Ironwood Pharmaceuticals Inc (IRWD) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Ironwood Pharmaceuticals Q2 2013 investor update conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Ms. Meredith Kaya, Director of Investor Relations. You may begin, ma'am.

Good morning and thank you for joining us for our second quarter 2013 investor update. Joining me for today's call are Peter Hecht, our Chief Executive Officer; Tom McCourt, our Chief Commercial Officer; Mark Currie, our Chief Scientific Officer; and Michael Higgins, our Chief Operating Officer. By now you should have a copy of our press release, which crossed the wire earlier this morning. If you need a copy of the press release, you can go to our website, www.IronwoodPharma.com to find an electronic copy. During the call our speakers will be referring to slides available via the webcast. For those of you dialing in, it may be helpful for you to go to the event section of our website to access the webcast live if you haven't done so already.

Some of the information discussed in today's call is based on information as of today, Tuesday, July 23, 2013 and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. We do not undertake any obligation to update any forward-looking statements made during this call or contained in the accompanying slides as a result of new information, future events, or otherwise. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in our press release, and on the current slide with the heading Safe Harbor statement, as well as the risks under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2013 and any of our future SEC filings. I would now like to turn the call over to Peter.

Thank you Meredith and thank you to everyone for joining us on the call this morning. As a result of the hard work, passion, and dedication of our terrific team, first half of 2013 was a transformative period for Ironwood. We made important progress on all three strands of our mission, to bringing important medicine to patients, maximize value for our fellow shareholders, and building our outstanding, high-functioning, and collaborative team and culture. Our primary focus is to maximize the LINZESS launch and performance there continues to be strong across all leading indicators. Our US partner, Forest, reported this morning approximately $28.8 million in net sales of LINZESS for the second quarter.

Tom will be providing a full update on the launch shortly. Following that, Mark will provide an overview of our development efforts for linaclotide and other pipeline assets, and Michael will update you on our efforts to bring linaclotide to appropriate patients worldwide, as well as review our financial performance for the quarter. Then I will rejoin the dialogue to wrap up and we will open up the call for your questions. With that I'd like to now turn the call over to Tom to provide an update on the LINZESS launch.

Thanks Peter and good morning. We continue to be encouraged by what we're seeing in our launch efforts with LINZESS and in the US marketplace. The four most important indicators for success of LINZESS include the growth and productivity of our prescriber base, the recognition by payers of the potential value LINZESS can offer decile patients, the active involvement of the patient in the treatment decision, and the uptake in growth of new and refill prescriptions, which drive total prescriptions.

We and our partner Forest are collaborating closely and effectively to activate all of these levers. Then as we will discuss in detail shortly, approximately 125,000 prescriptions for LINZESS have been filled in the second quarter. In addition, we are observing strong signals across key leading indicators reinforcing the substantial opportunity that exists for LINZESS moving forward.

Our salesforce is executing at a very high level and is a growing strategic asset for us, and we expect to utilize its full potential in the future. Starting with our physician efforts on Slide 5. At the end of June approximately 30,000 physicians have prescribed LINZESS. This tracks well with other successful primary care launches in the GI space, including Prilosec and Zelnorm. These 30,000 physicians include over 70% of top decile gastroenterologists and approximately 40% of top decile primary care physicians. Additionally, we are seeing approximately 1,000 new prescribers choosing LINZESS for the first time each week, which is a critical component for sustained growth over time. We are not only seeing strong adoption but also continued growth in prescribing overtime. The physician who began writing early continues to write. This suggests physicians appear to understand and recognize the patient need and the benefit LINZESS can offer appropriate patients.

Our robust and collaborative efforts to ensure physicians are well educated about the clinical profile LINZESS is manifesting itself in broad awareness, understanding, and strong uptake. According to our internal market research involving over 200 high and low adopting physicians, 70% of surveyed gastroenterologists and 50% of surveyed primary care physicians report to be highly knowledgeable about LINZESS, and the majority of surveyed physicians are highly satisfied with their initial experience with LINZESS compared to other treatment options and intend to expand use. These data combined with the findings that between 65% and 85% of physicians report a willingness to prescribe LINZESS for appropriate adult patients who request LINZESS is very encouraging as we continue to execute a launch plan.

Over the next several months, the strong joint sales force will continue to focus on our priority physician base, to enable broader adoption particularly amongst primary care physicians. The majority of LINZESS growth comes from either adult patients newly seeking care, or adult patients actively managed by physicians with an OTC. 63% of patients treated with LINZESS are new to prescription, the majority of whom previously were treated with OTCs. This continues to suggest a significant level of dissatisfaction amongst these adult patients, as well as the potential size of the market available to LINZESS. Highly symptomatic conditions such as -- Physicians reporting having an effect on abdominal pain in addition to improving bowel function is a critical aspect of the treatment decision and they recognize the benefit LINZESS provides patients.

