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Edited Transcript of IRWD earnings conference call or presentation 13-Feb-19 1:30pm GMT

Q4 2018 Ironwood Pharmaceuticals Inc Earnings Call

Cambridge Feb 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Ironwood Pharmaceuticals Inc earnings conference call or presentation Wednesday, February 13, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher I. Wright

Ironwood Pharmaceuticals, Inc. - Chief Development Officer & Senior VP of Global Development

* Gina R. Consylman

Ironwood Pharmaceuticals, Inc. - CFO, Senior VP & Treasurer

* Mark Mallon

Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser

* Meredith Kaya

Ironwood Pharmaceuticals, Inc. - VP of IR & Corporate Communications

* Michael Shetzline

Ironwood Pharmaceuticals, Inc. - Chief Medical Officer, Senior VP & Head of Drug Development

* Peter M. Hecht

Ironwood Pharmaceuticals, Inc. - Co-Founder, CEO & Director

* Thomas A. McCourt

Ironwood Pharmaceuticals, Inc. - President

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Conference Call Participants

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* Boris Peaker

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* David Neil Lebowitz

Morgan Stanley, Research Division - VP

* Edward D. Marks

H.C. Wainwright & Co, LLC, Research Division - Research Analyst

* Eric William Joseph

JP Morgan Chase & Co, Research Division - Analyst

* Irina Rivkind Koffler

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Analyst

* Jason Eron Zemansky

Barclays Bank PLC, Research Division - Research Analyst

* Patrick Ralph Trucchio

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Timothy Chiang

BTIG, LLC, Research Division - MD and Specialty Pharmaceutical Research Analyst

* Umer Raffat

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Analyst of Equity Research

* Ying Huang

BofA Merrill Lynch, Research Division - Director in Equity Research

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Presentation

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Operator [1]

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Good morning. My name is Emily and I will be your conference operator today. At this time, I would like to welcome everyone to the Ironwood Pharmaceuticals Fourth Quarter and Full Year 2018 Investor Update. (Operator Instructions)

Thank you, Meredith Kaya, you may begin your conference.

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Meredith Kaya, Ironwood Pharmaceuticals, Inc. - VP of IR & Corporate Communications [2]

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Good morning, and thanks for joining us for our fourth quarter and full year 2018 investor update. Our press release crossed the wire earlier this morning and can be found on our website, www.ironwoodpharma.com.

Today's call and accompanying slides include forward-looking statements. Such statements involve risks and uncertainties that may cause actual results to differ materially.

A discussion of these statements and risk factors is available on the current safe harbor statement slide as well as under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended September 30, 2018, and in our future SEC filings.

All forward-looking statements speak as of the date of the presentation, and we undertake no obligation to update such statements. Also included are non-GAAP financial measures, which should be considered only as supplement to and not a substitute for or superior to GAAP measures. For a reconciliation, please refer to the table at the end of our press release.

During today's call, Peter Hecht will begin with an overview and an update on the company's planned separation; Mark Mallon will then provide comments on new Ironwood; Peter will follow to discuss Cyclerion; and Gina Consylman will close by reviewing 2018 financial results and financial guidance.

We have the management teams for both Ironwood and Cyclerion available for the question-and-answer portion of the call. We will be referring to slides available via the webcast. For those of you dialing in, please go to the Events section of our website to access the webcast slides.

With that, I'll turn it over to Peter.

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Peter M. Hecht, Ironwood Pharmaceuticals, Inc. - Co-Founder, CEO & Director [3]

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Thanks, Meredith, and thank you all for joining us this morning. 2018 was a momentous year for Ironwood. We advanced our core business and we announced and worked feverishly to prepare for the upcoming planned separation. We're now in the cusp of launching 2 independent publicly traded companies, each poised to deliver important medicines to patients and generate great value for shareholders. We're going to take you through the operating highlights in a moment, but first I want to comment on the launch of the 2 new companies.

Over the past several months, we made important progress toward setting both companies up for success. We recently named the CEOs and the leadership teams of both companies and the board of directors. We filed our first public Form 10 registration statement, and we've been engaging with a great group of current and new potential investors to participate in the financing, and with Cyclerion, intends to raise between $150 million and $200 million, which should provide Cyclerion with at least 8 quarters of runway. We plan to update you with additional details on this financing soon.

Over the past 20 years, we brought LINZESS to million of patients around the world, and our drug-hunting team has generated 7 additional compounds in various stages of development that we believe have tremendous potential to change patients' lives. We're proud of the work that the team here has done to get to this point. We're very excited about the potential for both new companies.

