acquisition. In evaluating potential assets, we apply the same criteria as those used for investments in internally-discovered assets. To date, we have not in-licensed any drug candidates, but we do expect to do so from time to time.
The majority of our external costs are spent on linaclotide, as costs associated with later stage clinical trials are, in most cases, more significant than those incurred in earlier stages of our pipeline. We expect external costs related to the linaclotide program to begin decreasing if its current Phase 3 clinical trials yield positive data and no other clinical trials are necessary to obtain regulatory approval in the U.S. If IW-6118 is successful in early stage clinical trials, we would expect the program’s external costs to increase as it progresses through later stage clinical trials. The remainder of our research and development expense is not tracked by project as it consists primarily of our internal costs, and it benefits multiple projects that are in earlier stages of development and which typically share resources.
The successful development of our product candidates is highly uncertain and subject to a number of risks including, but not limited to:
· The duration of clinical trials may vary substantially according to the type, complexity and novelty of the product candidate.
· The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures.
· Data obtained from 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.
· The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a product candidate and are difficult to predict.
· The costs, timing and outcome of regulatory review of a product candidate.
· The emergence of competing technologies and products and other adverse market developments.
As a result of the uncertainties discussed above, we are unable to determine the duration and costs to complete current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any 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 scientific and clinical data of each product candidate, as well as ongoing assessments of such product candidate’s commercial potential.
We expect our research and development costs to continue to be substantial for the foreseeable future and to increase with respect to our product candidates other than linaclotide as we advance those product candidates through preclinical studies and clinical trials.
General and administrative expense. General and administrative expense consists primarily of compensation, benefits and other employee related expenses for personnel in our administrative, finance, legal, information technology, business development, commercial and human resource functions. Other costs include the legal costs of pursuing patent protection of our intellectual property, facility costs and professional fees for accounting and legal services. As a result of our initial public offering, or IPO, in February 2010, we anticipate increases in general and administrative expense relating to operating as a public company. These increases will likely include legal fees, accounting fees, costs associated with implementing and complying with the requirements of the Sarbanes-Oxley Act of 2002, and directors’ and officers’ insurance premiums, as well as fees for investor relations services. We also anticipate substantial expenses related to developing the organization necessary to commercialize linaclotide.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reported periods. These estimates and assumptions, including those related to revenue recognition, available-for-sale securities, impairments of long-lived assets, income taxes including the valuation allowance for deferred tax assets, research and development expenses, contingencies, and share-based compensation are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. Prior to our IPO, we also evaluated our estimates and judgments regarding the fair value assigned to our common stock. These critical estimates and assumptions are based on our historical experience, our observance of trends in the industry, and various other factors that are believed to be reasonable under the circumstances and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions.
During the six months ended June 30, 2010, there were no significant changes in our critical accounting policies or estimates. See Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 30, 2010 for additional information about these critical accounting policies, as well as a description of our other significant accounting policies.
Results of Operations
The following discussion summarizes the key factors our management believes are necessary for an understanding of our condensed consolidated financial statements.
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
|
(in thousands) |
|
(in thousands) |
|
||||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
||||
|
Collaborative arrangements |
|
$ |
9,188 |
|
$ |
6,210 |
|
$ |
18,026 |
|
$ |
10,660 |
|
|
Services |
|
1,771 |
|
400 |
|
1,985 |
|
1,181 |
|
||||
|
Total revenue |
|
10,959 |
|
6,610 |
|
20,011 |
|
11,841 |
|
||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
||||
|
Research and development |
|
20,953 |
|
19,397 |
|
39,590 |
|
38,004 |
|
||||
|
General and administrative |
|
7,325 |
|
5,790 |
|
13,968 |
|
10,984 |
|
||||
|
Total operating expenses |
|
28,278 |
|
25,187 |
|
53,558 |
|
48,988 |
|
||||
|
Loss from operations |
|
(17,319 |
) |
(18,577 |
) |
(33,547 |
) |
(37,147 |
) |
||||
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
||||
|
Interest expense |
|
(79 |
) |
(122 |
) |
(172 |
) |
(256 |
) |
||||
|
Interest and investment income |
|
189 |
|
82 |
|
257 |
|
186 |
|
||||
|
Remeasurement of forward purchase contracts |
|
— |
|
(300 |
) |
— |
|
(100 |
) |
||||
|
Other income (expense), net |
|
110 |
|
(340 |
) |
85 |
|
(170 |
) |
||||
|
Net loss |
|
(17,209 |
) |
(18,917 |
) |
(33,462 |
) |
(37,317 |
) |
||||
|
Net loss attributable to noncontrolling interest |
|
73 |
|
532 |
|
402 |
|
964 |
|
||||
|
Net loss attributable to Ironwood Pharmaceuticals, Inc. |
|
$ |
(17,136 |
) |
$ |
(18,385 |
) |
$ |
(33,060 |
) |
$ |
(36,353 |
) |
Three Months and Six Months Ended June 30, 2010 Compared to Three Months and Six Months Ended June 30, 2009
Revenue
|
|
|
Three Months Ended
|
|
Change |
|
Six Months Ended
|
|
Change |
|
||||||||||||||
|
|
|
2010 |
|
2009 |
|
$ |
|
% |
|
2010 |
|
2009 |
|
$ |
|
% |
|
||||||
|
|
|
(dollars in thousands) |
|
|
|
(dollars in thousands) |
|
|
|
||||||||||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Collaborative arrangements |
|
$ |
9,188 |
|
$ |
6,210 |
|
$ |
2,978 |
|
48.0 |
% |
$ |
18,026 |
|
$ |
10,660 |
|
$ |
7,366 |
|
69.1 |
% |
|
Services |
|
1,771 |
|
400 |
|
1,371 |
|
342.8 |
% |
1,985 |
|
1,181 |
|
804 |
|
68.1 |
% |
||||||
|
Total revenue |
|
$ |
10,959 |
|
$ |
6,610 |
|
$ |
4,349 |
|
65.8 |
% |
$ |
20,011 |
|
$ |
11,841 |
|
$ |
8,170 |
|
69.0 |
% |
Collaborative Arrangements. The increase in revenue from collaborative arrangements for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 was primarily due to an increase in revenue from the Forest collaboration, an increase in revenue related to the Almirall license agreement and an increase in revenue associated with the Astellas license agreement. During the three months ended June 30, 2010, we recognized approximately $1.0 million of revenue related to a $20.0 million Forest milestone payment we received in July 2009, approximately $0.8 million of revenue related to the $30.0 million up-front license payment received from Astellas in November 2009, as well as approximately $0.3 million from shipments of clinical trial materials to both Almirall and Astellas. We recognized approximately $0.8 million more in revenue during the three months ended
June 30, 2010 compared to the three months ended June 30, 2009, related to the $38.0 million up-front license payment received from Almirall in May 2009.
The increase in revenue from collaborative arrangements for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 was primarily due to an increase in revenue from the Forest collaboration, an increase in revenue related to the Almirall license agreement and an increase in revenue associated with the Astellas license agreement. During the six months ended June 30, 2010, we recognized approximately $2.0 million of revenue related to the $20.0 million Forest milestone payment, approximately $1.1 million of revenue related to the $30.0 million up-front license payment from Astellas, as well as approximately $0.8 million from shipments of clinical trial materials to both Almirall and Astellas. We recognized approximately $3.5 million more in revenue during the six months ended June 30, 2010 compared to the six months ended June 30, 2009, related to the $38.0 million up-front license payment received from Almirall and the amortization of the deferred revenue resulting from recording the initial $6.0 million valuation of the Almirall forward purchase contract, approximately $5.3 million compared to $1.8 million.
Services. Services revenue increased during both the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009 due to the one-time payment of approximately $1.8 million associated with the Tate & Lyle Investments, Ltd. (T&L) termination agreement.
Operating Expenses
|
|
|
Three Months Ended
|
|
Change |
|
Six Months Ended
|
|
Change |
|
||||||||||||||
|
|
|
2010 |
|
2009 |
|
$ |
|
% |
|
2010 |
|
2009 |
|
$ |
|
% |
|
||||||
|
|
|
(dollars in thousands) |
|
|
|
(dollars in thousands) |
|
|
|
||||||||||||||
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Research and development |
|
$ |
20,953 |
|
$ |
19,397 |
|
$ |
1,556 |
|
8.0 |
% |
$ |
39,590 |
|
$ |
38,004 |
|
$ |
1,586 |
|
4.2 |
% |
|
General and administrative |
|
7,325 |
|
5,790 |
|
1,535 |
|
26.5 |
% |
13,968 |
|
10,984 |
|
2,984 |
|
27.2 |
% |
||||||
|
Total operating expenses |
|
$ |
28,278 |
|
$ |
25,187 |
|
$ |
3,091 |
|
12.3 |
% |
$ |
53,558 |
|
$ |
48,988 |
|
$ |
4,570 |
|
9.3 |
% |
Research and Development Expense. The increase in research and development expense for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 was primarily due to an increase of approximately $0.7 million in compensation and benefits related expenses primarily due to a newly implemented employee incentive plan, an approximately $0.5 million increase in stock compensation expense primarily related to our annual stock option grant made in February 2010, an approximately $0.8 million increase in allocated facilities costs primarily due to increased rent expense associated with the newly acquired space at our 301 Binney Street facility, offset by a decrease of approximately $0.4 million in the Phase 3 clinical trials for linaclotide, primarily resulting from lower collaboration expenses.
The increase in research and development expense for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 was primarily due to an increase of approximately $0.7 million in compensation and benefits related expenses primarily due to a newly implemented employee incentive plan, an approximately $0.5 million increase in stock compensation expense primarily related to our annual stock option grant made in February 2010, an approximately $0.2 million increase in allocated facilities costs primarily due to increased rent expense associated with the newly acquired space at our 301 Binney Street facility, an approximately $0.3 million increase in internal research and development costs, offset by a decrease of approximately $0.1 million in the Phase 3 clinical trials for linaclotide, primarily resulting from lower collaboration expenses.
General and Administrative Expense. The increase in general and administrative expense for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 was due to an approximately $0.5 million increase in compensation and benefits related expenses due to increased headcount, an approximately $0.3 million increase in stock compensation expense primarily related to our annual stock option grant made in February 2010, an approximately $0.3 million increase in allocated facilities costs primarily due to increased rent expense associated with the newly acquired space at our 301 Binney Street facility, and an increase in external consulting costs of approximately $0.4 million associated with marketing and business development.
The increase in general and administrative expense for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 was due to an approximately $1.0 million increase in compensation and benefits related expenses as a result of increased headcount, an approximately $0.9 million increase in stock compensation expense primarily related to our annual stock option grant made in February 2010, an approximately $0.4 million increase in allocated facilities costs primarily due to increased rent expense associated with the newly acquired space at our 301 Binney Street facility, and an increase in consulting costs of approximately $0.7 million associated with marketing and business development, as well as compliance with the Sarbanes-Oxley Act of 2002 and stock administration.
Other Income (Expense), Net
|
|
|
Three Months Ended
|
|
Change |
|
Six Months Ended
|
|
Change |
|
||||||||||||||
|
|
|
2010 |
|
2009 |
|
$ |
|
% |
|
2010 |
|
2009 |
|
$ |
|
% |
|
||||||
|
|
|
(dollars in thousands) |
|
|
|
(dollars in thousands) |
|
|
|
||||||||||||||
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest expense |
|
$ |
(79 |
) |
$ |
(122 |
) |
$ |
43 |
|
35.2 |
% |
$ |
(172 |
) |
$ |
(256 |
) |
$ |
84 |
|
32.8 |
% |
|
Interest and investment income |
|
189 |
|
82 |
|
107 |
|
130.5 |
% |
257 |
|
186 |
|
71 |
|
38.2 |
% |
||||||
|
Remeasurement of forward purchase contracts |
|
— |
|
(300 |
) |
300 |
|
100.0 |
% |
— |
|
(100 |
) |
100 |
|
100.0 |
% |
||||||
|
Total other income (expense), net |
|
$ |
110 |
|
$ |
(340 |
) |
$ |
450 |
|
132.4 |
% |
$ |
85 |
|
$ |
(170 |
) |
$ |
255 |
|
150.0 |
% |
Interest Expense. The decrease in interest expense for both the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009 was the result of a reduction in long-term debt.
Interest and Investment Income. The increase in interest and investment income for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009 was due to higher average investment balances, partially offset by lower prevailing interest rates during the period.
Remeasurement of Forward Purchase Contracts. The increase in the remeasurement of forward purchase contracts for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009 resulted from the final settlement of the Forest forward purchase contract in July 2009 and the Almirall forward purchase contract in November 2009. Both forward purchase contracts were remeasured at June 30, 2009, resulting in an overall remeasurement loss of $0.3 million and $0.1 million over the three and six months ended June 30, 2009, respectively. As a result of the final settlements, there was not a corresponding remeasurement at June 30, 2010.
Net Loss Attributable to Noncontrolling Interest. The approximately $0.5 million and $0.6 million decrease in net loss attributable to noncontrolling interest, was due to a smaller net loss for Microbia during the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009, respectively. The smaller net loss for Microbia was primarily associated with lower expenses resulting from reduced headcount and approximately $1.8 million in revenue recorded in the three months ended June 30, 2010 associated with the termination of the T&L agreement.
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash for each of the periods set forth below:
|
|
|
Six Months Ended
|
|
||||
|
|
|
2010 |
|
2009 |
|
||
|
|
|
(in thousands) |
|
||||
|
Net cash (used in) provided by: |
|
|
|
|
|
||
|
Operating activities |
|
$ |
(45,289 |
) |
$ |
(7,845 |
) |
|
Investing activities |
|
(245,267 |
) |
12,050 |
|
||
|
Financing activities |
|
202,795 |
|
1,914 |
|
||
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(87,761 |
) |
$ |
6,119 |
|
We have incurred losses since our inception on January 5, 1998 and, as of June 30, 2010, we had a cumulative deficit of approximately $347.6 million. We have financed our operations to date primarily through the sale of preferred stock and common stock, including approximately $203.2 million of net proceeds from our IPO, payments received under collaborative arrangements, including reimbursement of certain expenses, debt financings and interest earned on investments. At June 30, 2010, we had approximately $271.6 million of cash, cash equivalents and available-for-sale securities. Our cash and cash equivalents include amounts held in money market funds, stated at cost plus accrued interest, which approximates fair market value and U.S. Treasury securities. Our available-for-sale securities include amounts held in U.S. government-sponsored entities and U.S. Treasury securities. We invest cash in excess of immediate requirements in accordance with our investment policy which limits the amounts we may invest in any one type of investment and requires all investments held by us to be A+ rated so as to primarily achieve liquidity and capital preservation.
Cash Flows From Operating Activities
Cash flows from operating activities represent the cash receipts and disbursements related to all our activities other than investing and financing activities. Our operating cash flow is derived by adjusting our net loss for:
· Non-cash items such as depreciation, share-based compensation expense, remeasurement of forward purchase contracts and accretion of discount/premium on investment securities;
· Changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.
Net cash used in operating activities totaled approximately $45.3 million for the six months ended June 30, 2010. The primary uses of cash were our net loss of approximately $33.5 million, a decrease of approximately $18.6 million in working capital resulting primarily from reductions in deferred revenue as revenue was recognized from our Forest collaboration agreement and our Almirall and Astellas license agreements. These uses of cash were partially offset by approximately $6.8 million of non-cash items.
Net cash used in operating activities totaled approximately $7.8 million for the six months ended June 30, 2009. The primary uses of cash were our net loss of approximately $37.3 million, offset by approximately $4.8 million in non-cash items and approximately $24.7 million increase in working capital. The increase in working capital was due primarily to an increase in deferred revenue resulting from the up-front cash payment associated with the Almirall license agreement of $38.0 million, partially offset by reductions in deferred revenue as revenue was recognized on our Forest and Almirall collaborations.
Cash Flows From Investing Activities
Cash used in investing activities for the six months ended June 30, 2010 totaled approximately $245.3 million and resulted primarily from the purchase of approximately $274.1 million of securities related to the investment of the net proceeds of our IPO and the purchase of approximately $8.6 million of property and equipment resulting from the expansion of our 301 Binney Street facility. These uses of cash were partially offset by the sale and maturity of approximately $37.5 million in investments.
Cash provided by investing activities for the six months ended June 30, 2009 totaled approximately $12.1 million and resulted primarily from the sales and maturities of securities of approximately $23.3 million, partially offset by the purchase of approximately $9.0 million of securities and the purchase of approximately $2.3 million of property and equipment.
Cash Flows From Financing Activities
Cash provided by financing activities for the six months ended June 30, 2010 totaled approximately $202.8 million and resulted primarily from the net proceeds of our IPO of approximately $203.2 million.
Cash provided by financing activities for the six months ended June 30, 2009 totaled approximately $1.9 million and primarily resulted from the net borrowings under our debt facility and capital leases.
Funding Requirements
To date, we have not commercialized any products and have not achieved profitability. We anticipate that we will continue to incur substantial net losses for the next several years as we further develop and prepare for the potential commercial launch of linaclotide, continue to invest in our pipeline, develop the organization required to sell our product candidates and operate as a publicly traded company.
We have generated revenue from services, up-front license fees and milestones, but have not generated any product revenue since our inception and do not expect to generate any product revenue from our collaborative arrangements or the sale of products unless we receive regulatory approval for commercial sale of linaclotide. We believe that our existing cash, cash equivalents and available-for-sale securities balances, interest income we earn on these balances, and amounts we expect to receive from our collaborators under existing contractual obligations will be sufficient to meet our anticipated cash requirements to complete development and commercialize linaclotide with our partner Forest for the U.S. market, and to fund our currently contemplated research and development efforts for at least the next five years, based on our current business plan. Our forecast of the period of time through which our financial resources will be adequate to support our operations, the costs to obtain regulatory approval, and the costs to commercialize our product candidates are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the “Risk Factors” section of this Quarterly Report on Form 10-Q. We have based these 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 of our product candidates, we are unable to estimate precisely the amounts of capital outlays and operating expenditures necessary to complete the development of, and to obtain regulatory approval for, linaclotide and our other product candidates for all of the indications for which we believe each product candidate is suited. Our funding requirements will depend on many factors, including, but not limited to, the following:
· the time and costs involved in obtaining regulatory approvals for our product candidates;
· the rate of progress and cost of our commercialization activities;
· the success of our research and development efforts;
· the expenses we incur in marketing and selling our product candidates;
· the revenue generated by sales of our product candidates;
· the emergence of competing or complementary technological developments;
· the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
· the terms and timing of any additional collaborative, licensing or other arrangements that we may establish; and
· the acquisition of businesses, products and technologies.
Contractual Commitments and Obligations
The disclosure of our contractual obligations and commitments is set forth under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Commitments and Obligations in our Annual Report on Form 10-K for the year ended December 31, 2009. As of June 30, 2010, in connection with Microbia’s November 2009 restructuring, Microbia may incur approximately $0.8 million of additional restructuring costs if Microbia implements an additional reduction in force prior to the earlier of November 5, 2010 or the date that Microbia closes on a new round of financing.
In June 2010, we entered into a commercial supply agreement with PolyPeptide Laboratories, Inc. and Polypeptide Laboratories (SWEDEN) AB for the purchase of a portion of the linaclotide active pharmaceutical ingredient, or API, that will be used to obtain regulatory approval of linaclotide in the United States, Canada and/or Mexico, and, pending any such approval, that will be commercialized in such country. The commercial supply agreement contains minimum purchase requirements that commence with the commercial launch of linaclotide and that are dependent upon forecasted commercial requirements. Since, at this time, linaclotide has not yet been approved for commercialization and future commercial demand for linaclotide is unknown, we cannot estimate our future minimum purchase requirements under the commercial supply agreement.
Related Party Transactions
We have and currently obtain legal services from a law firm that is an investor of ours. We paid approximately $41,000 and $100,000 in legal fees to this investor during the three and six months ended June 30, 2010, respectively and approximately $3,000 and $5,000 during the three and six months ended June 30, 2009, respectively.
In September 2006, T&L became a related party when we sold to them 1,823,529 shares of common stock of Microbia at the aggregate purchase price of approximately $2,000, and sold 7,000,000 shares of convertible preferred stock of Microbia at the aggregate purchase price of $7.0 million. T&L accounted for approximately 16% and 10% of our revenue for the three and six months ended June 30, 2010, respectively, and approximately 6% and 10% of our revenue for the three and six months ended June 30, 2009, respectively. On June 15, 2010, T&L and Microbia entered into an agreement to terminate their collaboration. The terms and conditions of the termination agreement include an exchange of intellectual property and a one-time payment to Microbia of approximately $1.8 million. All current and future obligations between Microbia and T&L are terminated as a result of this agreement.
In September 2009, Forest became a related party when we sold to them 2,083,333 shares of our convertible preferred stock at a price of $12.00 per share for cash proceeds of $25.0 million. Forest accounted for approximately 50% and 54% of our revenue for the three and six months ended June 30, 2010, respectively, and approximately 67% and 75% of our revenue for the three and six months ended June 30, 2009, respectively.
In November 2009, Almirall became a related party when we sold to them 681,819 shares of our convertible preferred stock at a price of $22.00 per share for cash proceeds of $15.0 million. Almirall accounted for approximately 25% and 29% of our revenue for the three and six months ended June 30, 2010, respectively, and approximately 27% and 15% of our revenue for the three and six months ended June 30, 2009, respectively.
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 facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) 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
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position or results of operations upon adoption.
Recently Issued Accounting Standards
In April 2010, the FASB issued Accounting Standards Update, or ASU, No. 2010-17, Revenue Recognition — Milestone Method, or ASU 2010-017. ASU 2010-017 provides guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This ASU is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010. Early adoption is permitted; however, adoption of this guidance as of a date other than January 1, 2011 will require us to apply this guidance retrospectively effective as of January 1, 2010 and will require disclosure of the effect of this guidance as applied to all previously reported interim periods in the fiscal year of adoption. As we plan to implement ASU No. 2010-17 prospectively, the effect of this guidance will be limited to future transactions.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements , or ASU 2009-13. ASU 2009-13, amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB Accounting Standards Codification, or ASC, Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables , or EITF 00-21). The consensus to ASU 2009-13 provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. EITF 00-21 previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. Under EITF 00-21, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and allows for retrospective application. We are currently evaluating the potential impact of this standard on our financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to market risk related to changes in interest rates. We invest our cash in a variety of financial instruments, principally deposits, securities issued by the U.S. government and its agencies and money market instruments. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk.
Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates, particularly because our investments are in short-term marketable securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 1% change in interest rates would not have a material effect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.
Recently, there has been concern in the credit markets regarding the value of a variety of mortgage-backed and auction rate securities and the resulting effect on various securities markets. We do not currently have any auction rate securities. We do not believe our cash, cash equivalents and available-for-sale investments have significant risk of default or illiquidity. While we believe our cash, cash equivalents and available-for-sale securities do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current instability of financial institutions, we cannot be assured that we will not experience losses on these deposits.