Turning to Slide 6 and the payer. Managed care coverage and out-of-pocket cost are the two most critical barriers for choosing LINZESS. This is one area where primary care launches have become increasingly more challenging in recent years and the primary focus of the LINZESS launch. We have made significant progress here in the first months of launch and we expect to add additional coverage in coming months. Right now, we estimate based on current secured contracts, about 80% of patients covered by commercial insurance plans will have unrestricted access to LINZESS, and approximately 50% will have tier 2 or about a $30 co-pay. We have also made good initial progress in our Medicare part D plan, which cover approximately 15% of target patient population.

Slide 7 summarizes the progress to date that we have had with patients. Our initial efforts including engage patients has primarily been through the digital channel. Our market research show that IBS-C and chronic constipation patients spend more time online seeking help for their symptoms than do others or any other GI condition. To date, these patients have been quite responsive to online education efforts, and based on the importance of a good patient-physician communication and previous patient response in this category there is sound support to expand this effort over time.

Highly symptomatic conditions like IBS and chronic constipation with a highly dissatisfied patient population or actively seeking care, combined with the growing LINZESS prescriber base and a strong payer access, are foundational to expanding the patient awareness and educational efforts. Therefore, we intend to adjust our current marketing mix over the up coming months to invest more fully in patient education to our digital channel, as well as broader communication channels in media, while expecting to continue to operate within the $250 million and $300 million marketing budget that we set forth.

The combined effort of physicians, payers, and patients drives the steady growth in total LINZESS prescriptions. As I mentioned a few minutes ago, approximately 120,000 total prescriptions for LINZESS were filled in the second quarter and over 200,000 have been filled since launch. New prescriptions make of approximately 60% of total prescriptions, growing more than 150% quarter over quarter. And the refill prescriptions are growing very nicely, which is a generally a good indicator LINZESS is working well in patients and is critical for long-term growth of LINZESS.

We are extremely pleased at where we are today, and yet it is important to remember that we are at the early stage of building our linaclotide franchise with the potential for long exclusivity. As you can see from this slide, we continue to track against our analogues, Zelnorm and Prilosec, even though we are launching to a far more challenging healthcare environment which we intend to improve over time. Together with our partner Forest, we continue to advance LINZESS in the marketplace, and hope and plan to strengthen the clinical profile as well as expand its utility for millions of additional appropriate patients. Over the next several months and years, we will continue to understand and leverage the critical success factors throughout the stages of the product lifecycle in order to optimize the growth and success. I will now turn the call over to Mark.

Thanks Tom and good morning. We are excited about the opportunities we are investing in across our research and development portfolio. As always we advance programs in a gated, data-driven, earn its way forward mode. We are seeing encouraging results in a number of areas and believe that we are creating value with our pipeline assets. We continue to make advancements in the pharmacology of linaclotide that strengthen our understandings of the effect of linaclotide in adult IBS-C patients and CIC patients. And enables us to explore the utility of linaclotide in our GC-C franchise more broadly.

In the near term we have opportunity to strengthen the current profile of LINZESS with existing data, as well as with emerging data that we will continue to gather. These opportunities include providing additional non-clinical data to support strengthening of the existing label, gaining a better understanding of linaclotide's effect on abdominal pain over time, exploring the effects of linaclotide on pain-sensing nerves, and working with the FDA to understand a path forward for including additional secondary endpoints in the label for both IBS-C and CIC.

We expect to report top line data during the third quarter from our Phase 3b study conducted to further evaluate the effects of LINZESS on abdominal symptoms in patients with CIC. This study will further enhance our understanding of the effects of linaclotide on bloating, as well as provide us with greater insight into the actives of linaclotide throughout the intestinal tract, particularly with respect to its effect on the abdominal symptoms of bloating, fullness, and abdominal pain. We are also exploring with our partner Forest potential paths to bring linaclotide to other patient populations, such as pediatrics, as agreed to in our post-marketing requirements with the FDA, and additional indications such as opioid-induced constipation. Both represent significant opportunity to bring linaclotide to millions of additional patients and we expect to initiate study for these indications in the first half of 2014, beginning with Phase 2 dose-ranging studies.

We and Forest have begun exploring the potential for a fixed-dose combination with a proton pump inhibitor as there is significant overlap between GIRD and IBS-C sufferers. We're also studying other formulations that may enhance the clinical profile of linaclotide. These efforts are in the early formulation development testing stage and could move into clinical development over the next couple of years.

Lastly, we continue to develop technical expertise and strength in a couple of key scientific areas. First, our experience with linaclotide in cyclic GMP has provided a strong base to further develop opportunities in the GC-C space and other modulators of cyclic GMP levels. We are studying a second GC-C agonist, IW-9179, in an exploratory Phase 2a study in European patients with dyspepsia symptoms, and we expect to report our top line data either late 2013 or early 2014.