With that, I'll turn it over to my friend and colleague, Mark Mallon, who will be Ironwood CEO upon separation.

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [4]

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Thanks, Peter. Well, today marks 40 days since I joined Ironwood, and I have to say I'm even more excited by the opportunities I see for the company to become a leading GI health care franchise. We have aligned on a clear set of priorities: grow LINZESS; accelerate our GI development portfolio; and begin generating cash and profits.

In its seventh year since launch, LINZESS continues to be the branded prescription market leader in its class, delivering strong top and bottom line growth. 2018 revenues grew 9% year-over-year to $761 million and total brand profitability grew nearly 20% to $445 million. With millions of patients who can still benefit from LINZESS, I believe there's much more we can do with this brand.

First, we are seeking to drive volume by capturing patients who were previously on prescription MiraLAX, which was withdrawn from the market in November last year. And as you can see on the left-hand of this slide, we saw a clear trend break in LINZESS prescription growth at the end of 2018, with acceleration continuing in the first 6 weeks of 2019. New prescription growth is up 14% so far in 2019 as compared to 2018 year-on-year. And in comparison, to this time last year, new prescription growth was actually flat year-over-year. So we're very encouraged by this start.

Second, we expect data midyear from our linaclotide Phase III beta trial that is exploring the effect of linaclotide on abdominal systems, including pain, bloating and discomfort. If these data are positive, we intend to begin communicating them to patients as soon as possible.

Now turning to our second priority, our late-stage pipeline. We have 2 promising and highly differentiated GI pipeline candidates: 3718 for persistent GERD and 7246 for abdominal pain associated with IBS-D. The 3718 Phase III [staff] trials continue to enroll well, with data expected in the second half of 2020. In these trials, we are evaluating the effect of 3718 on 2 of the most bothersome symptoms of persistent GERD: regurgitation and heartburn. The Phase II data with 3718 showed significant improvements in both symptoms. Its effect on heartburn in this trial was on the order of what was shown with PPIs over H2s. And with an estimated 10 million patients suffering from persistent GERD in the U.S., there is a clear opportunity for 3718 in this category.

With 7246, the extended release, formerly linaclotide, we and Allergan are preparing to initiate the Phase IIb trial in the second quarter. There are approximately 16 million people suffering from IBS-D in the U.S., with the majority of them suffering from frequent and severe abdominal pain. If this trial is successful, we will then have a product that we can evaluate across a full range of lower GI diseases with abdominal pain as a predominant symptom.

Shifting now to our third priority. We are taking important steps to become a profitable cash-generating company. In 2019, we expect to be profitable from continuing operations on a non-GAAP basis, which we plan -- and we plan to provide more guidance on this following completion of the separation. Our ability to begin delivering on profitability is dependent in large part on driving revenue growth and expanding margins. And as we transition to becoming profitable, we expect to be better positioned to explore ways to strengthen our balance sheet and lower our overall cost of capital.

Additionally, we are taking actions to create a more effective and efficient operation. We announced this morning our decision to reduce our nonsales workforce by approximately 20%. It was a difficult decision, but one that after significant deliberation, we felt was necessary to make for the future of Ironwood, its patients and its shareholders.

In summary, we have 3 strong assets, a fantastic team and the capabilities we need to create tremendous value. The first order of business is to strengthen our core. We must make sure we are doing everything we can to maximize LINZESS, deliver on our promising late-stage development portfolio and post-separation to begin generating cash and profits.

With that, I'll turn this back to you, Peter, about all the exciting opportunities at Cyclerion.

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Peter M. Hecht, Ironwood Pharmaceuticals, Inc. - Co-Founder, CEO & Director [5]

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Thanks, Mark. I'm super excited about the potential that Cyclerion has to generate value for patients and for shareholders. At the separation, Cyclerion is going to be a turbocharged startup, addressing 5 differentiated programs for serious and orphan diseases. We believe the potential for unlocking the full power of this sGC pathway comes from tailoring distinct sGC stimulators to tissues of greatest relevance to the diseases that they intend to treat, and our portfolio is designed to do just that.

We expect 4 important pipeline catalysts in 2018, including readouts from 3 Phase II trials. Olinciguat is a vascular once-a-day sGC stimulator that's in Phase II development for the treatment of sickle cell disease. And praliciguat, our systemic sGC stimulator, is currently being studied in 2 Phase II studies: one each in diabetic nephropathy and heart failure with preserved ejection fraction.