Our long-term debt and capital lease obligations bear interest at a fixed rate and therefore have minimal exposure to changes in interest rates.
Foreign Currency Risk
We have no operations outside the U.S. and do not have any foreign currency or other derivative financial instruments.
Effects of Inflation
We do not believe that inflation and changing prices have had a material effect on our business over the three and six months ended June 30, 2010 and 2009.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, or the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer and principal financial officer concluded no such changes during the period covered by this Quarterly Report on Form 10-Q materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
Our future operating results could differ materially from the results described in this report due to the risks and uncertainties related to our business, including those discussed below. Furthermore, these factors represent risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. We refer you to our “Special Note Regarding Forward-Looking Statements” which identifies the forward-looking statements in this report.
Risks Related to Our Business and Industry
We are largely dependent on the success of linaclotide, which may never receive regulatory approval or be successfully commercialized.
We currently have one product candidate, linaclotide, in Phase 3 clinical development. Our other drug candidates are in earlier stages of development. Our business depends entirely on the successful development and commercialization of our product candidates. We currently generate no revenue from sales, and we may never be able to develop marketable drugs. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of pharmaceutical products is subject to extensive regulation by the FDA, and foreign regulatory authorities, and regulations differ from jurisdiction to jurisdiction. We are not permitted to market any of our product candidates in the U.S. until we receive approval of a New Drug Application, or NDA, from the FDA, or in any foreign jurisdictions until we receive the requisite approvals from such jurisdictions. We have neither submitted an NDA nor received marketing approval for linaclotide in any jurisdiction. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. The FDA also has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Potential risks include:
· the FDA may not deem linaclotide or another product candidate safe and effective;
· the FDA may not find the data from preclinical studies and clinical trials sufficient to support approval;
· the FDA may not approve of manufacturing processes and facilities; or
· the FDA may change its approval policies or adopt new regulations.
Linaclotide is a first-in-class compound that is currently in Phase 3 clinical development for the treatment of IBS-C and CC and will require the successful completion of at least two Phase 3 clinical trials for each indication before submission of an NDA to the FDA for potential approval in such indication. In November 2009 and May 2010, we announced that we achieved favorable results in our CC trials. Even though linaclotide met the endpoints of the CC trial, it may not be approved for the CC indication or for any other indication for which we seek approval from the FDA. We are amending both Phase 3 IBS-C clinical trial protocols to include a fourth primary endpoint, based on (a) our interactions with the FDA and their recently-issued draft guidance with respect to the design of clinical trials for IBS-C, (b) our view that the likely higher responder rate with respect to the new endpoint will more accurately demonstrate the applicability of linaclotide to the general IBS-C population and (c) our desire to ensure that we are not disadvantaged in comparison to subsequent competitors who may be held to a less stringent responder analysis if they comply with the FDA’s draft guidance. While meeting one or more of the primary endpoints may result in a positive outcome to the clinical trials, there remains the risk that the results based on these endpoints may not support product approval. Further, the FDA may disagree with our trial design or our interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials. The FDA might also approve linaclotide for fewer or more limited indications than we request, or may grant approval contingent on the performance of costly post-approval clinical trials. In addition, the FDA may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of linaclotide. Any failure to obtain regulatory approval of linaclotide would significantly limit our ability to generate revenues, and any failure to obtain such approval for all of the indications and labeling claims we deem desirable could reduce our potential revenue.
Our clinical trials may fail to demonstrate acceptable levels of safety and efficacy of linaclotide, which could prevent or significantly delay regulatory approval.
Our product candidates are prone to the risks of failure inherent in drug development—most pharmaceutical product candidates fail. Before obtaining regulatory approvals for the commercial sale of linaclotide or any other product candidate for a specific indication, we must demonstrate with substantial evidence gathered in well-controlled clinical trials and to the satisfaction of the FDA, with respect to approval in the U.S., and to the satisfaction of similar regulatory authorities in other jurisdictions, with respect to approval in those jurisdictions, that the product candidate is safe and effective for use for the target indication.
The results from the preclinical and clinical trials that we have completed for linaclotide may not be replicated in future trials, or we may be unable to demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for linaclotide. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. If linaclotide is not shown to be safe and effective, our clinical development programs could be delayed or terminated. Our failure to adequately demonstrate the efficacy and safety of linaclotide or any other product candidates that we may develop, in-license or acquire would prevent receipt of regulatory approval and, ultimately, the commercialization of that product candidate.
The positive top-line results from our two Phase 3 clinical trials assessing the safety and efficacy of linaclotide in patients with CC may not be indicative of our two Phase 3 clinical trials assessing the safety and efficacy of linaclotide in patients with IBS-C.
In November 2009 and May 2010, we announced that the primary endpoint was achieved in each of our two Phase 3 clinical trials assessing the safety and efficacy of linaclotide in patients with CC. The primary efficacy endpoint in each of these two clinical trials is only one of the four primary efficacy endpoints in each of our two Phase 3 clinical trials assessing the safety and efficacy of linaclotide in patients with IBS-C. Positive results in the CC trial or from earlier clinical trials are not necessarily indicative of future success in the IBS-C trials, even with respect to similar endpoints. While meeting one or more of the primary endpoints may result in a positive outcome to the clinical trials, there remains the risk that the results based on these endpoints may not support product approval. Finally, our partners Almirall and Astellas intend to seek approval from regulatory authorities in each of their respective territories solely for the IBS-C indication. The European Medicines Agency, or the EMA, has indicated that Almirall can use the U.S. IBS-C clinical trial data as a basis for a Market Authorisation Application, the EMA’s counterpart to an NDA. Accordingly, if we are unable to establish safety and efficacy of linaclotide in our U.S. IBS-C trials, our partners may be unable to utilize our data in the U.S. in their regulatory filings, and may be hindered from obtaining approval for linaclotide in their respective territories.
Linaclotide may cause undesirable side effects or have other properties that could delay or prevent its regulatory approval or limit its commercial potential.
Undesirable side effects caused by linaclotide could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities and potential products liability claims. Earlier this year, we completed our evaluation of the data from our CC studies and are currently conducting two Phase 3 IBS-C trials as well as a long-term safety study in patients dosed with linaclotide over a 78-week period. Serious adverse events deemed to be caused by linaclotide could have a material adverse effect upon the linaclotide program and our business as a whole. The most common adverse event to date in the clinical studies evaluating the safety and efficacy of linaclotide has been diarrhea. For the most part, the diarrhea has been considered mild or moderate by the patients, but in a small percentage of patients, it has been severe enough for patients to discontinue participation in a study. There have been no serious adverse events in patients treated with linaclotide that were deemed by a study investigator to be “definitively related” or “probably related” to linaclotide treatment. There have been a small number of serious adverse events in patients treated with linaclotide that were deemed by an independent study investigator to be “possibly related” to linaclotide treatment, involving cases of abdominal pain, aplastic anemia, atrial fibrillation, bronchitis, gall stones, ileus, pericarditis, stroke and thombrosed hemorrhoids. At the end of the linaclotide development program, the incidence of these events in linaclotide recipients will be compared to the population at-large to assess whether linaclotide increases the risks of such events. Finally, there have been no deaths in our trials that were considered by a study investigator to be related to linaclotide treatment.
If linaclotide receives marketing approval, and we or others later identify undesirable side effects caused by the product, a number of potentially significant negative consequences could result, including:
· regulatory authorities may withdraw approvals of linaclotide;
· regulatory authorities may require additional warnings on the label;
· we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
· we could be sued and held liable for harm caused to patients; and
· our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of linaclotide and could substantially increase commercialization costs.
Delays in the completion of clinical testing could result in increased costs and delay or limit our ability to generate revenues.
Delays in the completion of clinical testing could significantly affect our product development costs. We do not know whether planned clinical trials will be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:
· obtaining regulatory approval to commence a clinical trial;
· reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
· manufacturing sufficient quantities of a product candidate for use in clinical trials;
· obtaining institutional review board approval to conduct a clinical trial at a prospective site;
· recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the treatment of similar conditions; and
· signing-up patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy or personal issues, or who are lost to further follow-up.
Clinical trials may also be delayed as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, an institutional review board overseeing the clinical trial at a clinical trial site (with respect to that site), the FDA, or other regulatory authorities due to a number of factors, including:
· failure to conduct the clinical trial in accordance with regulatory requirements or the study protocols;
· inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
· unforeseen safety issues; and
· lack of adequate funding to continue the clinical trial.
Additionally, changes in regulatory requirements and guidance may occur, and we may need to amend clinical trial protocols to reflect these changes. The FDA recently issued draft guidance on the design of clinical trials for IBS-C, and based on this draft guidance, we are amending both Phase 3 IBS-C clinical trial protocols to include a fourth primary endpoint. These amendments will, as any protocol amendment would, require institutional review board review and approval, which may adversely impact the costs, timing or successful completion of the clinical trials. If we experience delays in completion or if we terminate any of our clinical trials, the commercial prospects for linaclotide may be harmed, and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of linaclotide.
Because we work with Forest Laboratories, Inc. to develop, promote and manufacture linaclotide in North America, we are dependent upon a third party in our efforts to obtain regulatory approval for, and to commercialize, linaclotide within our expected timeframes.
We co-develop and plan to co-promote linaclotide in the U.S. with Forest. Forest plays a significant role in the conduct of the clinical trials for linaclotide and the subsequent collection and analysis of data. In addition, Forest is responsible for completing the manufacturing process of linaclotide upon production of the API, which consists of finishing and packaging linaclotide into capsules. Employees of Forest are not our employees, and we have limited ability to control the amount or timing of resources that they devote to linaclotide. If Forest fails to devote sufficient time and resources to linaclotide, or if its performance is substandard, it will delay the potential approval of our regulatory applications as well as the commercialization and manufacturing of linaclotide. A material breach by Forest of our collaboration agreement could also delay regulatory approval and commercialization of linaclotide. In addition, the
execution of clinical trials, and the subsequent compilation and analysis of the data produced, requires coordination among various parties. These functions may not be carried out effectively and efficiently if these parties fail to communicate and coordinate with one another. Moreover, although we have non-compete restrictions in place with Forest, Forest may have relationships with other commercial entities, some of which may compete with us. If Forest assists our competitors, it could harm our competitive position.
We may face competition in the IBS-C and CC marketplace for linaclotide, and new products may emerge that provide different or better alternatives for treatment of gastrointestinal conditions.
If approved and commercialized, linaclotide will compete globally with certain prescription therapies and over the counter products for the treatment of IBS-C and CC, or certain associated symptoms. The availability of prescription competitors and over the counter products for gastrointestinal conditions could limit the demand, and the price we are able to charge, for linaclotide unless we are able to differentiate linaclotide on the basis of its clinical benefits in our clinical trials. New developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical and medical technology industries at a rapid pace. These developments may render linaclotide obsolete or noncompetitive.
We believe certain companies are developing other products which could compete with linaclotide should they be approved by the FDA. Currently, there are compounds in late stage development for the treatment of patients with either IBS-C or CC. To our knowledge, other potential competitors also are in earlier stages of development. If our potential competitors are successful in completing drug development for their drug candidates and obtain approval from the FDA, they could limit the demand for linaclotide.
Many of our competitors have substantially greater financial, technical and human resources than us. Mergers and acquisitions in the pharmaceutical industry may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances made in the commercial applicability of technologies and greater availability of capital for investment in these fields.
We have limited sales and marketing experience and resources, and we may not be able to effectively market and sell linaclotide.
With linaclotide, we are developing a product candidate for large markets traditionally served by general practitioners and internists, as well as gastrointestinal specialists. Traditional pharmaceutical companies employ groups of sales representatives to call on these large generalist physician populations. In order to adequately address these physician groups, we must optimize our co-development and co-promotion relationship in the U.S., Canada and Mexico with Forest, our license and commercialization relationship in Europe with Almirall, and our license and commercialization relationship in certain Asian countries with Astellas. Likewise, we must either establish sales and marketing collaborations or co-promotion arrangements or expend significant resources to develop our own sales and marketing presence outside of North America, Europe, and those Asian countries. We currently possess limited resources and may not be successful in establishing additional collaborations or co-promotion arrangements on acceptable terms, if at all. We also face competition in our search for collaborators, co-promoters and sales force personnel. By entering into strategic collaborations or similar arrangements, we rely on third parties for financial resources and for development, commercialization, sales and marketing and regulatory expertise. Our collaborators may fail to develop or effectively commercialize linaclotide because they cannot obtain the necessary regulatory approvals, lack adequate financial or other resources or decide to focus on other initiatives.
Even if linaclotide receives regulatory approval, it may still face future development and regulatory difficulties.
Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. Linaclotide and our other product candidates would also be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeeping and submission of safety and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices, or GMP, regulations. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or the manufacturer, including requiring withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:
· issue warning letters or untitled letters;
· impose civil or criminal penalties;
· suspend regulatory approval;
· suspend any ongoing clinical trials;
· refuse to approve pending applications or supplements to applications filed by us;
· impose restrictions on operations, including costly new manufacturing requirements; or
· seize or detain products or require us to initiate a product recall.
Even if linaclotide receives regulatory approval in the U.S., we or our collaborators may never receive approval to commercialize linaclotide outside of the U.S.
In April 2009, we entered into an out-license agreement with Almirall for European rights to develop and commercialize linaclotide. In November 2009, we entered into an out-license agreement with Astellas for rights to develop and commercialize linaclotide in certain Asian countries. In the future, we may seek to commercialize linaclotide in foreign countries outside of Europe and those Asian countries with other parties or by ourselves. In order to market any products outside of the U.S., we must establish and comply with numerous and varying regulatory requirements of other jurisdictions regarding safety and efficacy. Approval procedures vary among jurisdictions and can involve product testing and administrative review periods different from, and greater than, those in the U.S. The time required to obtain approval in other jurisdictions might differ from that required to obtain FDA approval. The regulatory approval process in other jurisdictions may include all of the risks detailed above regarding FDA approval in the U.S. as well as other risks. Regulatory approval in one jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory processes in others. Failure to obtain regulatory approvals in other jurisdictions or any delay or setback in obtaining such approvals could have the same adverse effects detailed above regarding FDA approval in the U.S. As described above, such effects include the risks that linaclotide may not be approved for all indications requested, which could limit the uses of linaclotide and have an adverse effect on its commercial potential or require costly post-marketing studies.
If we or our collaboration partners and other third parties upon whom we rely to produce linaclotide are unable to satisfy FDA quality standards and related regulatory requirements, experience manufacturing difficulties, or are unable to manufacture sufficient quantities of our product candidates, our development and commercialization efforts may be materially harmed.
We do not currently possess internal manufacturing capacity. We currently utilize the services of contract manufacturers to manufacture our clinical supplies. With respect to the manufacturing of linaclotide, we (along with our U.S. collaboration partner, Forest) entered into a commercial supply agreement with PolyPeptide Laboratories, Inc. and Polypeptide Laboratories (SWEDEN) AB in June 2010 for the manufacture of the linaclotide API that will be used to obtain regulatory approval of linaclotide in the United States, Canada and/or Mexico, and, pending any such approval, that will be incorporated into finished product for commercialization in such country. In addition, we continue to pursue long-term commercial supply agreements with other manufacturers for the linaclotide API. We may not be able to enter into long-term agreements with such manufacturers on commercially reasonable terms, or at all. If we enter into a long-term commercial supply agreement with another manufacturer but then change or add manufacturers, the FDA and comparable foreign regulators must approve these manufacturers’ facilities and processes prior to use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in or independently develop the processes necessary for the production of our product candidates. While we believe we will have long term arrangements with a sufficient number of API manufacturers, if we lose a manufacturer, it would take us a substantial amount of time to identify and develop a relationship with an alternative manufacturer.
Peptide manufacturing is a highly specialized manufacturing business. These third party manufacturers acquire the raw materials for the API from a limited number of sources. Any curtailment in the availability of these raw materials could result in production or other delays with consequent adverse effects on us. In addition, because regulatory authorities must generally approve raw material sources for pharmaceutical products, changes in raw material suppliers may result in production delays or higher raw material costs.
Upon production of our API, each of our collaboration partners, Forest, Almirall and Astellas, is responsible for completing the manufacturing process of linaclotide which consists of finishing and packaging linaclotide into capsules, and we will be dependent upon those parties’ success in producing drug product for commercial sale. No party has experience producing the API or finished
drug product for linaclotide at commercial scale, and such efforts may fail. Traditionally, peptide manufacturing is costly and time consuming, resulting in low yields and poor stability. We cannot give any assurances that we will overcome these issues when scaling up manufacturing for linaclotide.
The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up production. These problems include difficulties with production costs and yields, quality control, including stability of the product and quality assurance testing, shortages of qualified personnel, as well as compliance with federal, state and foreign regulations. We are currently evaluating the stability of different batch sizes of linaclotide at various points in time. If we are unable to demonstrate stability in accordance with commercial requirements, or if our manufacturers were to encounter difficulties or otherwise fail to comply with their obligations to us, our ability to obtain FDA approval and market linaclotide would be jeopardized. In addition, any delay or interruption in the supply of clinical trial supplies could delay the completion of our clinical trials, increase the costs associated with conducting our clinical trials and, depending upon the period of delay, require us to commence new trials at significant additional expense or to terminate a trial.
Each of the linaclotide manufacturers would need to comply with GMP requirements enforced by the FDA through its facilities inspection program. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. Manufacturers of linaclotide may be unable to comply with these GMP requirements and with other FDA and foreign regulatory requirements. We have little control over our manufacturers’ or collaboration partners’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of linaclotide is compromised due to a manufacturers’ or collaboration partners’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize linaclotide, and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay of clinical trials, regulatory submissions, approvals or commercialization of linaclotide or our other product candidates, entail higher costs or result in our being unable to effectively commercialize linaclotide or our other product candidates. Furthermore, if our manufacturers or collaboration partners fail to deliver the required commercial quantities on a timely basis and at commercially reasonable prices, we may be unable to meet demand for any approved products and would lose potential revenues.
Guidelines and recommendations published by various organizations can reduce the use of our products.
Government agencies promulgate regulations and guidelines directly applicable to us and to our products. In addition, professional societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the health care and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies. Recommendations or guidelines suggesting the reduced use of our products or the use of competitive or alternative products that are followed by patients and health care providers could result in decreased use of our products.
We are subject to uncertainty relating to reimbursement policies which, if not favorable for linaclotide, could hinder or prevent linaclotide’s commercial success.
Our ability to commercialize linaclotide successfully will depend in part on the coverage and reimbursement levels set by governmental authorities, private health insurers and other third-party payors. As a threshold for coverage and reimbursement, third-party payors generally require that drug products have been approved for marketing by the FDA. Third-party payors also are increasingly challenging the effectiveness of and prices charged for medical products and services. We may not obtain adequate third-party coverage or reimbursement for linaclotide or we may be required to sell linaclotide at a discount.
We expect that private insurers will consider the efficacy, cost effectiveness and safety of linaclotide in determining whether to approve reimbursement for linaclotide and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business would be materially adversely affected if we do not receive approval for reimbursement of linaclotide from private insurers on a timely or satisfactory basis. Our business could also be adversely affected if private insurers, including managed care organizations, the Medicare program or other reimbursing bodies or payors limit the indications for which linaclotide will be reimbursed to a smaller set than we believe it is effective in treating.
In some foreign countries, particularly Canada and the countries of Europe, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products, including linaclotide, to other available therapies. Further, several European countries have recently implemented government measures to either freeze or reduce pricing of pharmaceutical products, and it is expected that other countries will do so, as well. If reimbursement for our products is unavailable in any country in which reimbursement is sought, limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.
We expect to experience pricing pressures in connection with the sale of linaclotide and our future products due to the potential healthcare reforms discussed below, as well as the trend toward programs aimed at reducing health care costs, the increasing influence of health maintenance organizations and additional legislative proposals.
We face potential product liability exposure, and, if successful claims are brought against us, we may incur substantial liabilities.
The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. If we cannot successfully defend ourselves against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in:
· decreased demand for any approved product;
· impairment of our business reputation;
· withdrawal of clinical trial participants;
· initiation of investigations by regulators;
· costs of related litigation;
· distraction of management’s attention from our primary business;
· substantial monetary awards to patients or other claimants;
· loss of revenues; and
· the inability to commercialize our product candidates.
We have obtained product liability insurance coverage for our clinical trials. Our insurance coverage is limited to $5 million per occurrence, and $10 million in the aggregate, and covers bodily injury and property damage arising from our clinical trials, subject to industry-standard terms, conditions and exclusions. Our insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If and when we obtain marketing approval for any of our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain this product liability insurance on commercially reasonable terms. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.
In pursuing our growth strategy, we will incur a variety of costs and may devote resources to potential opportunities that are never completed or for which we never receive the benefit. Our failure to successfully discover, acquire, develop and market additional product candidates or approved products would impair our ability to grow.
As part of our growth strategy, we intend to develop and market additional products and product candidates. We are pursuing various therapeutic opportunities through our pipeline. We may spend several years completing our development of any particular current or future internal product candidate, and failure can occur at any stage. The product candidates to which we allocate our resources may not end up being successful. In addition, because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology
to us. The success of this strategy depends partly upon our ability to identify, select, discover and acquire promising pharmaceutical product candidates and products.
The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all.
In addition, future acquisitions may entail numerous operational and financial risks, including:
· exposure to unknown liabilities;
· disruption of our business and diversion of our management’s time and attention to develop acquired products or technologies;
· incurrence of substantial debt, dilutive issuances of securities or depletion of cash to pay for acquisitions;
· higher than expected acquisition and integration costs;
· difficulty in combining the operations and personnel of any acquired businesses with our operations and personnel;
· increased amortization expenses;
· impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and
· inability to motivate key employees of any acquired businesses.
Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities.
Healthcare reform measures could hinder or prevent our product candidates’ commercial success.
The U.S. government and other governments have shown significant interest in pursuing healthcare reform, as evidenced by the recent passing of the Patient Protection and Affordable Healthcare Act and the Health Care and Education Reconciliation Act. This healthcare reform law will increase the number of individuals who receive health insurance coverage and will close a gap in drug coverage under Medicare Part D as established under the Medicare Prescription Drug Improvement Act of 2003; each of these reforms could potentially increase our future revenue from linaclotide or any other product candidates that are approved for sale. The newly-enacted law, however, also implements cost containment measures that could adversely affect our future revenue. These measures include increased drug rebates under Medicaid for brand name prescription drugs and extension of these rebates to Medicaid managed care. The legislation also extends 340B discounted pricing on outpatient drugs to children’s hospitals, critical access hospitals, and rural health centers; this expansion reduces the amount of reimbursement received for drugs purchased by these new 340B-covered entities.
Additional provisions of the health care reform law, which become effective in 2011, may negatively affect our future revenue and prospects for profitability. Along with other pharmaceutical manufacturers and importers of brand name prescription drugs, we would be assessed a fee based on our proportionate share of sales of brand name prescription drugs to certain government programs, including Medicare and Medicaid. As part of the health care reform law’s provisions closing a funding gap that currently exists in the Medicare Part D prescription drug program (commonly known as the “donut hole”), we will also be required to provide a 50% discount on brand name prescription drugs sold to beneficiaries who fall within the donut hole.
In the aftermath of the healthcare reform law, private health insurers and managed care plans are likely to continue challenging the prices charged for medical products and services. These cost-control initiatives could decrease the price we might establish for linaclotide, which would result in lower product revenue or royalties payable to us.
In addition, in some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. The recent U.S. legislation and these proposed reforms could result in reduced reimbursement rates for linaclotide and our other potential products, which would adversely affect our business strategy, operations and financial results.
In September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-marketing authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA’s exercise of this authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to assure compliance with post-approval regulatory requirements, and potential restrictions on the sale and/or distribution of approved products.
If our strategic alliances are unsuccessful, our operating results will be negatively impacted.
Our three primary strategic alliances are with Forest, Almirall and Astellas. The success of these arrangements is largely dependent on the resources, efforts and skills of these partners. Disputes and difficulties in such relationships are common, often due to conflicting priorities or conflicts of interest. Merger and acquisition activity may exacerbate these conflicts. The benefits of these alliances are reduced or eliminated when strategic partners:
· terminate the agreements covering the strategic alliance;
· fail to devote financial or other resources to the alliances and thereby hinder or delay development, manufacturing or commercialization activities; or
· fail to maintain the financial resources necessary to continue financing their portion of the development, manufacturing or commercialization costs, or become insolvent or declare bankruptcy.
We will need to increase the size of our organization, and we may experience difficulties in managing growth.
We will need to expand our managerial, operational, financial and other resources in order to manage our operations and clinical trials, continue our development activities and commercialize our product candidates. Our personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:
· manage our clinical trials effectively, including our Phase 3 clinical trials for linaclotide;
· manage our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors, collaborators and other third parties;
· improve our operational, financial and management controls, reporting systems and procedures; and
· attract and motivate sufficient numbers of talented employees.
We may not be able to manage our business effectively if we lose any of our current management team or if we are unable to attract and motivate key personnel.
We may not be able to attract or motivate qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the greater-Boston area. Our industry has experienced a high rate of turnover of management personnel in recent years. If we are not able to attract and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our objectives.
We are highly dependent on the development, regulatory, commercial and financial expertise of our management, particularly Peter M. Hecht, Ph.D., our Chief Executive Officer; Mark G. Currie, Ph.D., our Senior Vice President of Research and Development and our Chief Scientific Officer; Michael J. Higgins, our Senior Vice President, Chief Operating Officer and Chief Financial Officer; and Thomas A. McCourt, our Senior Vice President, Marketing and Sales and Chief Commercial Officer. Although no member of our management team has informed us to date that he or she intends to resign or retire, if we lose any members of our management team in the future, we may not be able to find suitable replacements, and our business may be harmed as a result. In addition to the competition for personnel, the Boston area in particular is characterized by a high cost of living. As such, we could have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment efforts.
We also have scientific and clinical advisors who assist us in formulating our product development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours.
We will need to obtain FDA approval of any proposed product names, and any failure or delay associated with such approval may adversely impact our business.
Any name we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal trademark registration from the U.S. Patent and Trademark Office. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately implies medical claims. If the FDA objects to any of our proposed product names, we may be required to adopt an alternative name for our product candidates. If we adopt an alternative name, we would lose the benefit of our existing trademark applications for such product candidate, such as linaclotide, and may be required to expend significant additional resources in an effort to identify a suitable product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. We may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our ability to commercialize our product candidates.
If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.
As a manufacturer of pharmaceuticals, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations include:
· federal healthcare program anti-kickback laws, which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;
· federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us which provide coding and billing advice to customers;
· the federal Health Insurance Portability and Accountability Act of 1996, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information;
· the Federal Food, Drug, and Cosmetic Act, which among other things, strictly regulates drug product marketing, prohibits manufacturers from marketing drug products for off-label use and regulates the distribution of drug samples; and
· state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by federal laws, thus complicating compliance efforts.
If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.
Our business involves the use of hazardous materials, and we must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
Our activities involve the controlled storage, use and disposal of hazardous materials. We are subject to federal, state, city and local laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures we use for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage.
Our business and operations would suffer in the event of system failures.
Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such an event could cause interruption of our operations. The loss of clinical trial data from completed or ongoing clinical trials for linaclotide could result in delays in our regulatory approval efforts and significantly increase our costs. To the extent that any disruption or security breach were to result in a loss of or damage to our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the development of our product candidates could be delayed.
If the proprietary strain-development platform of our biomanufacturing segment does not succeed, we may lose our investment in Microbia, Inc.
Our biomanufacturing segment consists of our majority ownership interest in Microbia. Microbia focuses on building a specialty biochemicals business based on a proprietary strain-development platform. The success of this segment is dependent on Microbia successfully developing, scaling up manufacturing and establishing commercial partnerships for biochemicals produced using its industrial biotechnology platform. If Microbia is not successful in developing products from its strain-development platform or partnering its platform, we may lose some or all of the value of our equity investment in Microbia.
Risks Related to Intellectual Property
Limitations on our patent rights relating to our product candidates may limit our ability to prevent third parties from competing against us.
Our success will depend on our ability to obtain and maintain patent protection for our product candidates, preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others.
The strength of patents in the pharmaceutical industry involves complex legal and scientific questions and can be uncertain. Patent applications in the U.S. and most other countries are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by several months or more. As a result, we cannot be certain that we were the first to conceive inventions covered by our patents and pending patent applications or that we were the first to file patent applications for such inventions. In addition, we cannot be certain that our patent applications will be granted, that any issued patents will adequately protect our intellectual property or that such patents will not be challenged, narrowed, invalidated or circumvented.
We also rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their
inventions to us. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants that are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.
In addition, the laws of certain foreign countries do not protect proprietary rights to the same extent or in the same manner as the U.S., and therefore, we may encounter problems in protecting and defending our intellectual property in certain foreign jurisdictions.
If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.
Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are developing products. As the biotechnology and pharmaceutical industry expands and more patents are issued, the risk increases that our potential products may give rise to claims of infringement of the patent rights of others. There may be issued patents of third parties of which we are currently unaware, that may be infringed by our product candidates. Because patent applications can take many years to issue, there may be currently pending applications which may later result in issued patents that our product candidates may infringe.
We may be exposed to, or threatened with, future litigation by third parties alleging that our product candidates infringe their intellectual property rights. If one of our product candidates is found to infringe the intellectual property rights of a third party, we or our collaborators could be enjoined by a court and required to pay damages and could be unable to commercialize the applicable product candidate unless we obtain a license to the patent. A license may not be available to us on acceptable terms, if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable relief which could prohibit us from making, using or selling our products, pending a trial on the merits, which may not occur for several years.
There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, but not limited to:
· infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;
· substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates the third party’s rights, and, if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’s attorneys’ fees;
· a court prohibiting us from selling our product unless the third party licenses its rights to us, which it is not required to do;
· if a license is available from a third party, we may have to pay substantial royalties, fees or grant cross-licenses to our intellectual property rights; and
· redesigning our products so they do not infringe, which may not be possible or may require substantial monetary expenditures and time.
We may become involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent application at risk of not issuing.
Interference proceedings brought by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our collaborators. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that are acceptable to us. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees. We may not be able to prevent, alone or with our collaborators, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the U.S.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceeding or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our Class A common stock.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The U.S. Patent and Trademark Office and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.
We have not yet registered trademarks for linaclotide in our potential markets, and failure to secure those registrations could adversely affect our business.
We have not yet registered trademarks for linaclotide in any jurisdiction. Although we have filed trademark applications for linaclotide in the U.S., our trademark applications in the U.S. and any other jurisdictions where we may file may not be allowed for registration, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the U.S. Patent and Trademark Office and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
We employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors, and as such, we may be subject to claims that these employees, or we, have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
Risks Related to Our Finances and Capital Requirements
We have incurred significant operating losses since our inception and anticipate that we will incur continued losses for the foreseeable future.
We have a limited operating history. In recent years, we have focused primarily on developing linaclotide, with the goal of supporting regulatory approval for this product candidate. We have financed our operations primarily through private placements of capital stock prior to our IPO, our IPO, and our collaboration and license arrangements, and we have incurred losses in each year since our inception in 1998. We incurred net losses attributable to Ironwood Pharmaceuticals, Inc. of approximately $17.1 million and $33.1 million in the three and six months ended June 30, 2010, respectively, and approximately $18.4 million and $36.4 million in the three and six months ended June 30, 2009, respectively. As of June 30, 2010, we had an accumulated deficit of approximately $347.6 million. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect our expenses to increase in connection with our efforts to commercialize linaclotide and our research and development of our other product candidates. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when, or if, we will become profitable.
We have not generated any product revenue from our product candidates and may never be profitable.
Our ability to become profitable depends upon our ability to generate revenue from sales. To date, we have not generated any product revenue, and we do not know when, or if, we will generate any such revenue. Our ability to generate product revenue depends on a number of factors, including, but not limited to, our ability to:
· successfully complete our ongoing and planned clinical trials for linaclotide;
· obtain regulatory approvals for linaclotide;
· if regulatory approvals are received, manufacture commercial quantities of linaclotide at acceptable cost levels;
· optimize our relationship to co-develop and co-promote linaclotide in the U.S. with Forest, to commercialize linaclotide in Europe with Almirall and to commercialize linaclotide in certain Asian countries with Astellas; and
· identify and enter into one or more strategic collaborations to market and sell linaclotide outside of North America, Europe and those Asian countries.
Even if linaclotide is approved for commercial sale, we anticipate incurring significant costs associated with commercialization. We may not achieve profitability after generating product sales. If we are unable to generate product revenues, we will not become profitable.
We may need additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.
Developing product candidates, conducting clinical trials, establishing manufacturing relationships and marketing drugs are expensive and uncertain. We believe that our cash on hand as of the date of this Quarterly Report on Form 10-Q and additional cash milestone payments we may receive from our collaborators will enable us to launch and commercialize linaclotide in the U.S. with our partner, Forest, and to fund our currently contemplated research and development efforts for at least the next five years based on our existing business plan. However, unforeseen circumstances may arise, or our strategic imperatives could change, requiring us to seek to raise additional funds. The amount and timing of our future funding requirements will depend on many factors, including, but not limited to:
· the rate of progress and cost of our clinical trials and other product development programs for linaclotide and our other product candidates;
· the costs and timing of in-licensing additional product candidates or acquiring other complementary companies;
· the timing of any regulatory approvals of our product candidates;
· the costs of establishing sales, marketing and distribution capabilities; and
· the status, terms and timing of any collaboration, licensing, co-promotion or other arrangements.
Additional funding may not be available on acceptable terms or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our development programs or our commercialization efforts.
Our quarterly operating results may fluctuate significantly.
We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:
· variations in the level of expenses related to our development programs;
· addition or termination of clinical trials;
· any intellectual property infringement lawsuit in which we may become involved;
· regulatory developments affecting our product candidates;
· our execution of any collaboration, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements;
· the achievement and timing of milestone payments under our existing collaboration and license agreements; and
· if linaclotide receives regulatory approval, the level of underlying demand for that product and wholesalers’ buying patterns.
If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our Class A common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.
Raising additional funds by issuing securities may cause dilution to existing stockholders and raising funds through borrowing or licensing arrangements may restrict our operations or require us to relinquish proprietary rights.
If we need to raise additional funds by issuing equity securities as a result of unforeseen circumstances or new strategic imperatives, our existing stockholders’ ownership will be diluted. If we seek to raise capital through debt financing, such transactions typically require covenants that restrict operating activities. Any borrowings under debt financing will need to be repaid, which creates additional financial risk, particularly if our business or prevailing financial market conditions are not conducive to paying-off or refinancing our outstanding debt obligations at maturity.
If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our product candidates or technologies, or to grant licenses on terms that are not favorable to us. If adequate funds are not available when and if needed, our ability to achieve profitability or to respond to competitive pressures would be significantly limited, and we may be required to delay, significantly curtail or eliminate one or more of our programs.
We have limited experience complying with public company obligations.
We face increased legal, accounting, administrative and other costs and expenses as a public company. Compliance with the Sarbanes-Oxley Act of 2002, the federal securities laws, as well as other rules of the SEC and NASDAQ, has resulted in significant initial cost to us as well as ongoing increases in our legal, audit and financial compliance costs. As a newly public company, we will soon become subject to Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. Although we have not identified any material weaknesses in our internal controls over financial reporting to date, we cannot assure that our internal controls over financial reporting will prove to be effective.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our Class A common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, including at our subsidiary, Microbia, could cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our Class A common stock.
Risks Relating to Securities Markets and Investment in Our Stock
The concentration of our capital stock ownership with our pre-IPO investors (and their affiliates), founders, directors, executives and employees will limit your ability to influence certain corporate matters.
Each share of Class A common stock and each share of Class B common stock has one vote per share on all matters except for the following matters (for which each share of our Class B common stock has ten votes per share and each share of our Class A common stock has one vote per share):
· adoption of a merger or consolidation agreement involving Ironwood;
· a sale of all or substantially all of Ironwood’s assets;
· a dissolution or liquidation of Ironwood; and,
· every matter, if and when any individual, entity or “group” (as such term is used in Regulation 13D of the Exchange Act has, or has publicly disclosed (through a press release or a filing with the SEC) an intent to have, beneficial ownership of 30% or more of the number of outstanding shares of Class A common stock and Class B common stock, combined.
Because of our dual class common stock structure, the holders of our Class B common stock, who consist of our pre-IPO investors (and their affiliates), founders, directors, executives and employees, will continue to be able to control the corporate matters listed above if any such matter is submitted to our stockholders for approval even if they come to own less than 50% of the outstanding shares of our common stock. As of July 30, 2010, the holders of our Class A common stock own 19.6% and the holders of our Class B common stock own 80.4% of the outstanding shares of Class A common stock and Class B common stock, combined. However, because of our dual class common stock structure these holders of our Class A common stock have 2.4% and holders of our Class B common stock have 97.6% of the total votes in each of the matters identified in the list above. This concentrated control with our Class B common stock holders limits the ability of the Class A common stockholders to influence those corporate matters and, as a result, we may take actions that many of our stockholders do not view as beneficial, which could adversely affect the market price of our Class A common stock.
Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could negatively impact the market price of our Class A common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control. These provisions include the following:
· Our certificate of incorporation provides for a dual class common stock structure. As a result of this structure, our pre-IPO investors (and each of their affiliates), founders, directors, executives and employees, each of whom hold shares of our Class B common stock, will have significant influence over certain matters requiring stockholder approval, including significant corporate transactions, such as a merger. This concentrated control could discourage others from initiating a change of control transaction that other stockholders may view as beneficial.
· Our board of directors is divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time. This staggered board structure prevents stockholders from replacing the entire board at a single stockholders’ meeting.
· Our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors.
· Our board of directors may issue, without stockholder approval, shares of preferred stock. The ability to authorize preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
· Stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting. Furthermore, stockholders may only remove a member of our board of directors for cause. These provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect such acquirer’s own slate of directors or otherwise attempting to obtain control of our company.
· Our stockholders may not act by written consent. As a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions outside of a stockholders’ meeting.
· Special meetings of stockholders may be called only by the chairman of our board of directors, our chief executive officer, our president or a majority of our board of directors. As a result, a holder, or holders, controlling a majority of our capital stock would not be able to call a special meeting.
· A majority of the outstanding shares of Class B common stock are required to amend our certificate of incorporation and a super-majority (80%) of the outstanding shares of Class B common stock are required to amend our by-laws, which make it more difficult to change the provisions described above.
In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation and our bylaws and in the Delaware General Corporation Law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors.
If holders of shares of our Class B common stock convert their shares of Class B common stock into shares of Class A common stock and either seek to sell such shares pursuant to an exemption from registration under the Securities Act of 1933, as amended, or exercise their registration rights, a significant number of shares of our Class A common stock could be sold into the market, which could reduce the trading price of our Class A common stock and impede our ability to raise future capital.
If our pre-IPO stockholders sell substantial amounts of Class A common stock into the market, the market price of our Class A common stock could decrease significantly. In addition, the perception in the market that such stockholders might sell shares could also depress the market price of our Class A common stock. Our officers and directors, and certain of our employees and other pre-IPO stockholders, who together hold an aggregate of approximately 76,230,943 shares our Class B common stock, were subject to lock-up agreements with the representatives of the underwriters in our IPO that recently terminated. Since these lock-up restrictions have terminated, these shares are eligible for sale into the market. The market price of shares of our Class A common stock may drop significantly following any sales or anticipated sales of these shares.
As of July 30, 2010, holders of approximately 70,170,477 shares of Class B common stock have rights under our eighth amended and restated investors’ rights agreement, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. These rights terminate on February 2, 2015, or for any particular holder with registration rights who at such time holds less than 1% of our outstanding Class B common stock, at such time following our IPO when all securities held by that stockholder subject to registration rights may be sold pursuant to Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, within a single 90 day period. We also have registered all shares of Class A common stock that we may issue under our equity compensation plans. Now that we have registered these shares, they can be freely sold in the public market upon issuance.
To the extent outstanding stock options are exercised, there will be further dilution to investors in our Class A common stock.
As of June 30, 2010, we had options to purchase 1,890,181 shares of Class A common stock and 12,998,652 shares of Class B common stock outstanding, with exercise prices ranging from $0.31 to $13.95 per share and a weighted average exercise price of $3.67 per share. Upon the vesting of each of these options, the holder may exercise his or her options, which would result in further dilution to investors in our Class A common stock.
We expect that the price of our Class A common stock will fluctuate substantially.
The market price of our Class A common stock may be highly volatile due to many factors, including:
· the results from our clinical trials, including our current and planned Phase 3 clinical trials for linaclotide;
· FDA or international regulatory actions, including actions on regulatory applications for any of our product candidates;
· the commercial performance of any of our product candidates that receive marketing approval;
· announcements of the introduction of new products by us or our competitors;
· market conditions in the pharmaceutical and biotechnology sectors;
· announcements concerning product development results or intellectual property rights of others;
· litigation or public concern about the safety of our potential products;
· actual and anticipated fluctuations in our quarterly operating results;
· deviations in our operating results from the estimates of securities analysts;
· sales of additional shares of our common stock;
· additions or departures of key personnel;
· any third-party coverage and reimbursement policies for linaclotide;
· developments concerning current or future strategic collaborations; and
· discussion of us or our stock price in the financial or scientific press or in online investor communities.
The realization of any of the risks described in these “Risk Factors” could have a dramatic and material adverse impact on the market price of our Class A common stock. In addition, class action litigation has often been instituted against companies whose securities have experienced periods of volatility. Any such litigation brought against us could result in substantial costs and a diversion of management attention, which could hurt our business, operating results and financial condition.
We have never paid dividends on our capital stock, and because we do not anticipate paying any cash dividends in the foreseeable future, capital appreciation, if any, of our common stock will be the sole source of gain on an investment in our Class A common stock.
We have paid no cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
SPECIAL NOTE REGARDING FORWARD—LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements. Forward-looking statements convey our expectations or forecasts of future events. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “seek,” “anticipate” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include, among other things, statements about:
· the progress of, timing of and amount of expenses associated with our research, development and commercialization activities;
· the timing, conduct and success of our clinical studies for our product candidates;
· our ability to obtain U.S. and foreign regulatory approval for our product candidates and the ability of our product candidates to meet existing or future regulatory standards;
· our expectations regarding federal, state and foreign regulatory requirements;
· the therapeutic benefits and effectiveness of our product candidates;
· the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our product candidates;
· our ability to manufacture or contract to manufacture sufficient amounts of our product candidates for clinical studies and products for commercialization activities;
· our plans with respect to collaborations and licenses related to the development, manufacture or sale of our product candidates;
· our expectations as to future financial performance, expense levels and liquidity sources;
· the timing of commercializing our product candidates;
· our plan to develop a high-quality commercial organization;
· our ability to compete with other companies that are or may be developing or selling products that are competitive with our product candidates;
· anticipated trends and challenges in our potential markets;
· the potential changes in the trading price of our Class A common stock;
· our ability to attract and motivate key personnel; and
· other factors discussed elsewhere in this Quarterly Report on Form 10-Q.
Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. These forward-looking statements may be affected by inaccurate assumptions or by known or unknown risks and uncertainties, including the risks, uncertainties and assumptions identified under the heading “Risk Factors” in this Quarterly Report on Form 10-Q. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur as contemplated, and actual results could differ materially from those anticipated in or implied by the forward-looking statements.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
We did not repurchase any of our equity securities during the quarter ended June 30, 2010.
Use of Proceeds
In February 2010, we completed our IPO of our Class A common stock pursuant to a Registration Statement on Form S-1, as amended (File No. 333-163275) that was declared effective on February 2, 2010. Under the registration statement, we registered the offering and sale of an aggregate of 19,166,667 shares of our Class A common stock. All of the 19,166,667 shares of Class A common stock registered under the registration statement, which included 2,500,000 shares of our Class A common stock sold pursuant to an over-allotment option granted to the underwriters, were sold at a price to the public of $11.25 per share. J.P. Morgan Securities Inc., Morgan Stanley & Co. Incorporated and Credit Suisse Securities (USA) LLC acted as joint book running managers of the offering and as representatives of the underwriters. The offering commenced on February 3, 2010 and closed on February 8, 2010. The sale of shares pursuant to the over-allotment option occurred on February 12, 2010. As a result of our IPO, we raised a total of $215.6 million in gross proceeds, and approximately $203.2 million in net proceeds after deducting underwriting discounts and commissions of $10.5 million and estimated offering expenses of $1.9 million. We did not pay, directly or indirectly, any offering expenses to any of our directors or officers or persons owning ten percent or more of any class of our equity securities or to any other affiliates.
There has been no material change in our planned use of proceeds from the IPO from that described in the final prospectus filed with the SEC pursuant to Rule 424(b) on February 4, 2010. As of June 30, 2010, approximately $160.4 million of the net proceeds remained available and were invested in highly liquid, short-term, interest-bearing funds, pending their use to fund our operations. Since our IPO, we estimate that we have used the proceeds in the following way:
· approximately $14.4 million to fund the development and commercialization of linaclotide;
· approximately $2.5 million to fund the research and development of IW-6118; and
· approximately $25.8 million for general corporate purposes.