We just started a Phase I trial with 6463, the first CNS-penetrant sGC simulator to enter clinical trials. Because 6463 readily crosses the blood-brain barrier, we have an opportunity to expand the utility of sGC pharmacology into the treatment of serious neurodegenerative diseases. We believe that nitric oxide plays a critical role in a number of CNS diseases. And preclinical research demonstrates really exciting activity for 6463, including an increase in cerebral blood flow, improved neuronal health and function, reduce markers of neuroinflammation and enhanced cognition.

The Phase I study is designed to provide safety, tolerability and PK data on single and multiple ascending doses of IW-6463. And importantly, we have the opportunity to explore translation of some of our preclinical results into the clinic with regard to CNS activity.

At Cyclerion, we're going to have a very strong leadership team with great experience in prosecuting both the pharmacology of nitric oxide in the SEC pathway and in allocating capital in R&D stage companies. The whole team is really fired up to launch, shape and define this new company.

With that, I'm going to turn it over to Gina to discuss our 2018 financial performance and 2019 guidance.

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Gina R. Consylman, Ironwood Pharmaceuticals, Inc. - CFO, Senior VP & Treasurer [6]

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Thanks, Peter, and good morning, everyone. Over the next few minutes, I will be detailing our fourth quarter and full year financial highlights, performance against 2018 guidance and expected 2019 financial guidance. Please refer to our press release for the detailed financial information.

Ironwood revenues increased 39% year-over-year in the fourth quarter to $131 million and grew 16% in 2018 to $347 million. As Peter mentioned, revenues in 2018 were driven primarily by LINZESS net sales growth and margin expansion and higher API sales to Astellas in Japan. LINZESS U.S. net sales were $205 million in the fourth quarter and $761 million for the full year 2018.

Total commercial profit in the fourth quarter and full year 2018 was $146 million and $503 million, ending the year with a commercial margin of 66%. Linaclotide API sales were $46 million during the fourth quarter and $70 million in full year 2018. API sales were higher in the fourth quarter compared to previous quarters, as Astellas continued to build inventory to support its launch. We expect API sales to continue to fluctuate quarterly.

Total operating expenses for the fourth quarter were $125 million, including $44 million in R&D and $58 million in SG&A. For the full year 2018, total operating expenses were $586 million, including $167 million in R&D and $241 million in SG&A. A reminder that full year 2018 operating expenses include the $150 million noncash impairment of intangible assets recorded in the third quarter related to our lesinurad license agreement with AstraZeneca and $23 million in separation expenses.

We ended 2018 with $173 million in cash and investments. We demonstrated strong financial performance in 2018, meeting all of our financial guidance, as you can see on this slide.

Regarding 2019, new Ironwood expects the following: Total revenues to be in the range of $370 million to $390 million, including revenue from both LINZESS commercial contribution and API sales to Astellas; net interest expense of approximately $35 million; total separation cost to be in the range of $30 million to $40 million; and restructuring expenses related to the reduction in force announced today of approximately $3 million to $4 million.

Once Ironwood separates from Cyclerion, we expect the costs directly associated with Cyclerion to be reported as discontinued operations and the results of the ongoing Ironwood business to be reported as continuing operations. As Mark mentioned, we continue to expect Ironwood to be profitable from continuing operations in 2019 on a non-GAAP basis and plan to provide specific guidance at an investor update following the completion of our separation. We do anticipate incurring a net loss prior to the separation.

In summary, 2019 is an important year for Ironwood. We are on the cusp of separating these 2 very exciting companies, each with distinct strategies, promising portfolios and experienced leadership teams that position them both to become industry-leading business creating value -- businesses creating value for patients and shareholders alike.

With that, I will turn the call over to the operator to begin the Q&A portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of David Lebowitz from Morgan Stanley.

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David Neil Lebowitz, Morgan Stanley, Research Division - VP [2]

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I have a question on the prescriptions. I guess, are there still a sizable number of patients transitioning to 90-day prescriptions or has this move generally slowed?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [3]

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Tom?

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Thomas A. McCourt, Ironwood Pharmaceuticals, Inc. - President [4]

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Sure, David. I think, one, it's been a nice opportunity that we've seen some near-term lift in. I think the thing -- there's 2 components of this. One, certainly, the patients that are no longer able to refill their generic prescription paid laxatives, which are up for grabs and we're clearly capturing a portion of those. But the other piece that we're seeing in the marketplace in markets in which it has eroded faster, is our growth is actually looks even more encouraging. So the fact that it's no longer a prescription option and the physician is choosing to pick prescription therapy, LINZESS is clearly a very attractive choice. So we see certainty 2 opportunities. One, with regard to the patients kind of up for grabs in the near term, but I think longer term, when a physician is choosing a prescription option for patients in need, LINZESS is looking even more preferable. And we still have substantial opportunities to move people to 90-day prescriptions. The majority of prescriptions are not yet on 90, so still lots of room to grow the brand that way.

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David Neil Lebowitz, Morgan Stanley, Research Division - VP [5]

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One more question. On IW-3718, is it possible to gain approval for that based on the regurgitation data alone? Or would some sort of reduction in pain or being a heartburn responder also be necessary?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [6]

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So the primary endpoint on those studies is reduction in frequent heartburn. So that will be the basis of the approval of the drug. Regurgitation is an important secondary endpoint, which is in the statistical plan, and so we're expecting to see a significant improvement in that. And with a positive on the primary endpoint, we'll be able to communicate that to physicians.

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Operator [7]

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Our next question comes from the line of Geoff Meacham from Barclays.

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Jason Eron Zemansky, Barclays Bank PLC, Research Division - Research Analyst [8]

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This is Jason on for Geoff. Just a quick question on the number of unique patients who've filled LINZESS prescriptions. It looks like the number was relatively flat quarter-over-quarter at 2.5 million. Just curious, with regards to the number, was there any -- some slow in uptake or something that kind of kept that number down? And then moving forward, you've talked at length at the opportunity of about 30 million to 40 million patients. What does this number kind of mean going forward? And when would you look for that overall number of unique patients to start to accelerate?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [9]

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Let me give it back to Tom. Thank you.

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Thomas A. McCourt, Ironwood Pharmaceuticals, Inc. - President [10]

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Yes, let me break it up into a couple of pieces. First, with regard to year-over-year new patients, one thing to keep in mind is the size of the prescription is having a significant impact on the overall total Rxs or new to brand -- or excuse me, total Rx count, particularly new Rx count. So as the size of the prescription is getting bigger, obviously, it suppresses somewhat the growth of the overall prescriptions. What we are seeing is a very dramatic improve -- increase in new-to-brand patients as we've seen really starting in December, looks like it's carrying over into January. So it certainly looks like we're seeing an acceleration over the last couple of months with regard to new-to-brand patients. I think as far as the growth opportunities as we look forward, as Mark mentioned earlier, I think this is really all about driving demand, finding new patients that we can motivate, that we haven't been able to motivate before, which is a real reason why we want to broaden our claim with regard to additional abdominal symptoms. I mean the challenge that we face in the marketplace is most patients don't actually identify with abdominal pain. They identify with bloating and discomfort. So having those claims within our messaging directly to consumers, we think will have a significant upside and certainly accelerate growth. So as I think about where we are right now as the market leader, one, I agree with you, I think there's a tremendous opportunity out in front of us, the level of patient and physician satisfaction is at an industry high and we have really broad payer access and reimbursement. And our core strategy will be to drive demand.

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Operator [11]

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Our next question comes from the line of Boris Peaker from Cowen.

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Boris Peaker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [12]

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I'm just curious on 3718 study. Is there an interim analysis built into the study? Or we have to wait until the end to get any results?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [13]

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I'm going to ask our new Head of R&D, Mike Shetzline, to answer that question. Mike?

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Michael Shetzline, Ironwood Pharmaceuticals, Inc. - Chief Medical Officer, Senior VP & Head of Drug Development [14]

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Yes, thanks. Currently, there is no interim built into this 3718 program. And -- but to your point, that's something we have been discussing back and forth, but that will take a thorough discussion with the agency if we were to do that, but currently there's no interim.

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Boris Peaker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [15]

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Got you. And maybe a new -- just a general strategic question for Ironwood specifically. And you mentioned that, obviously, the goal for the company is to become profitable post the split. I'm just curious, is the goal to maintain profitability for the foreseeable future and grow it? Or you mentioned that you're also looking at acquisitions and if you find something that you think is a fit, would you be willing to take on more expenses and risk and kind of forgo profitability in such scenario?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [16]

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Our goal is clear to grow profits. We -- as I said, our priorities for use of capital are making sure we're leaving no opportunities behind for LINZESS, that we're accelerating and maximizing the possibilities of our pipeline and moving us as quickly as we can to getting positive cash flow and profits. And the plan is to continue to grow profits over time. And we haven't really commented -- at least, I haven't really commented yet on sort of what our view on business development. That's a task for the days ahead for me.

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Boris Peaker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [17]

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Got you. And just my last question. For praliciguat, for the diabetic nephropathy data later this year, what do you need to see to consider that study a success and justify future development?