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Ironwood Pharmaceuticals, Inc. |
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Date: August 10, 2010 |
By: |
/s/ PETER M. HECHT |
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Peter M. Hecht, Ph.D. |
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Chief Executive Officer
and Director
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Date: August 10, 2010 |
By: |
/s/ MICHAEL J. HIGGINS |
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Michael J. Higgins |
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Senior Vice President,
Chief Operating Officer and
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EXHIBIT INDEX
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Exhibit No: |
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Description |
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3.1 |
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Eleventh Amended and Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 of Ironwood Pharmaceuticals, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 30, 2010. |
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3.2 |
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Fifth Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.2 of Ironwood Pharmaceuticals, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 30, 2010. |
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10.1#* |
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Commercial Supply Agreement, dated as of June 23, 2010, by and among PolyPeptide Laboratories, Inc. and Polypeptide Laboratories (SWEDEN) AB, Forest Laboratories, Inc. and Ironwood Pharmaceuticals, Inc. |
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31.1* |
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Certification of Chief Executive Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act. |
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31.2* |
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Certification of Chief Financial Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act. |
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32.1‡ |
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Certification of Chief Executive Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350. |
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32.2‡ |
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Certification of Chief Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350. |
# Confidential treatment requested under 17 C.F.R. §§200.80(b)(4) and 24b-2. The confidential portions of this exhibit have been omitted and are marked accordingly. The confidential portions have been filed separately with the SEC pursuant to the confidential treatment request.
* Filed herewith.
‡ Furnished herewith.
Exhibit 10.1
COMMERCIAL SUPPLY AGREEMENT
regarding
Linaclotide (MD-1100)
among
PolyPeptide
Laboratories, Inc.
365 Maple Ave, Torrance
CA 90503
and
PolyPeptide
Laboratories (SWEDEN) AB
PO Box 30089
SE20061 LIMHAMN
SWEDEN
and
Ironwood
Pharmaceuticals, Inc.
320 Bent Street
Cambridge, MA 02141
and
Forest
Laboratories, Inc.
909 Third Avenue
New York, New York 10022
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
This Agreement is entered into on the 23 rd day of June, 2010 (the “ Effective Date ”), among PolyPeptide Laboratories Inc., a Delaware corporation with its principal offices at 365 Maple Avenue, Torrance, CA 90503, USA (“ PPL Inc .”) and PolyPeptide Laboratories AB, a Swedish corporation having a place of business at PO Box 30089, SE-20061 LIMHAMN, Sweden (“ PPL AB ”) (PPL Inc. and PPL AB are hereinafter jointly referred to as POLYPEPTIDE ), and Ironwood Pharmaceuticals, Inc., a Delaware corporation with its principal offices at 320 Bent Street, Cambridge, MA 02141 (“ IRONWOOD ”) and Forest Laboratories, Inc., a Delaware corporation with its principal offices at 909 Third Avenue, New York, New York 10022 (“ FOREST ”) (IRONWOOD and FOREST are hereinafter jointly referred to as “ CUSTOMER ”).
RECITALS
Whereas, POLYPEPTIDE has developed or acquired patented and non-patented inventions, manufacturing and testing practices and procedures, and know-how, relating to the manufacture and testing of peptides, including PRODUCT (defined below), and possesses production facilities for large scale manufacturing of pharmaceutical peptides;
Whereas, IRONWOOD owns proprietary rights to linaclotide and compositions thereof, analytical methods related to linaclotide and methods of making and using linaclotide;
Whereas, IRONWOOD and FOREST are parties to that certain Collaboration Agreement (the “ COLLABORATION AGREEMENT ”) dated September 12, 2007, pursuant to which IRONWOOD licensed to FOREST certain rights to develop and commercialize the PRODUCT in the TERRITORY (as defined below),
Whereas, IRONWOOD and POLYPEPTIDE are parties to that certain Supply Agreement Relating to Product MD 1100 Acetate dated June 14, 2005 pursuant to which POLYPEPTIDE manufactures and supplies to IRONWOOD quantities of PRODUCT for clinical development (the “ DEVELOPMENT SUPPLY AGREEMENT ”),
Whereas, the parties now wish to enter into a long-term business relationship under which CUSTOMER desires to have POLYPEPTIDE manufacture and supply commercial quantities of PRODUCT and POLYPEPTIDE desires to manufacture and supply commercial quantities of PRODUCT to CUSTOMER for the TERRITORY.
Now therefore, in consideration of the foregoing premises, the mutual promises and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
which are hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows:
ARTICLE 1
DEFINITIONS
Capitalized terms used in this Agreement shall have the respective meanings set forth below:
1.1 “ Affiliate ” shall mean, with respect to a party, any corporation, partnership or other entity which owns or controls, is owned or controlled by or is under common ownership or control of such party. For these purposes, “ownership” or “control” means (i) ownership, directly or indirectly, of more than fifty per cent (50%) of the voting stock or partnership interests of each such corporation, partnership or entity; or (ii) the possession, directly or indirectly, of the legal power to direct or cause the direction of the general management and policies of such corporation, partnership or entity, whether through the ownership of voting securities, by contract or otherwise.
1.2 “ Alternative Suppliers ” shall have the meaning assigned to it in Section 7.1.
1.3 “ Alternative Supply Trigger ” shall have the meaning assigned to it in Section 7.2(v).
1.4 “ Applicable Laws ” shall mean all applicable statutes, ordinances, regulations, rules, or orders of any kind whatsoever of any governmental authority (including amendments thereto), applicable to the import, export, manufacture, packaging, labelling, storage and shipment of PRODUCT in the Territory and any other applicable jurisdiction, including, without limitation, the cGMPs.
1.5 “ Bankrupt Customer ” shall have the meaning assigned to it in Section 8.5.
1.6 “ Batch Records ” shall mean production and control records prepared for each batch of PRODUCT, in accordance with the Master Batch Records.
1.7 “ Claims ” shall have the meaning assigned to it in Section 13.1.
1.8 “ cGMPs ” shall mean then-current Good Manufacturing Practices as specified in ICH Guideline Q7A, Title 21 of the United States Code of Federal Regulations,
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
Parts 210 and 211, or equivalent laws, rules, or regulations of an applicable Regulatory Authority.
1.9 “ Commercial Launch Authorization Notice ” shall have the meaning assigned to it in Section 3.2.
1.10 “ Commercial Launch Date ” shall mean the date of first commercial sale in the Territory of the Final Drug Product by CUSTOMER or its Affiliates or distributors or sublicensees.
1.11 “ Competitive Offer Notice ” shall have the meaning assigned to it in Section 7.2(ii).
1.12 “ Confidential Information ” shall mean, with respect to CUSTOMER or POLYPEPTIDE (as the case may be), any proprietary information or data disclosed (in any form) by such party to the other party (or parties) under this Agreement, including (without limitation) with respect to such party’s products, business plans and Intellectual Property Rights.
1.13 “ Control ,” “ Controls ,” “ Controlled ” or “ Controlling ” shall mean, with respect to Intellectual Property Rights or Know-How, the ability of a party, whether by ownership, license or otherwise, to grant a license, sublicense or other rights to a third party.
1.14 “ CUSTOMER Indemnitees ” shall have the meaning assigned to it in Section 13.2.
1.15 “ CUSTOMER IP ” shall mean all CUSTOMER Know-How and all Intellectual Property Rights that claim or cover CUSTOMER Know-How and are Controlled by FOREST and/or IRONWOOD.
1.16 “ CUSTOMER Know-How ” shall mean Know-How relating to the PRODUCT, which FOREST and/or IRONWOOD Controls as of the date of the Agreement, or in which FOREST and/or IRONWOOD acquires a Controlling interest during the term of the Agreement. Notwithstanding the foregoing, CUSTOMER Know-How shall not include New Know-How or Development Know-How.
1.17 “ Customer New IP ” shall have the meaning assigned to it in Section 10.1.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
1.18 “ Development IP ” shall mean all Development Know-How and all Intellectual Property Rights that claim or cover any Development Know-How.
1.19 “ Development Know-How ” shall mean Know-How, that was or is conceived of, developed, made and/or reduced to practice by POLYPEPTIDE, alone or in conjunction with FOREST and/or IRONWOOD, under the DEVELOPMENT SUPPLY AGREEMENT (i) to the extent relating to, and used by POLYPEPTIDE in connection with, the manufacture of linaclotide, or any salts, derivatives, prodrugs or compositions thereof, or (ii) to the extent relating to and necessary for the manufacture, use or sale of the Final Drug Product.
1.20 “ DMF ” shall mean the Drug Master File for PRODUCT in the United States (as such term is defined in 21 C.F.R. Part 314.420), and any equivalent thereof filed elsewhere in the Territory
1.21 “ Facility Warranties ” shall have the meaning assigned to it in Section 4.1.
1.22 “ FDA ” shall mean the United States Food and Drug Administration and any successor entity.
1.23 “ FDCA ” shall mean the Federal Food Drug and Cosmetics Act, as amended from time to time, and all regulations promulgated there under (or any successor law and all regulations promulgated there under).
1.24 “ Final Drug Product ” shall mean the pharmaceutical product for which Regulatory Approval has been obtained, in finished form ready for commercial sale and distribution to, and use by, patients, incorporating the PRODUCT supplied by POLYPEPTIDE.
1.25 “ Firm Purchase Order ” shall mean a firm, non-cancellable purchase order in accordance with the terms of Article 3, binding upon both CUSTOMER and POLYPEPTIDE.
1.26 “ First Quarter Out ” shall have the meaning assigned to it in Section 3.3.
1.27 “ First Quarter Out Forecast ” shall have the meaning assigned to it in Section 3.3.
1.28 “ First Supply Year ” shall have the meaning assigned to it in Section 1.69
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
1.29 “ Force Majeure ” shall have the meaning assigned to it in Section 15.1.
1.30 “ Indemnitee ” shall have the meaning assigned to it in Section 13.3.
1.31 “ Indemnitor ” shall have the meaning assigned to it in Section 13.3.
1.32 “ Initial Quarterly Forecast ” shall have the meaning assigned to it in Section 3.2.
1.33 “ Initial Term ” shall have the meaning assigned to it in Section 8.1.
1.34 “ Intellectual Property Rights ” shall mean, collectively, all of the following intangible legal rights, whether or not filed, perfected, registered or recorded and whether now or hereafter existing, issued, granted or acquired: (a) patents or patent applications, including any and all continuations, continuations-in-part, divisionals, reissues, re-examinations, renewals, substitutions, utility models, supplemental protection certificates, or any additions or extensions thereof; (b) rights associated with works of authorship, including, without limitation, copyrights, copyright applications and copyright registrations; (c) rights in trademarks, trademark registrations and applications therefore, trade names, service marks, service names, logos, or trade dress; and (d) rights relating to the protection of formulae, trade secrets, know-how and confidential information.
1.35 “ Joint New IP ” shall have the meaning assigned to it in Section 10.1.
1.36 “ Know-How ” shall mean all inventions, improvements, discoveries, processes, methods, compositions, formulae, procedures, protocols, techniques, results of experimentation and testing, information and data, whether or not patented or patentable.
1.37 “ Latent Defect ” shall have the meaning assigned to it in Section 5.4.
1.38 “ Liabilities ” shall have the meaning assigned to it in Section 13.1.
1.39 “ Manufacturing Warranties ” shall have the meaning assigned to it in Section 4.1.
1.40 “ Master Batch Record ” shall mean the formal set of instructions for manufacturing the PRODUCT, as prepared by POLYPEPTIDE and approved in writing by both FOREST and IRONWOOD.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
1.41 “ Material Safety Data Sheet ” or “ MSDS ” shall mean the material safety data sheet used to comply with the Occupational Safety and Health Administration’s Hazard Communication Standard, 29 C.F.R. 1910.1200.
1.42 “ Minimum Requirement ” shall have the meaning assigned to it in Section 7.2(i).
1.43 “ NDA ” shall mean a New Drug Application filed with the FDA and any equivalent thereof filed elsewhere in the Territory.
1.44 “ New IP ” shall mean all New Know-How and all Intellectual Property Rights covering or claiming any New Know-How.
1.45 “ New Know-How ” shall mean Know-How, that is conceived of, developed, made and/or reduced to practice by POLYPEPTIDE, FOREST and/or IRONWOOD, pursuant to this Agreement (i) to the extent relating to, and used by POLYPEPTIDE in connection with the manufacture of linaclotide, or any salts, derivatives, prodrugs or compositions thereof, or (ii) to the extent relating to and necessary for the manufacture, use or sale of the Final Drug Product.
1.46 “ Non-Bankrupt Customer ” shall have the meaning assigned to it in Section 8.5.
1.47 “ Permits ” shall have the meaning assigned to it in Section 12.1(c).
1.48 “ Person ” shall mean an individual, corporation, partnership, trust, business trust, association, joint stock company, joint venture, pool, syndicate, sole proprietorship, unincorporated organisation, administrative authority or any other form of entity not specifically listed herein.
1.49 “ POLYPEPTIDE Indemnitees ” shall have the meaning assigned to it in Section 13.1.
1.50 “ POLYPEPTIDE IP ” shall mean all POLYPEPTIDE Know-How and all Intellectual Property Rights that claim or cover the POLYPEPTIDE Know-How and are Controlled by POLYPEPTIDE. POLYPEPTIDE IP shall not include New IP or Development IP.
1.51 “ POLYPEPTIDE Know-How ” shall mean all Know-How that relates to peptide synthesis, processing, purification, analytical methods and/or documentation, which POLYPEPTIDE Controls as of the date of the Agreement, or in which
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
POLYPEPTIDE acquires a Controlling interest during the term of the Agreement. Notwithstanding the foregoing, POLYPEPTIDE Know-How shall not include New Know-How or Development Know-How.
1.52 “ PolyPeptide New IP ” shall have the meaning assigned to it in Section 10.1.
1.53 “ POLYPEPTIDE Release Documents ” shall have the meaning assigned to it in Section 4.3.
1.54 “ PRODUCT ” shall mean linaclotide active pharmaceutical ingredient, as more specifically described in Appendix A .
1.55 “ Quality Agreement ” shall mean that certain Quality Agreement entered into among IRONWOOD, FOREST and POLYPEPTIDE in connection with this Agreement.
1.56 “ Recall ” shall have the meaning assigned to it in Section 6.2(a).
1.57 “ Recall Costs ” shall have the meaning assigned to it in Section 6.4.
1.58 “ Regulatory Approval ” shall mean an authorization by an appropriate Regulatory Authority necessary for commercial sale of the Final Drug Product in a jurisdiction in the Territory, including, without, limitation, approval of labelling and manufacturing
1.59 “ Regulatory Authority ” shall mean an agency or authority governing the approval, manufacture, marketing and sale of the PRODUCT in a jurisdiction in the Territory.
1.60 “ Release Date ” shall have the meaning assigned to it in Section 5.2.
1.61 “ Renewal Term ” shall have the meaning assigned to it in Section 8.2.
1.62 “ Representatives ” shall have the meaning assigned to it in Section 11.1.
1.63 “ Rolling Quarterly Forecast ” shall have the meaning assigned to it in Section 3.3.
1.64 “ Second Quarter Out ” shall have the meaning assigned to it in Section 3.3.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
1.65 “ Second Quarter Out Forecast ” shall have the meaning assigned to it in Section 3.3.
1.66 “ SOPs ” shall have the meaning assigned to it in Section 4.2.
1.67 “ Specifications ” shall mean the written specifications for the PRODUCT as defined in Appendix A, as amended from time to time in accordance with this Agreement and/or the Quality Agreement.
1.68 “ Supplemental Purchase Order ” shall have the meaning assigned to it in Section 3.6
1.69 “ Supply Year ” shall mean a twelve (12) consecutive month period during the Initial Term or any Renewal Term (or any such shorter stub period from the end of such a 12 month period to the end of the Initial Term or Renewal Term), with the “ First Supply Year ” commencing on the first day of the first month of the Initial Quarterly Forecast.
1.70 “ Term ” shall mean the Initial Term and the Renewal Term, if any.
1.71 “ Territory ” shall mean the countries of North America, consisting of the United States, Canada and Mexico, and their respective territories and possessions (including Puerto Rico, irrespective of political status).
1.72 “ Validation Batch ” shall mean a batch of PRODUCT (a) that (i) conforms to the parameters described in the validation protocol as agreed in writing between the parties, (ii) is manufactured according to cGMP, as applicable, (iii) is validated in accordance with the ICH Q7A Good Manufacturing Practice Guidance for Active Pharmaceutical Ingredients (the “ ICH Guidance ”) (including, without limitation, that such batch, together with two other such sequential batches of PRODUCT, demonstrates reproducibility of the commercial manufacturing process for PRODUCT), (iv) supports the NDA (or other filing for Regulatory Approval) for PRODUCT, (v) may be used to complete the consistency, comparability and stability studies for PRODUCT in connection with any such filing, and (vi) meets Specifications; or (b) supports a filing for Regulatory Approval of the implementation of a subsequent process or equipment change with respect to the commercial manufacture of PRODUCT.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
ARTICLE 2
SUPPLIES; EXCLUSIVE DEALING
2.1 Purchase and Supply Obligation.
(a) Subject to the terms and conditions hereof, POLYPEPTIDE agrees to supply CUSTOMER with such of CUSTOMER’s requirements of the PRODUCT for purposes of commercialization in the Territory as CUSTOMER shall set forth on Firm Purchase Orders placed by CUSTOMER in accordance with Article 3. Subject to the terms and conditions hereof, CUSTOMER agrees to purchase the quantities of PRODUCT set forth on Firm Purchase Orders placed by CUSTOMER in accordance with Article 3.
(b) POLYPEPTIDE may, in its discretion, allocate the manufacture of PRODUCT ordered pursuant to Firm Purchase Orders between its facilities located in Torrance, California and Malmo, Sweden with the objective of preserving each facility’s qualification to manufacture the PRODUCT.
(c) POLYPEPTIDE [**] of PRODUCT [**]. Thereafter, POLYPEPTIDE agrees that [**].
(d) If, at any time following the execution of this Agreement, POLYPEPTIDE [**].
2.2 Non-Compete.
(a) POLYPEPTIDE shall not (and shall cause its Affiliates not to), without the prior written consent of IRONWOOD (and FOREST, to the extent POLYPEPTIDE has not received written notice that the COLLABORATION AGREEMENT has been terminated and such manufacture is for purposes of development or commercialization in the Territory), manufacture or sell for or to any party (other than FOREST and/or IRONWOOD):
(i) any product or intermediate thereof containing linaclotide or a salt, derivative, prodrug or composition thereof, for a period beginning on the Effective Date and ending on [**] (A) [**], and (B) the date [**]; provided, however, that should the Agreement terminate due to CUSTOMER’s election under Section 8.2 (Renewal
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
Terms), then POLYPEPTIDE’s restrictions set forth herein shall terminate on [**] (A) [**], and (B) the date [**]; or
(ii) any product [**] or intermediate thereof [**], for a period beginning on the Effective Date and ending on (A) [**], or (B) [**].
Notwithstanding anything to the contrary set forth above, [**].
ARTICLE 3
PURCHASE ORDERS AND FORECASTS
3.1 Validation Batches . On or before [**], CUSTOMER shall provide to POLYPEPTIDE a purchase order for Validation Batches from POLYPEPTIDE’s facilities located in Torrance, CA and Malmo, Sweden, provided that each such facility is in good standing with Regulatory Authorities to the extent required for the manufacture of PRODUCT in accordance with the process validation protocol agreed to by the parties. At the time of delivery of a purchase order for the Validation Batches, CUSTOMER may elect to issue a purchase order for a pre-validation batch. Neither the purchase orders for the Validation Batches nor the purchase order for the pre-validation batch, if any, may contain a delivery date that requires completion of all Validation Batches that is earlier than [**] months after POLYPEPTIDE’s receipt of any such purchase order. Each such purchase order shall be deemed a Firm Purchase Order.
3.2 Initial Quarterly Forecast and Commercial Launch Authorization Notice .
(a) CUSTOMER shall provide to POLYPEPTIDE a written notice (the “ Commercial Launch Authorization Notice ”) containing (i) CUSTOMER’s authorization for POLYPEPTIDE to commence the manufacture of the initial launch quantities of PRODUCT, and (ii) an initial, non-binding, forecast of CUSTOMER’s requirements for delivery of PRODUCT for the first [**] full calendar quarters (“ Initial Quarterly Forecast ”). CUSTOMER shall provide the Commercial Launch Authorization Notice to POLYPEPTIDE no later than [**] months prior to the first day of the first full calendar quarter of the Initial Quarterly Forecast.
(b) From the Effective Date until the date of the Commercial Launch Authorization Notice, CUSTOMER shall keep POLYPEPTIDE informed of CUSTOMER’s
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
anticipated Commercial Launch Date and the quantities of PRODUCT expected to be included in CUSTOMER’s Initial Quarterly Forecast.
(c) The quantities of PRODUCT specified by CUSTOMER for delivery by POLYPEPTIDE for the first [**] full calendar quarters of the Initial Quarterly Forecast shall be firm and binding on CUSTOMER and POLYPEPTIDE, and CUSTOMER shall issue a Firm Purchase Order to POLYPEPTIDE for the same in accordance with Section 3.5 simultaneously with the delivery of the Initial Quarterly Forecast. All purchases shall be in full batch quantities; provided, however, that any amounts in excess of the quantity set forth in the Firm Purchase Order that CUSTOMER purchases as a result of this requirement shall serve to reduce CUSTOMER’s purchase obligations under its next Firm Purchase Order.
(d) POLYPEPTIDE shall inform CUSTOMER within [**] days after receiving the Initial Quarterly Forecast and such Firm Purchase Order of the time required to produce the PRODUCT quantities set forth in such Firm Purchase Order which time shall not exceed [**] months from the date of receipt of the Firm Purchase Order.
3.3 Rolling Quarterly Forecast.
(a) No later than [**] days after the beginning of the first calendar quarter included in the Initial Quarterly Forecast, and continuing on an ongoing basis each calendar quarter thereafter, CUSTOMER shall provide POLYPEPTIDE not later than [**] days after the beginning of each calendar quarter, with an updated non-binding rolling forecast, which commences [**] calendar quarters in the future and sets forth CUSTOMER’s requirements for [**] full calendar quarters (“ Rolling Quarterly Forecast ”). The first full calendar quarter of each Rolling Quarterly Forecast shall be referred to as the “ First Quarter Out ” and the forecast for each First Quarter Out shall be referred to as the “ First Quarter Out Forecast .” The second full calendar quarter of each Rolling Quarterly Forecast shall be referred to as the “ Second Quarter Out ” and the forecast for each Second Quarter Out shall be referred to as the “ Second Quarter Out Forecast .” The third full calendar quarter of each Rolling Quarterly Forecast shall be referred to as the “ Third Quarter Out ” and the forecast for each Third Quarter Out shall be referred to as the “ Third Quarter Out Forecast , “ and so on. By way of example,
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
a Rolling Quarterly Forecast provided on or before [**] of any year would set forth CUSTOMER’s requirements for [**] calendar quarters commencing with the calendar quarter beginning on [**], with such forecast for the calendar quarter beginning [**] being deemed the First Quarter Out Forecast; the forecast for the calendar quarter beginning [**] being deemed the Second Quarter Out Forecast; the forecast for the calendar quarter beginning [**] being deemed the Third Quarter Out Forecast, and the forecast for the calendar quarter beginning [**] being deemed the Fourth Quarter Out Forecast.
(b) POLYPEPTIDE agrees that each Rolling Quarterly Forecast submitted by CUSTOMER will be for general planning purposes only and shall not be binding on CUSTOMER or POLYPEPTIDE; provided, however , (i) the First Quarter Out Forecast of each Rolling Quarterly Forecast shall be firm and binding on CUSTOMER and POLYPEPTIDE (and CUSTOMER shall issue a purchase order therefore simultaneously with the issuance of the Rolling Quarterly Forecast), in accordance with Section 3.5 below, and (ii) the Second Quarter Out Forecast, Third Quarter Out Forecast and Fourth Quarter Out Forecast of each Rolling Quarterly Forecast shall be used to establish the maximum variances in respect of each such calendar quarter as discussed in Section 3.4 below (as adjusted by, and subject to the provisions regarding Supplemental Purchase Orders in Section 3.6 below).
3.4 Maximum Variance in Rolling Quarterly Forecast . When, in the Rolling Quarterly Forecast, a calendar quarter moves from being the Second Quarter Out to the First Quarter Out, CUSTOMER may increase or decrease the quantity of PRODUCT to be delivered in such calendar quarter by no more than [**] percent ([**]%). In addition, when a calendar quarter moves from being the Third Quarter Out to the Second Quarter Out, CUSTOMER may increase or decrease the quantity of PRODUCT to be delivered in such calendar quarter by no more than [**] percent ([**]%) and when a calendar quarter moves from being the Fourth Quarter Out to the Third Quarter Out, CUSTOMER may increase or decrease the quantity of PRODUCT to be delivered in such calendar quarter by no more than [**] percent ([**]%). By way of example, if the Rolling Quarterly Forecast issued on [**] provides for the delivery of 10 kilograms of PRODUCT during the calendar quarter commencing [**] (the Second Quarter Out) and the delivery of 20 kilograms of PRODUCT during the calendar quarter commencing
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
[**] (the Third Quarter Out), and the delivery of 20 kilograms of PRODUCT during the calendar quarter commencing [**] (the Fourth Quarter Out) then the Rolling Quarterly Forecast issued [**] (along with the simultaneously issued Firm Purchase Order) shall (i) provide for the delivery of no more than [**] kilograms of PRODUCT and no less than [**] kilograms of PRODUCT during the calendar quarter commencing [**] (now the First Quarter Out), (ii) provide for the delivery of no more than [**] kilograms of PRODUCT and no less than [**] kilograms of PRODUCT during the calendar quarter commencing [**] (now the Second Quarter Out), and (iii) provide for the delivery of no more than [**] kilograms of PRODUCT and no less than [**] kilograms of PRODUCT during the calendar quarter commencing [**] (now the Third Quarter Out).
3.5 Purchase Orders. Within [**] days of the beginning of each calendar quarter, CUSTOMER shall provide to POLYPEPTIDE a Firm Purchase Order setting forth CUSTOMER’s monthly requirements of PRODUCT for each month of the First Quarter Out Forecast. Each such Firm Purchase Order shall be binding upon CUSTOMER and POLYPEPTIDE without further notice or action. By way of example, for a Rolling Quarterly Forecast provided on or before [**] of any year, CUSTOMER shall submit a Firm Purchase Order to POLYPEPTIDE on or before [**] for monthly delivery dates in the calendar quarter commencing [**].
3.6 Supplemental Purchase Orders. In addition to the Firm Purchase Orders described in Section 3.5 above, CUSTOMER may submit purchase orders for additional quantities of PRODUCT at any time (each a “ Supplemental Purchase Order ”). No Supplemental Purchase Order shall be binding upon POLYPEPTIDE unless and until POLYPEPTIDE accepts the quantities and delivery dates specified therein in writing after receipt of the Supplemental Purchase Order. After acceptance, the Supplemental Purchase Order shall be a Firm Purchase Order binding upon CUSTOMER and POLYPEPTIDE. Notwithstanding the preceding, POLYPEPTIDE shall use [**] efforts to accept and fill Supplemental Purchase Orders in accordance with their terms and will advise CUSTOMER promptly after receipt of a Supplemental Purchase Order of its anticipated ability to fill such order.
3.7 Supply Chain Communication . Both parties shall communicate on a regular basis, and act with commercially reasonable discretion and cooperation in the
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
event of, any unforeseen supply chain situation that may impact the other party, especially during the period covered by the Initial Quarterly Forecast.
3.8 Delivery of PRODUCT. POLYPEPTIDE shall supply CUSTOMER on the delivery dates with the quantity of PRODUCT ordered by CUSTOMER pursuant to each Firm Purchase Order. The supply, purchase, delivery and sale of PRODUCT, and all rights and obligations of the parties, shall be governed solely by this Agreement, and any additional or contrary terms or provisions contained in any Firm Purchase Order or similar form or invoice or acknowledgement shall be void and have no force or effect, unless otherwise mutually agreed in writing by CUSTOMER and POLYPEPTIDE.
3.9 Penalties for Short Supply. POLYPEPTIDE agrees that it will promptly notify CUSTOMER in writing of any problems, supply or other situations that are likely to adversely affect the production of PRODUCT, or its timely delivery to CUSTOMER pursuant to a Firm Purchase Order. If POLYPEPTIDE (a) provides CUSTOMER with notice that it will be unable to deliver PRODUCT in the time frame specified in such Firm Purchase Order, or (b) otherwise fails to deliver PRODUCT, in the quantities ordered by CUSTOMER in a Firm Purchase Order, in each case within [**] days of the delivery date as specified in the Firm Purchase Order, and such failure is not due to Force Majeure, to any act or omission by CUSTOMER, or previously agreed to by CUSTOMER and POLYPEPTIDE in writing, then, in addition to all the other rights and remedies available to CUSTOMER under this Agreement and at law or in equity, CUSTOMER shall have the right to the following redress:
(i) CUSTOMER may elect, at its sole discretion, to require POLYPEPTIDE to supply the PRODUCT (in the quantity specified in such Firm Purchase Order or a lesser quantity) at a future date, with notice of this election provided in writing to POLYPEPTIDE within [**] days following (x) CUSTOMER’s receipt of notice of POLYPEPTIDE’s inability to meet the Firm Purchase Order (pursuant to clause (a) above), or (y) the end of the [**] day period specified in clause (b) above (unless, during such [**] day period, POLYPEPTIDE has demonstrated, to CUSTOMER’s reasonable satisfaction, that POLYPEPTIDE will meet such Firm Purchase Order within [**] days following such notice to POLYPEPTIDE) (as the case may be);
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
(ii) CUSTOMER may cancel, in whole or in part, any amount of the Firm Purchase Order that is unfulfilled and CUSTOMER shall have the right to cover with PRODUCT from a third party the unfulfilled quantities, with notice of this election provided in writing to POLYPEPTIDE within [**] days following (x) CUSTOMER’s receipt of notice of POLYPEPTIDE’s inability to meet the Firm Purchase Order (pursuant to clause (a) above), or (y) the end of the [**] day period specified in clause (b) above (unless, during such [**] day period, POLYPEPTIDE has demonstrated, to CUSTOMER’s reasonable satisfaction, that POLYPEPTIDE will meet such Firm Purchase Order within [**] days following such notice to POLYPEPTIDE) (as the case may be);
3.10 In the event that the delivery of any quantity of PRODUCT under a Firm Purchase Order is more than [**] days late from the date of delivery specified in the Firm Purchase Order, then POLYPEPTIDE shall reduce the price, for that quantity of PRODUCT that is at least [[**] days late, by an amount equal to [**] percent ([**]%) of the price of such PRODUCT; and
3.11 In the event that the delivery of any quantity of PRODUCT under a Firm Purchase Order is more than [**] days late from the date of delivery specified in the Firm Purchase Order, then POLYPEPTIDE shall make an additional reduction in the price, for that quantity of PRODUCT that is [**] days late, by an amount equal to an additional [**] percent ([**]%) of the price of such PRODUCT (so that the aggregate price reduction for PRODUCT that is [**] days late is [**] percent ([**]%)).
3.12 Regulatory Delay.
(a) If CUSTOMER has reason to believe that Regulatory Approval will be delayed, CUSTOMER shall provide POLYPEPTIDE with prompt written notice of such delay. In such case, if CUSTOMER has already issued the Commercial Launch Authorization Notice, Initial Quarterly Forecast and any Firm Purchase Orders (including the first Firm Purchase Order for quantities of PRODUCT specified by CUSTOMER for delivery by POLYPEPTIDE for the first [**] full calendar quarters of the Initial Quarterly Forecast), CUSTOMER may request that POLYPEPTIDE suspend production of PRODUCT quantities contained in any such Firm Purchase Order.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
(b) If CUSTOMER makes a suspension request, POLYPEPTIDE shall as promptly as possible suspend all production of PRODUCT, and the parties shall discuss in good faith and determine an efficient process for mitigating related costs, which process shall be implemented by POLYPEPTIDE in a timely manner. Subject to such discussion, during any period of regulatory delay, POLYPEPTIDE may invoice CUSTOMER for [**]; provided that all such amounts paid by CUSTOMER shall be credited by POLYPEPTIDE against the purchase price for finished PRODUCT subsequently delivered to CUSTOMER. If, in accordance with the agreed upon suspension process and a Firm Purchase Order, POLYPEPTIDE completes any PRODUCT batches in progress at the time of receipt of notice of regulatory delay, POLYPEPTIDE shall deliver and invoice CUSTOMER for any such finished PRODUCT no earlier than [**] months following the delivery date specified in the applicable Firm Purchase Order. CUSTOMER agrees to pay any such invoices within [**] days of its receipt thereof. In the event that CUSTOMER requests that POLYPEPTIDE delay delivery of PRODUCT to CUSTOMER, POLYPEPTIDE shall apply such payment to the purchase price due for the PRODUCT so delayed. POLYPEPTIDE agrees to use commercially reasonable efforts to mitigate the costs that are to be borne by CUSTOMER under this Section 3.12. Section 5.1 with respect to the transfer of title notwithstanding, in the event of delayed delivery of PRODUCT at the request of CUSTOMER, CUSTOMER agrees to obtain insurance for PRODUCT upon delivery of invoices to CUSTOMER under this Section 3.12(b).
ARTICLE 4
QUALITY, MANUFACTURING COMPLIANCE AND AUDITS
4.1 Manufacturing Requirements.
(a) POLYPEPTIDE warrants and covenants that it shall manufacture and supply the PRODUCT in accordance with (i) the Specifications, (ii) all Applicable Laws, and (iii) all Regulatory Approvals applicable for manufacture of the PRODUCT in the Territory (the “ Manufacturing Warranties ”).
(b) POLYPEPTIDE further warrants and covenants that at all times during the Term of this Agreement, it shall, at its own expense, (i) maintain the necessary permits required for the manufacture and supply of the PRODUCT in accordance with this Agreement, including all required facility licenses, and (ii) maintain its
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
facilities used for the manufacture of PRODUCT in compliance with all Applicable Laws (the “ Facility Warranties ”).
4.2 Changes in Manufacturing .
(a) Prior to implementation, POLYPEPTIDE shall notify CUSTOMER of any changes to Master Batch Records, analytical methods or PRODUCT-specific standard operating procedures (“ SOPs ”) of POLYPEPTIDE that would have a material impact on the PRODUCT. POLYPEPTIDE shall implement any such changes only with the prior written consent of CUSTOMER and in compliance with the Quality Agreement.
(b) If facility, equipment, process or system changes are required of POLYPEPTIDE as a result of requirements (including a change in Specifications) set forth by the FDA or any other Regulatory Authority, then, CUSTOMER and POLYPEPTIDE shall review such requirements in accordance with the terms of the Quality Agreement. If POLYPEPTIDE is required to implement changes solely because of manufacturing processes that are specific to the PRODUCT (and, in the absence of such specific manufacturing processes applicable to the PRODUCT, such changes would not be required), then [**] of the costs thereof, reasonably incurred. If POLYPEPTIDE is required to implement changes in order to ensure that the POLYPEPTIDE facility remains cGMP compliant or for any other reason not specified in the preceding sentence, then [**] of the costs thereof. POLYPEPTIDE shall consult with CUSTOMER prior to incurring any costs for which CUSTOMER is responsible hereunder. POLYPEPTIDE agrees to use commercially reasonable efforts to mitigate the costs that are borne by CUSTOMER under this Section 4.2(b).
(c) CUSTOMER, may, from time to time during the Term, request changes to the Specifications for reasons other than described above. POLYPEPTIDE agrees that it shall conduct a good faith review of any requested changes in the Specifications and will use commercially reasonable efforts to implement the changes in accordance with the terms of the Quality Agreement. All changes to the Specifications agreed to by POLYPEPTIDE shall include a reasonable time period for POLYPEPTIDE to implement such changes. In the event of any dispute with respect to whether or not such proposed changes to the Specifications can be reasonably implemented, CUSTOMER and POLYPEPTIDE
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
agree to negotiate in good faith to reach mutual agreement. [**] agrees to be [**] responsible for [**] costs associated with meeting the changes to the Specifications requested under this Section 4.2(c).
4.3 Release Documents. POLYPEPTIDE shall test the PRODUCT before delivery to CUSTOMER or a designee thereof in accordance with the Quality Agreement and shall provide to CUSTOMER in the time frame agreed upon among the parties, but in no event later than the date on which the PRODUCT is delivered, (i) a Certificate of Analysis containing the quality control test results for the lot, and confirming that the lot of PRODUCT conforms to the Specifications, and (ii) a Certificate of Conformance confirming that the lot of PRODUCT was made in accordance with cGMPs and the process defined in the approved Master Batch Record (collectively, (i) and (ii) are the “ POLYPEPTIDE Release Documents ”). Simultaneously with the delivery of the POLYPEPTIDE Release Documents, POLYPEPTIDE shall deliver to CUSTOMER copies of documents detailing any deviations, investigations or non-conformances from any manufacturing processes then in effect. All documents described in this Section 4.3 shall be in English.
4.4 Regulatory Support.
(a) POLYPEPTIDE agrees to use commercially reasonable efforts to assist CUSTOMER, in seeking approval of its NDA(s) with respect to PRODUCT. In furtherance of (and without limiting) the foregoing, POLPYPEPTIDE agrees to use commercially reasonable efforts to address feedback from the FDA (whether provided to POLYPEPTIDE or CUSTOMER) regarding the comparability of registration batches of PRODUCT manufactured by POLYPEPTIDE (before or after the Effective Date) that are submitted to the FDA in connection with the NDA filing for the PRODUCT.
(b) POLYPEPTIDE agrees to cooperate with any inspection by the FDA or other Regulatory Authority, including, but not limited to any inspection prior to approval of a PRODUCT NDA.
(c) POLYPEPTIDE agrees to (i) establish and maintain a separate DMF for each manufacturing site for the PRODUCT in accordance with POLYPEPTIDE’s SOP and the requirements of applicable Regulatory Authorities; and (ii) provide
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
CUSTOMER and their respective licensees in the Territory, with letters of access to, and rights to reference, each such DMF and any other comparable files. POLYPEPTIDE shall obtain CUSTOMER’S prior written approval of the Specifications filed in any DMF.
(d) At CUSTOMER’s request, POLYPEPTIDE agrees to provide such documentation and data as CUSTOMER reasonably requires to complete and maintain the CMC section of CUSTOMER’s NDA filings, in addition to, the filing and maintenance of the DMFs. POLYPEPTIDE shall establish each DMF in a timely manner to support CUSTOMER’s NDA filings, and shall provide to CUSTOMER such documentation, data and other information relating to the PRODUCT as CUSTOMER may require for submission to Regulatory Authorities.
(e) POLYPEPTIDE agrees to provide CUSTOMER with written copies of any proposed changes to a DMF at least [**] days prior to filing the changes, which changes shall not be implemented without CUSTOMER’s written consent except to the extent required to comply with the requirements of a Regulatory Authority which are indentified to CUSTOMER and implemented in a mutually agreed manner.
4.5 Quality Inspections and Audits. In accordance with the terms of the Quality Agreement, POLYPEPTIDE shall permit inspections and/or audits by CUSTOMER (and/or designated representative(s)) of those areas of the facilities where the PRODUCT is being manufactured, processed, stored or tested, or which could reasonably be expected to have a bearing on the quality of the PRODUCT. In addition, POLYPEPTIDE shall permit governmental inspectors acting pursuant to statutory authority to inspect the same such areas of the facilities, and to review required documentation relevant thereto. If, as a result of any such inspection or audit, CUSTOMER concludes that POLYPEPTIDE is not in compliance with any Applicable Laws, the Manufacturing Warranties, the Facility Warranties and any other obligations under this Agreement, CUSTOMER shall so notify POLYPEPTIDE in writing, specifying any areas of non-compliance in reasonable detail. To the extent POLYPEPTIDE agrees with such assessment, POLYPEPTIDE shall use its commercially reasonable efforts to remedy the problems identified as soon as practicable. In the event that POLYPEPTIDE does not agree with such assessment, POLYPEPTIDE and
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
CUSTOMER shall submit the assessment to an independent third party expert to determine whether the assessment is correct. The party against whom the third party expert rules shall bear the cost of the third party expert. If the third party agrees with CUSTOMER’s assessment, POLYPEPTIDE shall use its commercially reasonable efforts to remedy the problems identified [**].
4.6 Facility Information . POLYPEPTIDE shall furnish to CUSTOMER complete and thorough information (redacted to the extent required to comply with POLYPEPTIDE’s confidentiality obligations to third parties) regarding pre-Effective Date (i) audits by Regulatory Authorities of the facilities at which the PRODUCT is manufactured, (ii) inspectional observations (Form FDA 483); or (iii) warning letters. During the Term, POLYPEPTIDE will promptly (and in no case later than [**] days) notify CUSTOMER in writing of, and forward written copies of any documents relating to (i) future inspections or requests for inspections of those areas of POLYPEPTIDE’s facilities or those systems, in either case, that could reasonably be expected to have an impact on the production of the PRODUCT; (ii) inspectional observations (Form FDA 483) of POLYPEPTIDE’s facilities directly related to the manufacture of the PRODUCT; (iii) warning letters related to, or that could reasonably be expected to have an impact on, the manufacture of the PRODUCT by POLYPEPTIDE; or (iv) recall notices received that relate directly to the PRODUCT supplied by POLYPEPTIDE hereunder. In addition, POLYPEPTIDE shall, whenever possible and permissible, permit CUSTOMER (and designees) to be present during any inspection by a Regulatory Authority that relates to or could impact the PRODUCT. In addition POLYPEPTIDE shall provide CUSTOMER a reasonable opportunity to comment upon proposed responses by POLYPEPTIDE to any of the foregoing or to other communications related directly to PRODUCT or the facilities at which PRODUCT is manufactured (to the extent related to manufacturing of PRODUCT) from Regulatory Authorities and the comments of CUSTOMER shall not be unreasonably rejected. CUSTOMER shall provide its comments within [**] days following receipt of POLYPEPTIDE’s proposed responses to avoid any delay in response time to the Regulatory Authorities.
4.7 Material Safety Data Sheet . CUSTOMER shall provide POLYPEPTIDE with the appropriate MSDS for the PRODUCT.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
ARTICLE 5
DELIVERY, INVOICING AND PRODUCT ACCEPTANCE
5.1 Delivery and Storage. POLYPEPTIDE shall deliver PRODUCT on the delivery dates set forth in the relevant Firm Purchase Orders. Delivery shall be [**] (Incoterms 2000) to a location designated by [**] by a common carrier [**]. Title to the PRODUCT and risk of loss shall transfer to CUSTOMER upon [**]. If requested by CUSTOMER, POLYPEPTIDE agrees to delay delivery of PRODUCT for up to [**] days after the delivery date set forth in the relevant Firm Purchase Order at [**]; provided however, POLYPEPTIDE shall issue an invoice for such PRODUCT and title to the PRODUCT and the risk of loss shall transfer to CUSTOMER [**].
5.2 Invoice.
(a) POLYPEPTIDE shall invoice CUSTOMER with a single invoice concurrently with shipment of the PRODUCT on the delivery date specified in the applicable Firm Purchase Order or, in the event CUSTOMER requests a delivery delay pursuant to Section 5.1, on the day POLYPEPTIDE provides CUSTOMER the corresponding POLYPEPTIDE Release Documents (as set forth in Section 5.1) (the “ Release Date ”). Invoices shall be due and payable [**] days from the date of the receipt of the invoice.
(b) Notwithstanding the foregoing, with respect to [**], POLYPEPTIDE may invoice CUSTOMER [**]; provided however, that if POLYPEPTIDE invoices CUSTOMER for a PRODUCT batch in accordance with [**]. In making such determination pursuant to [**]. For the avoidance of doubt, [**]. In addition, [**].
For purposes of clarity, [**]. If [**].
5.3 Review of POLYPEPTIDE Release Documents, Batch Records and Master Batch Records. Upon receipt, CUSTOMER, or the designee, shall promptly examine the POLYPEPTIDE Release Documents (as defined in Section 4.3) for the PRODUCT’s compliance with the Specifications and POLYPEPTIDE Release Documents. CUSTOMER shall have the right to also review the relevant Batch Records and Master Batch Records, and POLYPEPTIDE agrees to make the Batch
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
Records and Master Batch Records available for inspection on site promptly upon request by CUSTOMER. The Batch Records and Master Batch Records at POLYPEPTIDE’s facility located in Torrance, CA will be in English. The Batch Records and Master Batch Records at POLYPEPTIDE’s facility located in Malmo, Sweden will be in Swedish, and POLYPEPTIDE shall provide for CUSTOMER’s review, English translations of such Master Batch Records and English summaries (in a form that is mutually agreed by the parties and complies with any applicable requirements of Regulatory Authorities) of such Batch Records. CUSTOMER may reject any shipment of PRODUCT (or part thereof) that it determines does not conform to the Specifications and POLYPEPTIDE Release Documents. If CUSTOMER determines that any such shipment does not comply with the Specifications and POLYPEPTIDE Release Documents, CUSTOMER shall notify POLYPEPTIDE promptly, but in any event not later than [**] days after receipt of the POLYPEPTIDE Release Documents. Any such notice of rejection shall be in writing and shall indicate the reasons for such rejection. The invoice for any rejected PRODUCT shall be cancelled, and any payment previously received for any rejected PRODUCT shall be promptly returned to CUSTOMER. If no such notice of rejection is issued within such [**] day period, CUSTOMER shall be deemed to have accepted such shipment.