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Christopher I. Wright, Ironwood Pharmaceuticals, Inc. - Chief Development Officer & Senior VP of Global Development [18]

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So thanks for the question. So we're currently undertaking a Phase II study in diabetic nephropathy with praliciguat. It's 2 doses, randomized controlled trial compared to placebo and we anticipate the data to come in the second half of this year. The primary endpoint is UACR or the amount of urine protein in -- protein in the urine. And we'd expect probably 20% or greater effect to have a go forward there. But as mentioned earlier, this is going to be a program that we'll be partnering. And so it will be -- we'll be looking at the entire package of data with potential partners to decide about how that might move forward.

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Operator [19]

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Our next question comes from the line of Umer Raffat from Evercore ISI.

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Umer Raffat, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Analyst of Equity Research [20]

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I wanted to focus on a couple of things. One, how do you think about Trulance possibly in the hands [balix] portfolio, improving the rebating structure and the commercial dynamic versus LINZESS? And secondly, I know the 3Q press release talked about the $59 million negative adjustment to net sales as communicated to you by your partner. My question was what prompted that new audit in the first place? And perhaps if you could speak to what your auditor was telling you versus what that auditors said and why the difference, et cetera?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [21]

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So I think we'll have Tom answer the first question and then Gina will take the second question. Tom?

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Thomas A. McCourt, Ironwood Pharmaceuticals, Inc. - President [22]

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Yes. I think, again, as a market leader, our focus will continue to be on growing and capturing the market, as well as continuing to differentiate our brand, having this more in situation where we have 3 doses and they have 1. And in order to really increase efficacy, they got to double the volume of products that -- or double the dose, which doubles the price, which isn't an attractive thing to do if you're a payer. And -- but third, we've always said from the very beginning, payer access is critical to success. I think what we have seen previously is a competitor that has been aggressive in pricing with the payer, but has not been able to gain a foothold in the marketplace. I think we're going to have to wait and see what the -- how things transition and how Bausch tends to move their strategy forward. But obviously, we're in a situation where there continues to be a lot of opportunity out there, a lot of growth, but obviously, we're going to continue to see some pricing pressure as we move forward. But I think we'll just have to see how they want to proceed. Gina?

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Gina R. Consylman, Ironwood Pharmaceuticals, Inc. - CFO, Senior VP & Treasurer [23]

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Sure. This is Gina. I can take the second part of the question. I don't really have a new update from what we repeated -- or said earlier in our Q3 update, and that's we do have a standard process where we conduct collaboration audits with our partner on a regular basis. This is not our first one. This is just a standard process of our internal controls because the LINZESS net sales are reported by Allergan and our financial statements are materially impacted by the LINZESS financials or the LINZESS calculation. So we do our standard calculation. This time around, it was a more significant adjustment [than] what we were expecting. But the good news is that we have been working very closely with Allergan and we have aligned on a more frequent reconciliation process, but hopefully it will not even rise the level of an audit adjustment to this magnitude in the future. And that process will begin in 2018.

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Operator [24]

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Our next question comes from the line of Ying Huang from Bank of America Merrill Lynch.

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Ying Huang, BofA Merrill Lynch, Research Division - Director in Equity Research [25]

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The first one is on the API sales. So we understand why you see a big bump, given the launch by Astellas, but how should we think about 2019, considering that AstraZeneca will launch in China? Would that also add to that revenue line? Any color will be helpful on that. And then secondly, I want to ask about the need for capital, given your cash balance as of last quarter. Do you feel there is additional need for the new Ironwood? Or given the non-GAAP profitability, you don't think there's any need to raise additional capital?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [26]

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So thanks for the question. So regarding Japan and guidance for this year from an API sales, I don't think we've actually provided guidance. We're still in -- or Astellas is still in the early phases of the launch. They're going to continue to, I think, do some building of inventory. So the API sales will lead the demand sales and then will continue to be volatility from a quarter-to-quarter basis. But we're encouraged by the demand that we're seeing in Japan and the commitment that Astellas is showing. In terms of China, we're very excited to hear the news that it was approved. There is a process, but that take several months to get sort of final pricing and everything in place for a launch. So I don't -- wouldn't expect to see significant sales in 2019. A very big opportunity, longer term, with 16 million patients potentially being -- have an opportunity -- are suffering from chronic -- from IBS and IBS-C and could potentially -- and have access to health care and could potentially benefit from LINZESS, but that will take a little bit of time to get reimbursement in place and start to build that market.