5.4 Latent Defects . Notwithstanding the foregoing, CUSTOMER (or its designee) may further inspect the PRODUCT following the [**] day period set forth above, for damage, adulteration or other failure to comply with the Specifications on the Release Date and POLYPEPTIDE Release Documents that would not reasonably be expected to be detectable in accordance with customary industry practice during an initial inspection of PRODUCT and the corresponding POLYPEPTIDE Release Documents (a “ Latent Defect ”). CUSTOMER shall have the right to reject any PRODUCT (including, previously accepted PRODUCT) that it (or its designee) determines contains a Latent Defect; provided, however, that CUSTOMER shall submit a rejection notice under this Section 5.4 specifying all such Latent Defects no later than [[**] days of discovery thereof, but in any event within [**] months of the CUSTOMER’s receipt of the PRODUCT for PRODUCT delivered any time during the first [**] Supply Years and within [**] months of the CUSTOMER’s receipt of the PRODUCT for PRODUCT delivered any time thereafter. The invoice for any rejected PRODUCT shall be cancelled, and any
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
payment previously received for any rejected PRODUCT shall be promptly returned to CUSTOMER.
5.5 Disputes. Within [**] days after any notice of rejection is received, POLYPEPTIDE shall notify CUSTOMER, in writing, whether it accepts CUSTOMER’s basis for rejection. If POLYPEPTIDE in good faith disagrees with CUSTOMER’s determination that a PRODUCT rejection was proper under this Article 5, such PRODUCT shall be submitted to a mutually acceptable third party laboratory and / or regulatory expert. The third party shall determine whether such PRODUCT was or was not properly rejected under this Article 5. The party against whom the third party tester or regulatory expert rules shall bear all expenses. Whether or not POLYPEPTIDE accepts CUSTOMER’s basis for rejection, promptly on receipt of a notice of rejection of PRODUCT, POLYPEPTIDE shall replace such rejected PRODUCT, [**] as soon as reasonably practical, but not later than [**] days of POLYPEPTIDE’s receipt of the notice or rejection (except for Validation Batches which replacement time line is subject to Section 5.2(b)). If the third party tester or regulatory expert rules that the PRODUCT was not appropriately rejected under this Article 5, CUSTOMER shall purchase the rejected PRODUCT, irrespective of whether POLYPEPTIDE has already replaced it. All replacement PRODUCT shall be subject to the provisions of Sections 5.3 and 5.4 above. CUSTOMER may not destroy any PRODUCT until it receives written notification from POLYPEPTIDE that POLYPEPTIDE does not dispute the rejection of the PRODUCT hereunder and that POLYPEPTIDE does not request return of the PRODUCT. Upon authorization from POLYPEPTIDE to do so, CUSTOMER shall destroy the rejected PRODUCT at POLYPEPTIDE’s cost and shall provide POLYPEPTIDE with certification of such destruction. CUSTOMER shall, upon receipt of POLYPEPTIDE’s request for return, promptly return said PRODUCT [**].
ARTICLE 6
COMPLAINTS AND RECALLS
6.1 PRODUCT Complaints. CUSTOMER will correspond with complainants on all complaints associated with PRODUCT in accordance with the terms of the Quality Agreement. POLYPEPTIDE will provide reasonable assistance to CUSTOMER in investigating PRODUCT complaints by analyzing PRODUCT,
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
processes and components to determine the cause, if any of an alleged PRODUCT manufacturing defect or failure, in accordance with the terms of the Quality Agreement. In the event POLYPEPTIDE receives a complaint relating to PRODUCT it shall promptly (and in no case later than [**] days) inform CUSTOMER in writing thereof.
6.2 Recalls .
(a) In the event any party believes it may be necessary to conduct a recall, field correction, market withdrawal, stock recovery, or other similar action with respect to Final Drug Product incorporating PRODUCT sold by POLYPEPTIDE to CUSTOMER (a “ Recall ”), POLYPEPTIDE and CUSTOMER shall consult with each other, to the extent practicable, as to how best to proceed, it being understood and agreed that the final decision as to any Recall of Final Drug Product shall be made by CUSTOMER ; provided, however, that POLYPEPTIDE shall not be prohibited hereunder from taking any action that it is required to take by Applicable Law .
(b) In the event of a Recall, POLYPEPTIDE will provide reasonable assistance to CUSTOMER in an investigation to determine the cause and extent of the problem, in accordance with the terms of the Quality Agreement. All FDA or other applicable Regulatory Authority contacts and coordination of any recall activities will be led by CUSTOMER unless otherwise required by the FDA or other Regulatory Authority. The parties agree that each party shall consult with the others and shall cooperate in all recalls, but that CUSTOMER shall be the primary interface with the applicable Regulatory Authority.
6.3 Recall Records . CUSTOMER shall maintain records of all sales of Final Drug Product and customers sufficient to adequately administer a Recall for the period required by Applicable Law. POLYPEPTIDE will maintain complete and accurate records of all PRODUCT supplied under this Agreement for such periods as may be required by Applicable Laws, and in accordance with the Quality Agreement.
6.4 Recall Expenses . If the Recall arises from the manufacture, storage or handling of the PRODUCT by POLYPEPTIDE or POLYPEPTIDE’s breach of its Manufacturing Warranties, the cost of goods sold, distribution expenses and
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
third-party recall expenses (collectively, “ Recall Costs ”) shall be borne by POLYPEPTIDE. CUSTOMER shall bear the Recall Costs for all other Recalls.
ARTICLE 7
ALTERNATIVE SUPPLY AND MINIMUM PURCHASE REQUIREMENTS
7.1 Alternative Supplier .
(i) FOREST and IRONWOOD shall have the right, at any time, in their sole discretion, to qualify themselves, or one or more third parties to manufacture PRODUCT (“ Alternative Suppliers ”). Subject only to the then-current Minimum Requirement (as described in Section 7.2 below), CUSTOMER shall have the right to purchase or acquire PRODUCT from one or more Alternative Suppliers. POLYPEPTIDE agrees that it will promptly notify CUSTOMER in writing of any problems, supply or other situations that are likely to adversely affect the production of PRODUCT, or its timely delivery to CUSTOMER in accordance with a Firm Purchase Order therefore.
(ii) POLPYPEPTIDE acknowledges that processes and procedures for the manufacture of peptides such as the PRODUCT may be similar among different manufacturers, and accordingly agrees that CUSTOMER’s utilization of Alternative Suppliers shall not give rise to a presumption that CUSTOMER has improperly disclosed or used POLYPEPTIDE’s Confidential Information or misappropriated POLYPEPTIDE’s Intellectual Property Rights, and POLYPEPTIDE shall not assert any such presumption (under any doctrine of law) in any claim or action by POLYPEPTIDE against CUSTOMER.
7.2 Minimum Purchase Requirements .
(i) The First Supply Year shall commence on the first day of the first month included in the Initial Quarterly Forecast, and shall continue for twelve (12) months thereafter. During the First Supply Year and for each Supply Year thereafter until this Agreement expires or is terminated, CUSTOMER shall purchase from POLYPEPTIDE an amount of PRODUCT to be sold or distributed in the Territory equal to at least: (a) [**] percent ( [**] %) of CUSTOMER’s demand for the Territory during the Supply Year if the applicable price for PRODUCT under the Agreement during such Supply Year is at least [**] less than [**] for
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
supplying PRODUCT (in each case, in similar quantities and meeting the Specifications, (b) [**] percent ( [**] %) of CUSTOMER’s demand for the Territory during the Supply Year if the applicable price for PRODUCT under the Agreement during such Supply Year is less than [**] above [**] for supplying PRODUCT (in each case, in similar quantities and meeting the Specifications), or (c) [**] percent ( [**] %) of CUSTOMER’s demand for the Territory during the Supply Year if (i) the applicable price for PRODUCT under the Agreement during such Supply Year is [**] above [**] for supplying PRODUCT (in each case, in similar quantities and meeting the Specifications), but does not exceed the applicable price set forth on Appendix D hereto(1), or (ii) if CUSTOMER elects to manufacture PRODUCT internally or through an Affiliates (as applicable from time to time, the “ Minimum Requirement ”); provided, that, in each case, POLYPEPTIDE has demonstrated, to the satisfaction of CUSTOMER, its ability to produce and sustain the production of PRODUCT in quantities sufficient to support the applicable Minimum Requirement. If POLYPEPTIDE is unable to make such demonstration to CUSTOMER’s satisfaction, the Minimum Requirement shall be reduced to a lower percentage of CUSTOMER’s total demand for the Territory with respect to which POLYPEPTIDE is able to demonstrate its ability to produce and sustain production. Notwithstanding anything to the contrary set forth herein, the Minimum Requirement shall not exceed [**] .
(ii) Within [**] days following the Effective Date, CUSTOMER shall, subject to applicable confidentiality obligations, provide evidence of third party supplier pricing or evidence of internal manufacturing costs (as the case may be) for Product and evidence that the alternative supplier’s commercial product passes release testing requirements comparable to that required under this Agreement. Based on such evidence, the parties shall determine the initial Minimum Requirement. No later than [**] days prior to the first day of each Supply Year, CUSTOMER may notify POLYPEPTIDE (the “ Competitive Offer Notice ”) that it can purchase from a reputable third party supplier, PRODUCT that: (a) meets
(1) Volume-based pricing will initially be based on aggregate supply by POLYPEPTIDE to Customer and its Affiliates and licensees in the Territory. In the event that Ironwood, or its licensees, seek to engage POLYPEPTIDE to manufacture PRODUCT for sale outside of the Territory, POLYPEPTIDE agrees to negotiate in good faith pricing schedules under this Agreement and under such additional territory agreements that fairly reflect the efficiencies associated with the manufacture of the additional volume of PRODUCT.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
the Specifications, and (b) is offered at a price for similar quantities (taking into consideration any other fees paid to such third party supplier that affect pricing), that is lower than the then-current price for PRODUCT purchased under this Agreement by an amount that would result in a reduction to the then-current Minimum Requirement. Upon receipt of such notice, CUSTOMER and POLYPEPTIDE shall meet and discuss whether POLYPEPTIDE can improve its cost structure within a reasonable period of time in order to match the other source. Following issuance of the Competitive Offer Notice, at the request of POLYPEPTIDE, CUSTOMER shall, subject to applicable confidentiality obligations, provide evidence of the third party offer or evidence of internal costs (as the case may be) and evidence that the alternative supplier’s commercial product passes release testing requirements comparable to that required under this Agreement. POLYPEPTIDE shall have [**] days from its receipt of the Competitive Offer Notice to notify CUSTOMER in writing that it is willing to reduce its pricing under this Agreement in order to maintain (or increase) the then-current Minimum Requirement. If POLYPEPTIDE does not deliver such notice within such time period, then the Minimum Requirement shall be reduced in accordance with Section 7.2(i) above. Reduced pricing (if applicable) shall apply to any Firm Purchase Orders issued after CUSTOMER’s receipt of POLYPEPTIDE’s written notice of price reduction. This process and its impact on the Rolling Forecast is illustrated on Appendix B . If POLYPEPTIDE reduces its pricing under this Agreement pursuant to a Competitive Bid Notice and the third party supplier with the competitive pricing fails to obtain regulatory approval for the PRODUCT or withdraws its application for regulatory approval for PRODUCT, POLYPEPTIDE’s price reduction shall be null and void and the purchase price for PRODUCT shall revert back to the purchase price prior to the price reduction. [**] .
(iii) In addition to, or in lieu of, the Competitive Offer Notice, no later than [**] days prior to the first day of each Supply Year, CUSTOMER may notify POLYPEPTIDE that it intends to commence the manufacture of PRODUCT internally, or through an Affiliate. In such case, the Minimum Requirement shall be reduced to [**] percent [**]%) of CUSTOMER’s demand for the Territory during the Supply Year as set forth in 7.2(i)(c) above. This process and its impact on the Rolling Forecast is illustrated on Appendix B.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
(iv) Notwithstanding the above, in the event that: (a) CUSTOMER has placed Firm Purchase Orders with POLYPEPTIDE consistent with the Minimum Requirement, and during any period of [**] consecutive months, POLYPEPTIDE is unable to make timely delivery of the amounts set forth in the Firm Purchase Orders for any reason, or (b) POLYPEPTIDE becomes bankrupt as set forth in Section 8.5, then, in either case, the applicable Minimum Requirement shall be reduced to such amount as CUSTOMER shall, in its sole discretion (but after consultation with POLYPEPTIDE if practicable in light of the circumstances giving rise to the failure of timely delivery), determine POLYPEPTIDE is able to provide to CUSTOMER, and this amount shall become the Minimum Requirement for the remainder of the Term. The procedure set forth herein shall be repeated if the triggering events arise again after adjustment of the Minimum Requirement.
(v) Enabling Alternative Suppliers. If (i) at any time during the Term, CUSTOMER’S minimum requirement is reduced pursuant to Section (iv) (but not pursuant to Section (ii)), (ii) at any time during the Term, POLYPEPTIDE is unable to make timely delivery of at least [**] percent ([**]%) of the aggregate quantity of PRODUCT set forth on Firm Purchase Orders placed in compliance with the terms of this Agreement for any consecutive [**] month period or at least [**] percent ([**]%) of the aggregate quantity of PRODUCT set forth on Firm Purchase Orders for any consecutive [**] month period, (iii) at any time during the Term, POLYPEPTIDE informs CUSTOMER that based upon the Rolling Quarterly Forecast provided by CUSTOMER, POLYPEPTIDE anticipates that it will be unable to meet CUSTOMER’s PRODUCT requirements set forth in such forecast, (iv) at any time during the Term, CUSTOMER elects to qualify IRONWOOD, FOREST or an Affiliate of either as an Alternative Supplier, or (v) this Agreement is terminated by CUSTOMER pursuant to Section 8.3, 8.5 or 15.1 or by POLYPEPTIDE pursuant to Section 8.2, then in any such instance an “ Alternative Supply Trigger ” shall be deemed to have occurred. Once an Alternative Supply Trigger has occurred, POLYPEPTIDE will promptly cooperate with CUSTOMER and use commercially reasonable efforts to provide full and complete technical assistance, as needed, to optimize the ability and speed of an Alternative Supplier to successfully manufacture PRODUCT. Such efforts may include (but are not intended to be limited to) the transfer to CUSTOMER or the Alternative Supplier of POLYPEPTIDE Know-How,
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
Development Know-How, New Know-How and other PRODUCT-specific data and information in POLYPEPTIDE’s possession. Technical assistance provided by POLYPEPTIDE shall be at [**] expense except where the Alternative Supply Trigger is caused by [**], in which case the costs of such technical assistance shall be [**]. In the event of an Alternative Supply Trigger, FOREST and IRONWOOD shall each obtain a co-exclusive, worldwide, irrevocable, perpetual, royalty-free, fully paid license (with rights to sublicense) under the POLYPEPTIDE IP to develop, manufacture, have manufactured, formulate, use, sell, have sold, offer for sale, import and have imported PRODUCT, Final Drug Product, or any salts, derivatives, prodrugs or compositions of the PRODUCT.
ARTICLE 8
TERM AND TERMINATION
8.1 Term. This Agreement shall commence on the Effective Date and, unless terminated earlier in accordance with this Article 8, shall continue in effect for a period of five (5) years from the Commercial Launch Date (the “ Initial Term ”).
8.2 Renewal Terms. This Agreement will automatically renew upon the expiration of the Initial Term and shall continue in effect for consecutive three (3) year periods (each such period being a “ Renewal Term ”), unless (i) terminated by twenty-four (24) months advance written notice executed by both FOREST and IRONWOOD and delivered to POLYPEPTIDE, or (ii) terminated by twenty-four (24) months advance written notice executed by POLYPEPTIDE and delivered to both FOREST and IRONWOOD. Termination notices issued under this Section 8.2 shall not be effective prior to the end of the Initial Term.
8.3 Termination by CUSTOMER for Cause. FOREST and IRONWOOD, acting together, but not separately, may terminate this Agreement at any time if POLYPEPTIDE materially breaches a provision of this Agreement and fails to cure the breach within [**] days after POLYPEPTIDE’s receipt of written notice containing details of the material breach. With respect to a particular material default or breach of this Agreement, failure of CUSTOMER to provide notice to POLYPEPTIDE as required by this Section 8.3 shall not constitute a waiver of the right to give such notice with respect to any subsequent default or breach.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
8.4 Termination by POLYPEPTIDE for Cause. In the event that FOREST and/or IRONWOOD materially breach a provision of this Agreement, POLYPEPTIDE shall provide written notice containing details of the material breach to both FOREST and IRONWOOD. If the breach is not cured within [**] days of the receipt of the notice, then POLYPEPTIDE shall have the right to immediately terminate this Agreement, provided however, if the breach is for failure of CUSTOMER to make timely payment on invoices, then the time period that CUSTOMER has to cure is [**] days. For clarity, if the notice describes a breach of an obligation assigned hereunder to only one of FOREST or IRONWOOD, either FOREST or IRONWOOD shall have the right to cure the breach and avoid the termination of this Agreement. With respect to a particular material default or breach of this Agreement, failure of POLYPEPTIDE to provide notice to FOREST and IRONWOOD as required by this Section 8.4 shall not constitute a waiver of the right to give such notices with respect to any subsequent default or breach.
8.5 Bankruptcy .
(a) To the extent permitted under applicable law, FOREST and IRONWOOD acting together, but not separately, may terminate this Agreement effective immediately with written notice if POLYPEPTIDE shall file for bankruptcy, shall be adjudicated bankrupt, shall file a petition under insolvency laws, shall be dissolved or shall have a receiver appointed for substantially all of its property.
(b) To the extent permitted under applicable law, if either FOREST or IRONWOOD shall file for bankruptcy, shall be adjudicated bankrupt, shall file a petition under insolvency laws, shall be dissolved or shall have a receiver appointed for substantially all of its property (the “ Bankrupt Customer ”), POLYPEPTIDE shall have the right to request that the other party (the “ Non-Bankrupt Customer ”) assume in writing all rights and obligations of the Bankrupt Customer under this Agreement and the Agreement shall remain in full force and effect as an Agreement between POLYPEPTIDE and the Non-Bankrupt Customer. If the Non-Bankrupt Customer does not agree to assume the obligations of the Bankrupt Customer, then POLYPEPTIDE shall have the right to terminate this Agreement effective immediately.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
(c) All rights and licenses granted under or pursuant to any Section of this Agreement are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy Code, licenses of rights to “ intellectual property ” as defined under Section 101(35A) of the Bankruptcy Code. The parties shall retain and may fully exercise all of their respective rights and elections under the Bankruptcy Code.
8.6 Product Discontinuance .
(a) FOREST and IRONWOOD, acting together, but not separately, shall have the right to terminate this Agreement, upon written notice to POLYPEPTIDE, in the event the PRODUCT fails to receive Regulatory Approval in [**] or in the event the manufacture and commercial sale of the PRODUCT is discontinued (including, without limitation due to suspension or revocation of prior Regulatory Approval in the Territory) in [**] (any such event, a “ PRODUCT Termination ”).
(b) CUSTOMER shall provide POLYPEPTIDE with prompt written notice of the occurrence of a PRODUCT Termination. Following a PRODUCT Termination, CUSTOMER may either (i) exercise its right to terminate this Agreement pursuant to Section 8.6(a), or (ii) elect to continue the Agreement but suspend production of PRODUCT (subject to Section 8.6(c) below), in each case by providing written notice of such exercise or election (as the case may be) to POLYPEPTIDE. In either case, at the written request of CUSTOMER (the “ Request ”), (A) POLYPEPTIDE shall suspend production of PRODUCT quantities contained in any Firm Purchase Order or any Rolling Quarterly Forecast and CUSTOMER shall within [**] days of the date of the Request reimburse POLYPEPTIDE for its fully loaded internal costs as well as external costs associated with work-in-progress commenced under any Firm Purchase Order and raw materials and intermediates purchased for the manufacture of PRODUCT under the Firm Purchase Order, or (B) POLYPEPTIDE shall suspend production of any PRODUCT quantities contained in any Rolling Quarterly Forecast and shall complete the manufacture of PRODUCT that was the subject of an outstanding Firm Purchase Order at the time of the Request and the delivery, acceptance and payment provisions of this Agreement shall apply to such PRODUCT. To the extent it is reasonably practicable to do so,
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
POLYPEPTIDE agrees to use commercially reasonable efforts to mitigate the costs that are borne by CUSTOMER under this Section 8.6(b).
(c) If CUSTOMER elects to continue the Agreement but suspend production of Product pursuant to Section 8.6(b)(ii), then (i) CUSTOMER may, any time following such election, terminate this Agreement pursuant to Section 8.6(a), and (ii) if CUSTOMER has not resumed production of Product (or placed a Firm Purchase Order) or terminated this Agreement within [**] months following such election, then, within [**] days following the expiration of such [**] month period, POLYPEPTIDE shall have the right to provide CUSTOMER a written notice of termination of this Agreement, which termination shall become effective [**] days following CUSTOMER’s receipt of such notice if CUSTOMER does not resume production of Product (or place a Firm Purchase Order) within such [**] day period. If CUSTOMER resumes production of Product (or places a Firm Purchase Order) within such [**] day period, then this Agreement shall continue in full force and effect. If CUSTOMER terminates this Agreement pursuant to Section 8.6(a) or POLYPEPTIDE terminates this Agreement pursuant to this Section 8.6(c), then the restrictions set forth in Section 2.2 shall terminate in their entirety as of the effective date of such termination.
8.7 Termination by FOREST or Ironwood . At any time, CUSTOMER may deliver to POLYPEPTIDE written notice executed by both FOREST and IRONWOOD, informing POLYPEPTIDE that after the date set forth in the notice, either FOREST or IRONWOOD shall become the sole customer under this Agreement. Following its receipt of such notice, and after the date set forth in the notice, this Agreement shall be deemed amended such that CUSTOMER shall mean the sole customer designated in the notice, and POLYPEPTIDE shall thereafter look solely to such entity for performance under this Agreement.