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Gina R. Consylman, Ironwood Pharmaceuticals, Inc. - CFO, Senior VP & Treasurer [27]

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I just want to add one comment on AstraZeneca, that final launch. The economics of the China arrangement are more similar to the Allergan collaboration arrangement that we have, and we will not be selling API at a significant -- at a mark-up like we do with the Astellas arrangement.

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [28]

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Yes, we don't envision a need at this time to be raising capital because the business is going to be profitable from 2019 and our focus will be making sure that we're generating cash and profit and growing that over time. Of course, opportunities and conditions change, so we'll respond if needed, but that's not in our plans today. That answer your question?

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Ying Huang, BofA Merrill Lynch, Research Division - Director in Equity Research [29]

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Very helpful.

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Operator [30]

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Our next question comes from the line of Eric Joseph from JPMorgan.

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Eric William Joseph, JP Morgan Chase & Co, Research Division - Analyst [31]

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Just wondering how you're thinking about sort of longer-term commercial margins for LINZESS with any incremental investment from marketing to abdominal symptom claims. I guess, specifically how you're thinking about, at this point, the peak commercial margin potential of the product? And on IW-3718, I'm just curious to know what your latest thinking is around the potential for a partnership and whether it's realistic at this point to think about a partnership announcement ahead of these 3 data?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [32]

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So thanks for both questions. So we're excited about the abdominal symptoms claim. I think we have significant investment behind the brand today. I've thoroughly reviewed both the consumer and the sales force investment and I think the order of magnitude is right. But we will stand ready if we see increases -- sorry, there's some noise in the room. Apologies, if you've heard that. But we stand ready if we see increases in promotion response in this that allow us to do more, then we will do more. So basically, we're well positioned to launch ABC -- the ABS new data. We have the right resources in place and we'll monitor it closely. If there's opportunity to do more, we'll do it. In regards to partnership for 3718, I think we're not ready to comment on that at this point. We will be -- we are -- we'll be in discussions of partnering, certainly internationally, but it's premature to give any guidance on that at this point.

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Operator [33]

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Our next question comes from the line of Raghuram Selvaraju from H.C. Wainwright.

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Edward D. Marks, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [34]

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This is Edward Marks on for Ram. I'm just wondering if there are any notable similarities between the Japanese and the Chinese markets and how these might affect the trajectory in China?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [35]

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So this is Mark. There are some pretty significant differences between the 2 markets, primarily in the reimbursement. So in Japan, basically, your pricing and reimbursement is almost from beginning of approval and launch. And so there's a potential to really accelerate and gain sales quickly. In China, although they have made substantial improvements in their reimbursement process and have accelerated, it still takes longer to do that. It's not just about getting reimbursement nationally, you actually also have to get -- ultimately get the reimbursement approval at the province level. And so it takes time to follow that through and roll it out across the provinces. I should say from a disease perspective, IBS-C is in line with what we see in the rest of the world in both Japan and China, so it's a very significant unmet need in patients and so we're excited about both, but the timing of the benefits will be a bit different.

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Edward D. Marks, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [36]

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Okay. And how will the royalties on net sales generated from AstraZeneca be booked in China?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [37]

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Gina?

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Gina R. Consylman, Ironwood Pharmaceuticals, Inc. - CFO, Senior VP & Treasurer [38]

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The arrangement that we have with China is a collaboration. It is very similar to what we have in the U.S. with Allergan, where really the only difference is in the U.S., we share the profits and losses, 50-50. With AstraZeneca in China, the split is 45-55 up into a certain threshold. So assume 45% of the losses will be recorded in our financial statements initially.

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Edward D. Marks, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [39]

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Okay. And then just on the spit in general, can you provide any guidance on some of the R&D budgets you're projecting for both Ironwood and Cyclerion and whether Ironwood will have any future obligations towards Cyclerion in terms of R&D costs, reimbursement milestones, those kind of things?

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Gina R. Consylman, Ironwood Pharmaceuticals, Inc. - CFO, Senior VP & Treasurer [40]

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Sure. I'm going to take the first part of that. So we are -- we have committed to providing additional guidance once we are able to separate. And one of the reasons that we're delaying that guidance and not providing it today is just because of the distinction I was trying to make in my part of the script between continued operations and continuing operations. And while we expect to separate during the first half of 2019, the exact date of that is not solidified at this point and it will change the profitability and the timing and the recording of our financial statements based on that exact split date. So that's why we're not providing the incremental guidance right now. Related to -- on the Cyclerion side on R&D, just to see if we can give you a little bit of color related to projections. You could take a look at our public Form-10 that was filed last month and it would give you an indication of -- at least on a historical basis, what Cyclerion has been spending.