8.8 Non-Exclusive Remedy. Termination of this Agreement shall be in addition to, and shall not prejudice, the parties’ remedies at law or in equity, including, without limitation, the parties’ ability to receive legal damages and/or equitable relief with respect to any breach of this Agreement, regardless of whether or not such breach was the reason for the termination.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
ARTICLE 9
PRICES AND INVOICES
9.1 Product Prices. For Validation Batches supplied hereunder, CUSTOMER will pay POLYPEPTIDE the price per gram set forth on Appendix C. For all other PRODUCT supplied hereunder by POLYPEPTIDE, CUSTOMER will pay to POLYPEPTIDE a price per gram based on the cumulative volume of actual linaclotide content within PRODUCT ordered for delivery during any given Supply Year in accordance with the Pricing Schedule set forth on Appendix D hereto. The pricing set forth on Appendix D hereto is based on the Specifications set forth on Appendix A hereto as of the Effective Date. In the event of a material change to such Specifications, such pricing shall be adjusted by the parties in good faith to reflect such change. The parties agree that for purposes of determining pricing of PRODUCT to be sold under this Agreement, the price per gram shall be set at the beginning of the Supply Year based upon the forecasted amount contained in the most recent Rolling Quarterly Forecast issued prior to the commencement of the Supply Year. After each Supply Year, the parties shall compare the forecasted amount upon which the price per gram was based to the actual amount of PRODUCT delivered during the Supply Year. If the actual amount would have resulted in a different price per gram than that paid by CUSTOMER, than any underpayment shall be paid to POLYPEPTIDE and any overpayment shall be refunded to CUSTOMER within [**] days following the completion of the analysis and its acceptance by CUSTOMER and POLYPEPTIDE. For clarity, all quantities of PRODUCT delivered to FOREST or IRONWOOD, or any of their respective designees, licensees or sublicensees (whether ordered under this Agreement or under another Agreement with POLYPEPTIDE) shall be aggregated with amounts purchased by CUSTOMER under this Agreement for the purpose of determining the price per gram.
9.2 Invoices . All invoices issued and payments made pursuant to this Agreement shall be in United States Dollars. Each invoice shall identify the Firm Purchase Order number, Batch numbers and quantities. Invoices shall be due and payable [**] days after receipt thereof.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
9.3 Price Adjustments for Inflation. POLYPEPTIDE may adjust the prices set forth in the Pricing Schedule [**] if necessary to reflect an increase in POLYPEPTIDE’s costs, including by way of example, materials and wages, which costs shall be documented with reasonable specificity to CUSTOMER in connection with any such adjustment; provided, however, that the annual percentage increase shall be less than or equal to the Producer Price Index-Pharmaceutical Preparations (Code PCU2834) published by the US Bureau of Labor Statistics for the most recent 12 months period for which figures are available or, if the same is no longer published, an index that is substantially similar thereto, and agreeable to all parties. No adjustment pursuant to this Section shall be made prior to [**].
9.4 Price Adjustments for Improvements. It is the expectation of the parties that POLYPEPTIDE and the CUSTOMER will achieve improvements in manufacturing that will result in decreased manufacturing costs, and promptly following the Effective Date, the Parties will form a working group comprised of an equal number of representatives from each of POLYPEPTIDE, IRONWOOD and FOREST which will meet periodically as mutually agreed to explore and discuss such improvements. POLYPEPTIDE agrees to use good faith efforts to achieve such improvements, and further agrees to notify CUSTOMER when such improvements have been achieved. Thereafter, the parties will negotiate in good faith a reduction to future PRODUCT pricing based upon the savings achieved as a result of the improvement, with [**] percent ([**]%) of such savings to be allocated to CUSTOMER and [**] percent ([[**]%) to POLYPEPTIDE; provided that [**].
ARTICLE 10
OWNERSHIP AND LICENCES
10.1 Ownership. All POLYPEPTIDE IP and Development IP shall be and remain the property of POLYPEPTIDE. All CUSTOMER IP shall be and remain the property of IRONWOOD and/or FOREST. Ownership of all New IP shall be determined in accordance with United States patent laws; i.e. , all New IP conceived of or developed (i) solely by IRONWOOD and/or FOREST (“ Customer New IP ”) shall be owned by CUSTOMER, (ii) solely by POLYPEPTIDE (“ PolyPeptide New IP ”) shall be owned by POLYPEPTIDE, and (iii) jointly by IRONWOOD and/or FOREST (on the one hand) and POLYPEPTIDE (on the
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
other hand) (“ Joint New IP ”) shall be owned jointly by POLYPEPTIDE and CUSTOMER. Further, all records of work performed by POLYPEPTIDE under this Agreement and all reports required to be delivered by POLYPEPTIDE to CUSTOMER under this Agreement shall be deemed “works made for hire” and owned by CUSTOMER. Notwithstanding the foregoing, solely to the extent necessary to comply with Applicable Laws, POLYPEPTIDE shall have the right to keep one (1) copy, or if so required, one (1) original, of such records and reports. The provisions of this Article 10 shall be deemed to supersede any provisions of the DEVELOPMENT SUPPLY AGREEMENT which are inconsistent with the provisions hereof. The COLLABORATION AGREEMENT shall govern all matters pertaining to the ownership and protection of, any Intellectual Property Rights as between IRONWOOD and FOREST.
10.2 PolyPeptide New IP .
(i) Subject to Section 10.2(ii) below, POLYPEPTIDE shall have the only right to file patent applications relating to inventions included in the New Know-How made solely by POLYPEPTIDE. In the event that POLYPEPTIDE seeks such patent protection, POLYPEPTIDE shall bear the costs, including, but not limited to, attorney’s fees associated with preparing, filing and prosecuting such patent applications and for maintaining such patent protection as may be granted. POLYPEPTIDE shall provide CUSTOMER with a copy of any proposed patent applications prior to filing and shall afford CUSTOMER a commercially reasonable period of time to comment on any such applications. POLYPEPTIDE agrees that CUSTOMER’s comments shall not be unreasonably rejected. POLYPEPTIDE agrees to promptly inform CUSTOMER of any additional correspondence, office actions or filings associated with patent applications which claim such New Know-How and shall provide CUSTOMER with a commercially reasonable period of time to comment on such additional filings. POLYPEPTIDE agrees that it shall not unreasonably reject CUSTOMER’s comments.
(ii) POLYPEPTIDE agrees not to file or prosecute a patent application containing any claims or subject matter covering POLYPEPTIDE New IP without the prior written consent of CUSTOMER. POLYPEPTIDE hereby grants to FOREST and IRONWOOD a co-exclusive, worldwide, irrevocable, perpetual, royalty-free
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
fully paid license under the PolyPeptide New IP to develop, manufacture, have manufactured, formulate, use, sell, have sold, offer for sale, import and have imported PRODUCT and Final Drug Product, or any salts, derivatives, prodrugs or compositions of the PRODUCT. Such license shall include the right to sublicense to third parties [**]. The co-exclusive license granted in this Section 10.2(ii) shall not limit POLYPEPTIDE’s right to assign its obligations under this Agreement to Affiliates in accordance with Section 15.2.
10.3 Customer New IP .
(i) CUSTOMER shall have the only right to file patent applications relating to inventions included in the New Know-How made solely by IRONWOOD and/or FOREST. In the event that CUSTOMER seeks such patent protection, CUSTOMER shall bear the costs, including, but not limited to, attorney’s fees associated with preparing, filing and prosecuting such patent applications and for maintaining such patent protection as may be granted. CUSTOMER shall provide POLYPEPTIDE with a copy of any proposed patent applications prior to filing and shall afford POLYPEPTIDE a commercially reasonable period of time to comment on any such applications. CUSTOMER agrees that POLYPEPTIDE’s comments will not be unreasonably rejected. CUSTOMER agrees to promptly inform POLYPEPTIDE of any additional correspondence, office actions or filings associated with patent applications which claim such New Know-How and shall provide POLYPEPTIDE with a commercially reasonable period of time to comment on such additional filings. CUSTOMER agrees that it shall not unreasonably reject POLYPEPTIDE’s comments.
(ii) CUSTOMER hereby grants to POLYPEPTIDE a non-exclusive, worldwide, irrevocable, perpetual, royalty-free fully paid license under the Customer New IP to develop, manufacture, have manufactured, formulate, use, sell, have sold, offer for sale, import and have imported any product other than (A) the PRODUCT, Final Drug Product, or any salts, derivatives, prodrugs or compositions of the PRODUCT and (B) any other product containing an orally delivered peptide that is a guanylate cyclase C agonist.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
10.4 Joint New IP .
(i) POLYPEPTIDE and CUSTOMER shall cooperate in the filing of patent applications relating to inventions included in the New Know-How made jointly by IRONWOOD and/or FOREST (on the one hand) and POLYPEPTIDE (on the other hand). In the event that either CUSTOMER or POLYPEPTIDE seeks such patent protection, the filing party shall bear the costs, including, but not limited to, attorney’s fees associated with preparing, filing and prosecuting such patent applications and for maintaining such patent protection as may be granted. The filing party shall provide the other party with a copy of any proposed patent applications prior to filing and shall afford the other party a commercially reasonable period of time to comment on any such applications, which comments will not be unreasonably rejected. The filing party agrees to promptly inform the other party of any additional correspondence, office actions or filings associated with patent applications which claim such New Know-How and shall provide the other party with a commercially reasonable period of time to comment on such additional filings, which comments shall not be unreasonably rejected.
(ii) Except as contemplated by [**], POLYPEPTIDE shall not, during or after the Term, [**].
10.5 Development IP .
(i) POLYPEPTIDE represents and warrants to CUSTOMER that, as of the Effective Date, it has not filed patent applications which claim Development Know-How. In the event that POLYPEPTIDE elects to file patent applications claiming Development Know-How after the Effective Date, and subject to POLYPEPTIDE’s obligation to secure prior consent from CUSTOMER as set forth in Section 10.5(ii), POLYPEPTIDE shall provide CUSTOMER with a copy of the proposed applications prior to filing and shall afford CUSTOMER a commercially reasonable period of time to comment on any such applications. POLYPEPTIDE agrees that CUSTOMER’s comments will not be unreasonably rejected. POLYPEPTIDE agrees to promptly inform CUSTOMER of any additional correspondence, office actions or filings associated with patent applications which claim Development Know-How and shall provide CUSTOMER with a commercially reasonable period of time to comment on such
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
additional filings. POLYPEPTIDE agrees that it shall not unreasonably reject CUSTOMER’s comments.
(ii) POLYPEPTIDE represents and warrants that it has not filed patent applications containing claims or subject matter covering Development IP. POLYPEPTIDE agrees that it shall not file or prosecute patent applications containing claims or subject matter covering Development IP without the prior written consent of CUSTOMER. POLYPEPTIDE hereby grants to FOREST and IRONWOOD a co-exclusive, worldwide, irrevocable, perpetual, royalty-free fully paid license under the Development IP to develop, manufacture, have manufactured, formulate, use, sell, have sold, offer for sale, import and have imported PRODUCT and Final Drug Product, or any salts, derivatives, prodrugs or compositions of the PRODUCT. Such license shall include the right to sublicense to third parties [**]. The co-exclusive license granted in this Section 10.5(ii) shall not limit POLYPEPTIDE’s right to assign its obligations under this Agreement to Affiliates in accordance with Section 15.2.
10.6 Enforcement of IP. In connection with and in furtherance of the objectives of the license grants to FOREST and IRONWOOD pursuant to Article 10 and pursuant to Section 7.2(v), POLYPEPTIDE agrees to cooperate with CUSTOMER, as reasonably requested by CUSTOMER in connection with CUSTOMER’s development or commercialization of PRODUCT or Final Drug Product and at CUSTOMER’s expense, to enforce such PolyPeptide New IP, Joint New IP, Development IP and/or POLYPEPTIDE IP against Third Parties (including, without limitation, by agreeing to act as a party to enforcement litigation).
10.7 Agreements with Employees, Consultants and Subcontractors. Each party represents that all employees, consultants and authorized subcontractors, who will participate in carrying out any obligations under this Agreement will have agreements in place that (a) impose confidentiality obligations on such employees, consultants and authorized subcontractors comparable to those set forth in Article 11 of this Agreement; and (b) effectively vest in POLYPEPTIDE or CUSTOMER, as applicable, any and all rights which such personnel and authorized subcontractors might otherwise have in the results of their work relating to this Agreement and are adequate to permit POLYPEPTIDE or
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
CUSTOMER, as applicable, to transfer such rights and to grant such licenses as set forth in this Agreement.
10.8 License Grant to POLYPEPTIDE for PRODUCT. CUSTOMER hereby grants to POLYPEPTIDE a non-exclusive, non-sublicensable, royalty-free license under the CUSTOMER IP and Customer New IP to manufacture the PRODUCT for CUSTOMER or for any other third party approved in writing by IRONWOOD. This license shall terminate upon the expiration or early termination of this Agreement unless POLYPEPTIDE is engaged in the manufacture of PRODUCT for a third party with the consent of IRONWOOD. In such case the license shall terminate at the earlier of, (a) the time POLYPEPTIDE ceases to manufacture PRODUCT for the third party, or (b) at such time as IRONWOOD revokes its authorization for POLYPEPTIDE to manufacture PRODUCT for such third party.
ARTICLE 11
CONFIDENTIALITY
11.1 Confidentiality Obligations . CUSTOMER and POLYPEPTIDE each agrees to retain in strict confidence and not to disclose, divulge or otherwise communicate to any other person or entity any Confidential Information of the other, whether disclosed prior to or after the Effective Date, and further agrees not to use any such Confidential Information for any purpose, except pursuant to, and in order to carry out, the terms and objectives of this Agreement, provided that each may disclose Confidential Information of the other to the officers, directors, employees, agents, consultants, authorized subcontractors or other representatives of the receiving party or its Affiliates (the “ Representatives ”), who, in each case, need to know such Confidential Information for purposes of the implementation and performance by the receiving party of this Agreement and will use such Confidential Information only for such limited purposes. For clarity, all information relating to New IP and all information, data, results, reports and records prepared by POLYPEPTIDE in the performance of this Agreement shall be deemed to be CUSTOMER Confidential Information, and POLYPEPTIDE agrees to treat it as such. Notwithstanding the above, FOREST and IRONWOOD shall be permitted to share POLYPEPTIDE’s Confidential Information with each other.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
11.2 Standard of Care . CUSTOMER and POLYPEPTIDE each agree to use with respect to the other party’s Confidential Information at least the same standard of care as it uses to protect proprietary or Confidential Information of its own of comparable sensitivity, and to exercise every reasonable precaution to prevent and restrain the unauthorized disclosure of the other party’s Confidential Information by any of its Representatives.
11.3 Obligations of Representatives to Maintain Confidentiality . CUSTOMER and POLYPEPTIDE each warrants that each of its Representatives to whom any of the other party’s Confidential Information is revealed shall previously have been informed of the confidential nature of the Confidential Information and shall be under a contractual or other legal obligation to maintain the confidentiality of the Confidential Information in accordance with terms and conditions substantially similar to those applicable to the receiving party under this Article 11.
11.4 Exceptions . The provisions of Section 11.1 shall not apply to any Confidential Information disclosed hereunder which:
(a) was known by the receiving party prior to its disclosure to the receiving party by the other party, as evidenced by the prior written records of the receiving party; or
(b) either before or after the date of disclosure to the receiving party by the other party is lawfully disclosed to receiving party by an independent, unaffiliated third party rightfully in possession of the Confidential Information, provided that disclosure and use is in conformity with the obligations of confidentiality and non-use imposed by such third party; or
(c) either before or after the date of disclosure to the receiving party by the other party becomes published or generally known to the public through no fault or omission on the part of the receiving party or its Representatives; or
(d) is developed independently by the receiving party without use of Confidential Information of the other Party, as evidenced by the written records of the receiving party; provided, however, that this subsection (d) shall not serve to exclude from the definition of CUSTOMER’s Confidential Information any
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
information relating to New IP or any information, data, results, reports and records prepared by POLYPEPTIDE in the performance of this Agreement.
11.5 Required Disclosures . Confidential Information may be disclosed, without breaching this Agreement, by the receiving party to the extent necessary to comply with Applicable Laws, or in response to a valid subpoena or other judicial order or a request by Regulatory Authorities, or to defend or prosecute litigation; provided, however, that to the extent practicable, in each of the foregoing cases, the receiving party shall provide prior written notice to the other party of any such required disclosure and shall take, at the disclosing party’s request, such reasonable and lawful actions to avoid and/or minimize the degree of such disclosure, and shall provide the disclosing party with the opportunity to seek to obtain suitable protection to prevent such required disclosure.
11.6 Use of Confidential Information Pursuant to Licenses . Notwithstanding anything herein to the contrary, the parties agree that disclosure and use by FOREST and/or IRONWOOD (including their respective licensees, sublicensees and designees) of POLYPEPTIDE’s Confidential Information pursuant to the license granted in Section 7.2(v) shall not be a violation of any term or condition contained in this Article 11, provided that such disclosure or use is reasonably necessary in order to exploit the applicable license granted.
11.7 Confidentiality of Terms of Agreement . Except as may be required to be disclosed pursuant to Sections 11.4 or 11.9, neither CUSTOMER nor POLYPEPTIDE shall disclose the terms of this Agreement to any third party without the prior written consent of the other party, except that (i) the parties may disclose the terms of this Agreement to their accountants and attorneys, provided any such attorney or accountant agrees to be bound by the confidentiality obligations of this Article 11.6, and (ii) each of FOREST and IRONWOOD may disclose the terms of this Agreement to its collaboration partners, and potential licensees.
11.8 Construction . Except as otherwise set forth in this Agreement, nothing herein shall be construed as giving a party any right, title, interest in or ownership of the Confidential Information of another party. For the purposes of this Agreement, any specific item disclosed as part of Confidential Information shall not be deemed to be in the public domain or in the prior possession of the
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
receiving party merely because more general information is in the public domain or more general information is in the prior possession of the receiving party, unless the more general information also discloses or reflects the specific Confidential Information.
11.9 Survival of Confidentiality Obligations . The confidentiality obligations of the parties contained in this Article 11 shall remain binding on the parties during and after the Term of this Agreement, and shall survive the expiration or termination of this Agreement, regardless of the cause of such expiration or termination. The parties acknowledge that any breach of this Article 11 will constitute irreparable harm, and that the non-breaching party shall be entitled to specific performance or injunctive relief to enforce this Article 11 in addition to whatever remedies such party may otherwise be entitled to at law or in equity.
11.10 Publicity and SEC Filings . CUSTOMER and POLYPEPTIDE agree that no public announcement of the execution or terms of this Agreement shall be made without the prior written consent of POLYPEPTIDE, IRONWOOD and FOREST. In the event that any of the parties are obligated to make disclosure in satisfaction of requirements of the Securities and Exchange Commission or any other governmental or regulatory agencies, the parties shall cooperate fully and in a timely manner to see that the filings are made and confidential treatment is sought with respect to Confidential Information of the parties.
ARTICLE 12
WARRANTIES AND CONSEQUENTIAL DAMAGES
12.1 Warranties by POLYPEPTIDE. POLYPEPTIDE represents, warrants and covenants that:
(a) POLYPEPTIDE shall manufacture PRODUCT in accordance with the Manufacturing Warranties and that the PRODUCT, when delivered pursuant to the terms of this Agreement will conform the Specifications and POLYPEPTIDE Release Documents;
(b) The PRODUCT, when delivered to CUSTOMER pursuant to the terms of this Agreement, will not be adulterated, misbranded, or otherwise prohibited from sale within the meaning of the FDCA or any other Applicable Laws;
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
(c) As of the Effective Date, POLYPEPTIDE has obtained (or will obtain prior to manufacturing PRODUCT hereunder), and will remain in compliance with during the Term of this Agreement, all permits, licenses and other authorizations (the “ Permits ”) which are required under Applicable Laws relating to the manufacturing of the Product;
(d) As of the Effective Date, (i) POLYPEPTIDE has not been, and none of its employees has been, suspended, debarred or subject to temporary denial of approval by the FDA from working in or providing services, directly or indirectly, to any applicant for approval of a drug product or any pharmaceutical or biotechnology company, (ii) to the best of POLYPEPTIDE’s knowledge, none of its consultants and authorized subcontractors who will participate in the performance, supervision, management or review of the manufacturing of PRODUCT supplied under this Agreement has been, suspended, debarred or subject to temporary denial of approval by the FDA from working in or providing services, directly or indirectly, to any applicant for approval of a drug product or any pharmaceutical or biotechnology company, and (iii) to the best of POLYPEPTIDE’s knowledge, neither it nor its employees nor such persons referenced in subsection (ii) above are under consideration to be suspended, debarred or subject to temporary denial of approval, by the FDA from working in or providing services, directly or indirectly, to any applicant for approval of a drug product or any pharmaceutical or biotechnology company;
(e) [**] use of the POLYPEPTIDE IP for manufacture of PRODUCT (including any analytic methods used by POLYPEPTIDE) hereunder will not infringe any Intellectual Property Rights of any third party;
(f) All waste generated in the manufacture of the PRODUCT under this Agreement will be stored, transported and disposed of in a safe and environmentally sound manner consistent with all Applicable Laws;
(g) Any manufacturing facility used by POLYPEPTIDE to manufacture PRODUCT is in compliance with the Facility Warranties.
(h) POLYPEPTIDE will provide CUSTOMER with prompt written notice of any facts or circumstances (whether occurring prior to or after the Effective Date) which cause any of the representations and warranties contained in this Section 12.1 not
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
to be true, accurate, and complete in any material respect as of the Effective Date or as of any date during the Term of this Agreement.
12.2 Waiver of Consequential Damages. IN NO EVENT SHALL A PARTY HERETO BE LIABLE TO ANOTHER PARTY HERETO FOR LOSS OF PROFITS, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES UNDER THIS AGREEMENT FROM ANY CAUSE WHATSOEVER, EXCEPT TO THE EXTENT ARISING OUT OF (A) A BREACH OF ARTICLE 11 (CONFIDENTIALITY), (B) A WILLFUL OR INTENTIONAL BREACH OR MISREPRESENTATION HEREUNDER, OR (C) OBLIGATIONS TO INDEMNIFY AS SET FORTH IN ARTICLE 13.
12.3 Limitation of Liability . POLYPEPTIDE’s LIABILITY FOR DIRECT DAMAGES WILL BE LIMITED TO [**]. THIS LIMITATION OF LIABILITY SHALL NOT APPLY IN THE EVENT LIABILITY ARISES OUT OF (A) A BREACH OF ARTICLE 11 (CONFIDENTIALITY), (B) A WILLFUL OR INTENTIONAL BREACH OR MISREPRESENTATION HEREUNDER OR (C) OBLIGATIONS TO INDEMNIFY AS SET FORTH IN ARTICE 13.