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Operator [41]

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Our next question comes from the line of Patrick Trucchio from Berenberg Capital Markets.

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Patrick Ralph Trucchio, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [42]

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I just had a few follow-ups on 3718. So in the Phase IIb, the primary was the percent change from baseline to week 8 in weekly heartburn severity. And in the Phase III, the primary is the proportion of overall heartburn responders at week 8. So a few questions on this. First, can you remind us why the primary is changed or is different in the Phase III compared to the Phase II? And can you give us some context around your discussions with the agency that led to the change? Secondly, in the Phase II, how was the 45% reduction in weekly heartburn severity determined to be clinically meaningful and is this definition consistent in the Phase III study? And then lastly, in the Phase II study, I believe the differential placebo on the heartburn responder endpoint was nearly 16%. Is that what we should expect next year -- in the second half of next year in the Phase III study?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [43]

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We're going to have Chris answer your question since Mike is even newer than I am. So Chris?

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Christopher I. Wright, Ironwood Pharmaceuticals, Inc. - Chief Development Officer & Senior VP of Global Development [44]

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It's Chris Wright. So I think your first question was around the primary endpoint. So the primary endpoint was discussed with the FDA. And in the process of developing the compound into Phase II, we had discussions about developing a responder criteria for our Phase III study. So until you actually do the study and look at the data, it's uncertain what the proper response criteria would be. And so we utilized our Phase II study to determine that and so -- and that's why we had a different primary endpoint, because we needed to do that study to determine exactly how we would utilize the responder criteria as a primary endpoint for Phase III. In terms of the degree of change and how that -- how we determined that, that was meaningful, so through the course of the study in the Phase II study, we asked a number of different questions and we relate those questions to what the patients consider to be meaningful improvements in their symptoms. And based on that, we're able to define what percent of heartburn change is considered to be clinically meaningful. And we review that with the FDA as well and they agreed with that percent change that we described, the 45% reduction. And then lastly, in terms of the magnitude of the effect, so I would expect we would have a similar magnitude. I mean there are some changes that were made in this study to try to enhance our likelihood of success and enhance the strength of the effect to make sure that we reduce the variance as much as possible. So I think it's -- we're likely to see similar types of effects. We're hopeful that some of the changes that we made will make the study even better powered than the Phase II study.

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [45]

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I think I just like to add a couple sort of bigger picture perspective, having reviewed the data from the study and also the Phase III design. We've got absolutely all of the data that, assuming the study is positive, that we needed to be able to communicate the benefits -- potential benefits of 3718 to both physicians and patients. The concept of having a technical definition of heartburn that really captures the change that's occurring most consistently that the FDA is comfortable as a primary and then having critical secondaries, like regurgitation, like reduction in heartburn, or reduction in heartburn-free days -- or increase in heartburn-free days, those types of endpoints in the secondary are there and we'll be able to leverage them in a communication. So I'm very confident that if the study reads out positively, and we're confident in the study, that we're going to be able to do everything we need to do to communicate the benefits to the physicians and patients.

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Operator [46]

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Our next question comes from the line of Tim Chiang from BTIG.

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Timothy Chiang, BTIG, LLC, Research Division - MD and Specialty Pharmaceutical Research Analyst [47]

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Since we're on the topic of 3718, maybe I wanted to just go back to your Phase III study enrollments. How many -- it seemed like in the Phase IIb study, you had especially good results in patients that were Bravo positive. How are you guys looking at enrollment in terms of those types of patients in the Phase III study?

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Mark Mallon, Ironwood Pharmaceuticals, Inc. - Executive Senior Adviser [48]

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So the Phase III study, actually, we've -- as Chris was alluding to, requiring all patients to be both Bravo positive and to have signs of erosive esophagitis. So we saw benefits in -- the most benefit in these patients. But -- and we really want to make sure that we're confirming that these patients have acid reflux disease, and that's the best way to do that.

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Thomas A. McCourt, Ironwood Pharmaceuticals, Inc. - President [49]

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I just want to make sure we're clear because I'm not sure. It's got to be -- they have to be Bravo positive. They may or may not have erosive esophagitis. They are not required to have erosive esophagitis to be in the study, but it was important to include them and this was a long discussion with the FDA because of the range of patients that are likely to get the drug, whether they're non-erosive or erosive, but suffering from frequent heartburn, that we encompassed all of those. The exciting news for us, which was very consistent with what we saw with PPI responders, was the fact that people that had a baseline erosion had a greater magnitude of benefit over placebo. And so the fact that we're eliminating functional heartburn by making sure all patients are Bravo positive and making sure that we have this diverse GERD population, I think, we feel very good about the trial design and I think FDA was very collaborative in finalizing that with us.