ARTICLE 13
INDEMNIFICATION
13.1 Indemnification by CUSTOMER . CUSTOMER shall defend, indemnify and hold harmless POLYPEPTIDE, its directors, officers, employees and agents (“ POLYPEPTIDE Indemnitees ”) from and against any loss, costs, damages, judgments, settlements, interest, fees, or expenses, including, without limitation, all reasonable attorneys’ fees related to or arising from this Agreement or the PRODUCT (collectively, “ Liabilities ”) paid or payable by the POLYPEPTIDE Indemnitees in connection with any claim, action, suit, demand or other legal assertion or proceeding brought by a third party (collectively, “ Claims ”) to the extent that any such Claims or Liabilities arise out of or result from (i) the storage (after delivery to CUSTOMER or its designee), use, transfer or sale including without limitation, the labelling, packaging, distribution, promotion and marketing of the PRODUCT or any product which incorporates the PRODUCT (including the Final Drug Product); (ii) the failure by CUSTOMER to comply with Applicable Laws relating to the PRODUCT; or (iii) any negligent or wilful act or omission by CUSTOMER in connection with its performance of this
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
Agreement or any breach by CUSTOMER of any of its representations, warranties or covenants contained herein; (iv) any Claim that the marketing, distribution or sale of the PRODUCT and/or any pharmaceutical compositions containing the PRODUCT violate the Intellectual Property Rights of any third party, except to the extent such Claim is subject to Section 13.2(v) below ; or (v) any Claim that the use of CUSTOMER IP for manufacture of the PRODUCT and/or any pharmaceutical compositions containing the PRODUCT violate the Intellectual Property Rights of any third party.
13.2 Indemnification by POLYPEPTIDE . POLYPEPTIDE shall defend, indemnify and hold harmless FOREST and IRONWOOD, and each of their respective directors, officers, employees and agents (collectively, the “ CUSTOMER Indemnitees ”) from and against any Liability paid or payable by the CUSTOMER Indemnitees in connection with any Claims to the extent that any such Claims or Liabilities arise out of or result from (i) failure of any PRODUCT to meet Specifications and POLYPEPTIDE Release Documents; (ii) the failure by POLYPEPTIDE to comply with Applicable Laws with respect to the manufacture of the PRODUCT; (iii) any negligent or wilful act or omission by POLYPEPTIDE, including without limitation negligence in manufacturing PRODUCT in accordance to Specifications and Manufacturing Warranties; (iv) any breach by POLYPEPTIDE of any of its representations, warranties or covenants contained herein, or (v) any Claim that the manufacture of PRODUCT by POLYPEPTIDE infringes the Intellectual Property Rights of any third party (except to the extent such Claim is subject to subsection (v) of Section 13.1).
13.3 Prompt Notice Required . No claim for indemnification hereunder shall be valid unless notice of the matter which may give rise to such claim is given in writing by the indemnitee (the “ Indemnitee ”) to the party against whom indemnification may be sought (the “ Indemnitor ”) as soon as reasonably practicable after such Indemnitee becomes aware of such claim; provided, however, that the failure to notify the Indemnitor shall not relieve it from any liability that it may have to the Indemnitee otherwise unless the Indemnitor demonstrates that the defense of the underlying Claim has been materially prejudiced by such failure to provide timely notice. Such notice shall request indemnification and describe the Liability and Claim giving rise to the request for indemnification, and provide relevant details thereof. The Indemnitor shall notify the Indemnitee no later than
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
thirty (30) days from such notice of its intention to assume the defense of any such Claim. If the Indemnitor fails to give Indemnitee notice of its intention to defend any such Claim as provided in this Section 13.3, the Indemnitee involved shall have the right to assume the defense thereof with counsel of its choice, at the Indemnitor’s expense, and defend, settle or otherwise dispose of such Claim with the consent of the Indemnitor, not to be unreasonably withheld or delayed.
13.4 Indemnitor May Settle . Subject to the terms of this Section 13.4, the Indemnitor shall at its expense, have the right to settle and defend, through counsel reasonably satisfactory to the Indemnitee, any Claim or Liability which is or may be brought in connection with all matters for which indemnification is provided hereunder. In such event the Indemnitee of the Claim or Liability in question and any successor thereto shall permit Indemnitor’s counsel and independent auditors, to the extent relevant, full and free access to its books and records and otherwise fully cooperate with the Indemnitor in connection with such Claim or Liability; provided, however, that (i) the Indemnitee shall have the right fully to participate in such defense at its own expense; (ii) the Indemnitor’s counsel and independent auditors shall not disclose any Confidential Information of the Indemnitee to the Indemnitor without the Indemnitee’s consent; (iii) access shall only be given to the books and records that are relevant to the Claim or Liability at issue. The defense by the Indemnitor of any such actions shall not be deemed a waiver by the Indemnitor of its right to assert a claim with respect to the responsibility of the Indemnitor with respect to the Claim or Liability in question. The Indemnitor shall have the right to settle or compromise any Claim against the Indemnitee without the consent of the Indemnitee provided that the terms thereof: (a) provide for the unconditional release of the Indemnitee; (b) require the payment of compensatory monetary damages by Indemnitor only; and (c) expressly state that neither the fact of settlement nor the settlement agreement shall constitute, or be construed or interpreted as, an admission by the Indemnitee of any issue, fact, allegation or any other aspect of the Claim being settled. In all other cases, the Indemnitee and Indemnitor must agree to enter into any proposed settlement, such agreement not be unreasonably withheld. No Indemnitee shall pay or voluntarily permit the determination of any Liability which is subject to any such Claim while the Indemnitor is negotiating the settlement thereof or contesting the matter, except with the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
13.5 Assistance . Each party shall provide all information in its possession and reasonable assistance to another party as necessary to enable another party to defend any Claim. The Indemnitee shall provide reasonable cooperation to the Indemnitor in defense of any Claim or Liability, including, but not limited to, affording complete access to all relevant records. Nothing herein shall prevent the Indemnitee from retaining counsel of its choice, at such party’s expense, to monitor the defense, trial, or settlement of this matter, and the Indemnitor and its counsel shall reasonably cooperate with such Indemnitee counsel.
ARTICLE 14
INSURANCE
14.1 Amounts . Each party shall maintain during the Term insurance in such amounts and against such risks as is customary by companies engaged in the same or similar business and similarly located, and shall, upon request, furnish evidence of such insurance.
14.2 POLYPEPTIDE Insurance . Without prejudice to any rights or remedies CUSTOMER may have under this Agreement or otherwise at law generally, POLYPEPTIDE shall (at POLYPEPTIDE’s sole cost and expense) maintain in full force and effect, during the Term of this Agreement and for a period of [**] years after the expiration or termination hereof, adequate commercial general liability insurance, including product liability insurance, covering the risks and Liabilities arising out of any breach by POLYPEPTIDE of its obligations under this Agreement and POLYPEPTIDE’s indemnification obligations hereunder. Such insurance shall be written by a reputable insurance company with an A.M. Best rating of “A,” and shall list FOREST and IRONWOOD as additional named insureds thereunder, and shall require [**] days written notice to be given to each of FOREST and IRONWOOD prior to any cancellation or material change thereof. The limits of such insurance shall not be less than [**] per occurrence with an aggregate of [**] for personal injury, including death, and property damage. Upon request, POLYPEPTIDE shall provide FOREST and/or IRONWOOD with a certificate of insurance evidencing the same.
14.3 FOREST and IRONWOOD Insurance . Without prejudice to any rights or remedies POLYPEPTIDE may have under this Agreement or otherwise at law generally, each of FOREST and IRONWOOD shall (at their own sole cost and
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
expense) maintain in full force and effect, during the Term of this Agreement and for a period of [**] years after the expiration or termination hereof, adequate commercial general liability insurance, including product liability insurance, covering the risks and Liabilities that may arise from its breach of its obligations under this Agreement and from its indemnification obligations to POLYPEPTIDE hereunder. Such insurance shall be written by a reputable insurance company with an A.M. Best rating of “A,” and shall list POLYPEPTIDE as an additional named insured thereunder, and shall require [**] days written notice to be given to POLYPEPTIDE prior to any cancellation or material change thereof. The limits of such insurance shall not be less than [**] per occurrence with an aggregate of [**] for personal injury, including death, and property damage. Upon request, each of FOREST and IRONWOOD shall provide POLYPEPTIDE with a certificate of insurance evidencing the same.
ARTICLE 15
GENERAL PROVISIONS
15.1 Force Majeure . Failure of any party to perform its obligations under this Agreement shall not subject such Party to any liability or place them in breach of any term or condition of this Agreement to the other party if such failure is due to any cause beyond the reasonable control of such non-performing party (“ Force Majeure ”), unless conclusive evidence to the contrary is provided. Causes of non-performance constituting Force Majeure shall include, without limitation, acts of God, fire, explosion, flood, drought, war, riot, sabotage, embargo, strikes or other labor trouble, interruption of or delay in transportation, a national health emergency or compliance with any order or regulation of any government entity acting with color of right. The party affected shall promptly notify the other party of the condition constituting force majeure as defined herein and shall exert commercially reasonable efforts to eliminate, cure and overcome any such causes and to resume performance of its obligations with all possible speed; provided that nothing herein shall obligate a party to settle on terms unsatisfactory to such party any strike, lockout or other labor difficulty, any investigation or other proceeding by any public authority or any litigation by any third party. If POLYPEPTIDE experiences a condition constituting force majeure as defined herein for more than [**] consecutive days, then (a) CUSTOMER may request that the parties consult with each other to negotiate a mutually
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
satisfactory resolution to the problem, if practicable, and (b) if after such consultations POLYPEPTIDE continues to experience a condition constituting force majeure as defined herein for more than an additional [**] consecutive days, then an Alternative Supply Trigger shall be deemed to have occurred under Section 7.2(v), and Customer may purchase PRODUCT from a third party (without regard to the Minimum Requirement) and cancel any unfulfilled Firm Purchase Orders. If such force majeure continues for more than [**] consecutive days, then FOREST and IRONWOOD, together, but not separately, may terminate this Agreement.
15.2 Assignment . No party shall, without the prior written consent (not to be unreasonably withheld or delayed) of the other parties, assign or transfer this Agreement to any person or entity, in whole or in part. In addition, POLYPEPTIDE agrees that it shall not subcontract or delegate any of its obligations hereunder without the prior written consent of FOREST and IRONWOOD, which shall not be unreasonably withheld. Notwithstanding the foregoing, (a) a party may, without such consent, assign this Agreement (or any of its rights or obligations hereunder) to an Affiliate of such party; provided that no assignment to an Affiliate shall relieve any party of responsibility for the performance of its obligations hereunder; (b) each of FOREST, IRONWOOD and POLYPEPTIDE may assign this Agreement without the prior written consent of another party to any successor in connection with a merger or acquisition by such third party of a controlling interest in the equity securities, or a substantial portion of the assets to which this Agreement relates, of FOREST, IRONWOOD or POLYPEPTIDE, as the case may be, provided (x) in such case, that the successor or assignee assumes all of the assignee’s obligations under this Agreement and (y) in the event of assignment by POLYPEPTIDE under this subsection 15.2(b), that unless prior consent for the assignment has been obtained from FOREST and IRONWOOD, then FOREST and IRONWOOD, together, but not separately, may terminate this Agreement by providing [**] months written notice to POLYPEPTIDE or its successor if they have reasonable objective grounds to conclude that the assignee’s performance under this Agreement will not be substantially similar to that of POLYPEPTIDE. Upon POLYPEPTIDE’s request, CUSTOMER agrees to provide and discuss in good faith such objective grounds. All of the terms and provisions of this Agreement shall be binding
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns.
15.3 Relationship with CUSTOMER. Following the Effective Date, FOREST and IRONWOOD shall provide POLYPEPTIDE with a written notice signed by each of FOREST and IRONWOOD which shall identify the party that will be providing POLYPEPTIDE with all forecasts and orders required or permitted to be furnished hereunder. POLYPEPTIDE shall be entitled to rely upon such written notice until it receives a written notice containing contrary instructions signed by both FOREST and IRONWOOD.
15.4 Entire Agreement . This Agreement, together with the Quality Agreement, shall constitute the entire Agreement between the parties hereto and shall supersede any other agreements, whether oral or written, express or implied, as they pertain to the subject matter of this Agreement, which generally pertains to the commercial supply of PRODUCT.
15.5 Quality Agreement . The parties shall negotiate in good faith the Quality Agreement and shall execute the Quality Agreement no later than ninety (90) days following the Effective Date. To the extent there is any conflict between the provisions of the Quality Agreement and this Agreement, the provisions of this Agreement shall apply.
15.6 Independent Relationship . Nothing herein contained shall be deemed to create an employment, agency, joint venture or partnership relationship between the parties hereto or any of their agents or employees, or any other legal arrangement that would impose liability upon one party for the act or failure to act of another party. No party shall have any power to enter into any contracts or commitments or to incur any liabilities in the name of, or on behalf of, the another party, or to bind another party in any respect whatsoever.
15.7 Notice . All notices and other communications required or permitted to be given or made pursuant to this Agreement shall be in writing signed by the sender and shall be deemed duly given (a) on the date delivered, if personally delivered, (b) on the date sent by telecopier with automatic confirmation by the transmitting machine showing the proper number of pages were transmitted without error, (c) on the business day after being sent by Federal Express or another recognized
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
overnight mail service which utilizes a written form of receipt for next day or next business day delivery, or (d) two (2) business days after mailing, if mailed by United States postage-prepaid certified or registered mail, return receipt requested, in each case addressed to the applicable party at the address set forth below; provided that a party may change its address for receiving notice by the proper giving of notice hereunder:
If to IRONWOOD:
Ironwood Pharmaceuticals, Inc.
320 Bent Street
Cambridge, MA 02141
Attn: Chief Operating Officer
Fax: 617.494.0480
With a copy to:
Ironwood Pharmaceuticals, Inc.
320 Bent Street
Cambridge, MA 02141
Attn: General Counsel
Fax: 617.494.0480
If to FOREST:
Forest Laboratories, Inc.
909 Third Avenue
New York, New York 10022
Attn: General Counsel
Fax: [**]
If to POLYPEPTIDE
PolyPeptide Laboratories, Inc.
365 Maple Avenue
Torrance, CA 90503
Attn: Chief Operating Officer
Fax: (310) 782-3645
With a copy to:
PolyPeptide Laboratories (SWEDEN) AB
PO Box 30089
SE20061 Limhamn
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
Sweden
Attn: Managing Director
Fax:+46 40 36 63 85
Notices to IRONWOOD or FOREST shall not be deemed effective unless and until a copy of such notice is furnished to both such parties.
15.8 Waiver . Any delay or failure in enforcing a party’s rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such party’s rights to the future enforcement of its rights under this Agreement, nor operate to bar the exercise or enforcement thereof at any time or times thereafter, excepting only as to an express written and signed waiver as to a particular matter for a particular period of time.
15.9 Headings . Section headings contained in this Agreement are included for convenience only and form no part of the agreement between the parties.
15.10 Severability . If any provision of this Agreement or the application of any such provision to any person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provisions hereof. The parties shall consult and use good faith efforts to agree upon a valid and enforceable provision, which shall be a reasonable substitute for such invalid provision in light of the intent of this Agreement.
15.11 Counterparts . This Agreement may be executed in any number of separate counterparts, each of which shall be deemed to be an original, but which together shall constitute one and the same instrument. Facsimile or telecopy versions of manual signatures of this Agreement shall be considered original manual signatures.
15.12 Governing Law . This Agreement and any and all matters arising directly or indirectly herefrom shall be governed by and construed and enforced in accordance with the internal laws of the [**] applicable to agreements made and to be performed entirely in such state, without giving effect to the conflict of law principles thereof which would dictate that the laws of another jurisdiction would apply. The parties expressly agree that the United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement or
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
any party’s performance hereunder. Matters of inventorship shall be determined in accordance with the principles of United States patent law.
15.13 Informal Dispute Resolution . Unless otherwise expressly provided for herein, any claim or controversy between the parties arising out of or relating to the execution, interpretation and performance of this Agreement (including the validity, scope and enforceability of this provision) shall be identified in writing and presented to the other parties. Within fourteen (14) days after delivery of such notice of dispute, the a senior business officer of each party shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute in good faith. All reasonable requests for information made by one party to the others shall be honored. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. If such Executive Officers cannot resolve such dispute within fourteen (14) days after such meeting, then each party reserves its right to any and all remedies available under law or equity with respect to any other dispute.
15.14 Arbitration .
(a) If any claim or controversy is not resolved pursuant to Section 15.13, then such claim or controversy shall be resolved by arbitration in accordance with the rules of the American Arbitration Association. There shall be three conflict-free, unbiased arbitrators, at least one of which shall be knowledgeable in peptide chemistry and the manufacture thereof, and at least one of which shall be knowledgeable in FDA requirements for the manufacture of active pharmaceutical ingredients (who shall be separate from the individual knowledgeable in peptide chemistry), and all of which shall have significant experience relating to the pharmaceutical/ biotechnology industry relevant to the matters being arbitrated.
(b) A demand for arbitration must be filed with the American Arbitration Association within one year of the date the claim or controversy arises. The arbitration hearing shall be held as soon as practicable but in any event no later than three (3) months after the initial demand for arbitration is filed with the American Arbitration Association.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
(c) The arbitration hearing shall be held in [**] .
15.15 Injunctive Relief . Any party may seek immediate injunctive or other interim equitable relief as necessary to Agreement, but no such action for such relief shall waive the arbitration provisions set forth in Section 15.14 or act to remove or otherwise prevent the arbitration of any disputes under this Agreement as contemplated by Section 15.14.
15.16 Amendments . This Agreement may not be amended except by an instrument in writing signed on behalf of each of the Parties.
15.17 Further Actions and Documents . Each Party agrees to execute, acknowledge and deliver all such further instruments, and to do all such further acts, as may be reasonably necessary or appropriate to carry out the intent and purposes of this Agreement.
15.18 Survival . The parties’ respective rights and obligations under the following Sections and Articles (and all associated definitions) shall survive the termination or expiration of this Agreement: Articles 1, 6, 10, 11, 12, 13, 14, 15 and Section 2.2.
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
IN WITNESS WHEREOF, the parties have executed this Commercial Supply Agreement as of the Effective Date.
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PolyPeptide Laboratories, Inc. |
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By: |
/s/ Jane Salik |
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Name: |
Jane Salik |
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Title: |
CEO |
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PolyPeptide Laboratories (SWEDEN) AB |
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By: |
/s/ Alain Scarso |
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Name: |
Alain Scarso |
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Title: |
Managing Director |
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Ironwood Pharmaceuticals, Inc. |
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By: |
/s/ Michael J. Higgins |
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Name: |
Michael J. Higgins |
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Title: |
COO |
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Forest Laboratories, Inc. |
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By: |
/s/ Lawrence Olanoff |
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Name: |
Lawrence Olanoff |
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Title: |
President and Chief Operating Officer |
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[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
APPENDIX A
PRODUCT SPECIFICATIONS
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Attributes |
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Analytical Procedure |
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Specifications |
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(Test ID) |
PPL Torrance |
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PPL Sweden |
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[**] |
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[**] [**] |
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[**] |
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[**] |
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[**] [**] |
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[**] |
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Identity: |
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[**] |
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[**] [**] |
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[**] to [**] |
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[**] |
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[**]
[**] |
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[**] to [**] [**] to [**] [**] to [**] [**] to [**] [**] to [**] [**] to [**] [**] to [**] [**] to [**] |
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[**] |
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[**] [**] |
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[**] |
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Assay: |
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[**] |
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[**] [**] |
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[**] to [**] |
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[**] |
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[**] [**] |
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[**] to [**] |
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[**] |
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[**] [**] |
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[**] to [**] |
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[**] |
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[**] [**] |
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[**] |
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[**] |
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[**] |
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[**] |
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[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
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Attributes |
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Analytical Procedure |
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Specifications |
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(Test ID) |
PPL Torrance |
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PPL Sweden |
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[**] |
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[**] |
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[**] [**] |
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[**] |
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[**] |
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[**] [**] |
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[**] |
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[**] [**] |
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[**] |
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[**] [**] |
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[**] [**] |
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[**] [**] |
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[**] [**] |
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[**] |
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[**] [**] |
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[**] to [**] |
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[**] |
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[**] [**] |
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[**] |
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Microbiological Control |
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[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
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Attributes |
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Analytical Procedure |
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Specifications |
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(Test ID) |
PPL Torrance |
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PPL Sweden |
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[**] |
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[**] [**] |
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[**] [**] |
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[**]
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
APPENDIX B
ILLUSTRATION OF ADJUSTMENTS TO MINIMUM PURCHASE OBLIGATIONS AND THE
IMPACT ON THE ROLLING FORECAST
[**]
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
APPENDIX C
PRICING FOR VALIDATION BATCHES
The following pricing schedule is for the validation package for Malmo and Torrance. The commercial batch size for Malmo will be at [**] (gross weigh) and Torrance will be at [**] (gross weigh). The prices below include a mutually agreed stability program for each batch. The minimum requirements for such stability program are set forth on the stability protocol attached as Schedule 1 to this Appendix C.
Malmo
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Process validation 1 |
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[**] |
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[**] per gram* |
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Process validation 2 |
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[**] |
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[**] per gram* |
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Process validation 3 |
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[**] |
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[**] per gram* |
Torrance
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Pre-validation |
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[**] |
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[**] per gram * |
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Process validation 1 |
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[**] |
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[**] per gram * |
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Process validation 2 |
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[**] |
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[**] per gram * |
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Process validation 3 |
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[**] |
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[**] per gram * |
*Batch sizes listed above are based on gross weight but all fees shall be calculated on the basis of actual Linaclotide content.
Any excess material generated from production of the pre-validation and validation batches will be available for purchase by CUSTOMER (at CUSTOMER’S sole discretion) at [**] per gram (net linaclotide).
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
SCHEDULE 1 TO APPENDIX C
STABILITY PROTOCOL
[**]
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
APPENDIX D
PRODUCT PRICING
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Annual Quantity
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Price per gram (net
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[**] kg |
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[**] |
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[**] kg |
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[**] |
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[**] kg |
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[**] |
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[**] kg |
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[**] |
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[**] kg |
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[**] |
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[**] kg |
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[**] |
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[**] kg |
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[**] |
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[**] kg |
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[**] |
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[**] kg |
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[**] |
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[**] kg |
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[**] |
[**] = Portions of this exhibit have been omitted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.
EXHIBIT 31.1
CERTIFICATION PURSUANT
TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
I, Peter M. Hecht, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Ironwood Pharmaceuticals, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 10, 2010
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/s/ PETER M. HECHT |
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Peter M. Hecht, Ph.D. |
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Chief Executive Officer |
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EXHIBIT 31.2
CERTIFICATION PURSUANT
TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
I, Michael J. Higgins, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Ironwood Pharmaceuticals, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 10, 2010
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/s/ MICHAEL J. HIGGINS |
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Michael J. Higgins |
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Chief Financial Officer |
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ironwood Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter M. Hecht, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ PETER M. HECHT |
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Peter M. Hecht, Ph.D. |
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Chief Executive Officer |
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August 10, 2010 |
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A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ironwood Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael J. Higgins, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ MICHAEL J. HIGGINS |
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Michael J. Higgins |
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Chief Financial Officer |
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August 10, 2010 |
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A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.