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Timothy Chiang, BTIG, LLC, Research Division - MD and Specialty Pharmaceutical Research Analyst [50]

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Okay, great. And I just had one follow-up for Peter on the Cyclerion pipeline. Obviously, there are a number of companies trying to find a treatment in sickle cell disease. It's certainly a high -- there's certainly a high unmet medical need. Just wanted to sort of go back to the mechanism of action for olinciguat and how you think this product could potentially -- the difference that may alter the treatments that are out there. Well, there aren't any, but how do you think olinciguat could benefit these patients potentially?

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Peter M. Hecht, Ironwood Pharmaceuticals, Inc. - Co-Founder, CEO & Director [51]

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Tim, we agree there's a tremendous unmet need in sickle cell at this point. It's a terribly underserved market and we're very excited about the pharmacology of olinciguat and the potential for it to help patients. And Chris, can you follow on a little bit on the mechanism and the study design?

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Christopher I. Wright, Ironwood Pharmaceuticals, Inc. - Chief Development Officer & Senior VP of Global Development [52]

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Sure, sure. Tim, it's Chris. Thanks for the question. So we do believe there's a great opportunity in sickle cell disease as there's still a very high unmet need there. And in particular, if you kind of look at the symptom domains in sickle cell disease, there's many of them that remain very underserved, in particular the daily symptoms and also organ damage, which are -- which is something that really people end up dying from and is a cause of mortality. So -- and then the therapies that are there -- that are currently there or that are being developed sort of only target one or another of the symptom domains, but not the broader range of symptom domains. So, some target anemia, some target VOC, but they don't target the overarching symptomatology and clinical features of the disease. So we believe there's very high unmet need there. And we believe that our mechanism is a really great mechanism for this. So as you probably know, sickle cell disease is a NO-deficiency disease, where cells hemolyze the heme and they basically binds the nitrous oxide and causes a reduction in its level. You also can't produce nitric oxide because arginase also spills out of red blood cells and that prevents the production of NO. And many of the consequences of the disease of sickling and hemolysis, the downstream consequences are directly related, we believe, to NO deficiency. So basically increased vascular inflammation and vasoconstriction, decreased blood flow, those are all directly related to NO deficiency. And we believe with olinciguat, we can reverse those effects. And so we find a very nice match between the several elements of the pathophysiology and the way in which our sGC stimulator, olinciguat, which targets the vessels in the highly perfused organs acts. You have other question or...

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Timothy Chiang, BTIG, LLC, Research Division - MD and Specialty Pharmaceutical Research Analyst [53]

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Maybe just one last question on the study. Are you guys fully enrolled with the olinciguat study? I know there's quite a few studies ongoing in sickle cell and there are not that many patients.

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Christopher I. Wright, Ironwood Pharmaceuticals, Inc. - Chief Development Officer & Senior VP of Global Development [54]

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Sure. So as you know, it's a randomized controlled trial of 3 different doses of olinciguat compared to placebo. It's a 12-week study. Olinciguat is being dosed once daily. And the study is in the process of enrollment currently, and we expect to have data in the second half of this year.

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Operator [55]

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Our next question comes from the line of Irina Koffler from Mizuho.

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Irina Rivkind Koffler, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Analyst [56]

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I just wanted to get a little bit more detailed on the guidance for next year, the revenue guide. Is there any milestone payments included in that guidance or is that potential upside and maybe have you broken out any API or anything else within that estimate?

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Gina R. Consylman, Ironwood Pharmaceuticals, Inc. - CFO, Senior VP & Treasurer [57]

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Irina, this is Gina. We have not included any milestones in the guidance. It does include both LINZESS collaboration revenue and API sales. We continue to believe that the API sales will fluctuate quarterly and they will be flat to down next year.

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Operator [58]

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And that is all the time we have for questions today. I will turn it back over to Peter for closing remarks.

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Peter M. Hecht, Ironwood Pharmaceuticals, Inc. - Co-Founder, CEO & Director [59]

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Thank you all very much for participating this morning and for listening in. As always, we're available to take your questions throughout the day. If you have follow-up questions, please coordinate through Meredith Kaya. Her information is on the press release. Thanks again. Have a great day.

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Operator [60]

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And this does conclude today's conference call. You may now disconnect.