Second, we have built discovery and development expertise in the field of peptide science, including pharmacology, chemistry, and formulations that have started to yield late-stage discovery assets. We expect to provide an overall pipeline update, including discovery and development stage opportunities, during an investor day later this year. Now I'd like to turn this call over to Michael Higgins.

Thanks Mark. Today I'd like to update you all on two topics, first, progress globally with linaclotide, and second, an update on our financial performance. I'll start with an update on the progress we and our partners have made in bringing linaclotide to appropriate patients worldwide, recognizing the increasing interdependencies of our development of commercial efforts on a global basis.

Beginning with Europe, our partner Almirall has launched Constella in the UK, Germany, and the Nordic countries. Initial feedback from Almirall has been consistent across all of each of the territories in which they have launched. Physicians are reporting early positive experiences with Constella in their adult IBS-C patients. Almirall is working closely with the relevant regulatory authorities to establish appropriate pricing and reimbursement in those countries. As such, we were pleased to see the Scottish Medicines Consortium publish a positive clinical assessment on Constella last month. From a financial perspective, we received approximately $2 million in milestone payments in the second quarter for our amended agreement with Almirall, and will be booking royalties from sales of Constella in Europe on a cash basis and expect to begin recognizing those royalties on our income statement starting in the third quarter.

In China, we and AstraZeneca have initiated a Phase 3 clinical trial for linaclotide in adult patients with IBS-C, with patient enrollment beginning in the coming weeks, and top line data expected in the first half of 2015. Our Japanese partner, Astellas, continues to advance its Phase 2 clinical trial with linaclotide in adult IBS-C patients with completion expected in the second half of 2013. Pending completion of the these development programs, and submissions of the NDA equivalent in each country, we anticipate that linaclotide could be commercialized in China and Japan as early as 2016. Both China and Japan represent significant market opportunities for linaclotide given the large unmet need across both countries and the limited treatment options currently available. Importantly, in addition to the milestones and upfront payments from our ex-US partners, we have the potential to share in approximately 50% of the long-term value of linaclotide in these territories. We also maintain full rights in the end-partner territories, representing additional value-creating opportunities for linaclotide.

Turning to our financials. I'd like to start off with a few highlights from Q2. LINZESS net sales as reported by Forest were $28.8 million. As a quick reminder LINZESS sales are not included in Ironwood's revenue line, but instead are captured as part of our collaboration expense line, which I will discuss in more detail shortly. Total operating expenses for Ironwood during the second quarter were $55 million, and we ended the quarter with approximately $300 million in cash and cash equivalents.

Turning to our income statement. GAAP revenues this quarter were approximately $9.7 million, and are made up of a few components. First, $6 million in the sale of API to our ex-US partners; second, $1.9 million in milestones from Almirall related to the launch of LINZESS in the UK and Germany; and third, $1.7 million in amortization from our Astellas and AstraZeneca collaborations. As I just mentioned, our total operating expenses in Q2 were approximately $55 million. Included in this is our R&D expenses, which for the second quarter were approximately $24.1 million and comprised of the following -- $3.8 million in LINZESS R&D; $7.1 million invested into our supply chain and to support our rest-of-world partners, and their development and commercialization efforts. As we bring linaclotide to adult patients globally we are incurring validation expenses in R&D to build redundancy in our supply chain through multiple API and drove product manufacturers. And lastly, we invested $13.2 million in our non-linaclotide pipeline, which Mark spoke to earlier.

Total operating expenses also included SG&A expenses, which for the second quarter were approximately $30.9 million. Included in this quarter were $8.3 million in LINZESS sales and marketing expenses that was included in the collaboration expense share with Forest, $8.6 million of additional sales and marketing as well as rest-of-world support. The additional sales and marketing cost is primarily made up of the unreimbursed portion of our salesforce. We are making investments into our salesforce that have brought significant value to our joint selling efforts with Forest, and we will look at ways to maximize this asset over time. And finally, in the overall operating expense, G&A cost of approximately $14 million were also included. We recorded approximately $5.3 million in interest expense for the second quarter 2013 in connection with $175 million debt deal we completed in January 2013. From a cash perspective, we ended the quarter with approximately $300 million in cash and cash equivalents. During the quarter we raised approximately $138 million in equity and used approximately $82 million of net cash for operations.

Turning to our LINZESS financials. As I just mentioned, Forest reported $28.8 million in net sales of LINZESS for the second quarter of 2013. We have stated in prior calls that we expect gross net discounts to ultimately settle on the 20% to 25% range. We are currently in the mid-teens and expect to land at the high end of the range as we continue to add more patients onto tier 2 coverage. From an inventory perspective we have sold through our initial stocking levels, and are now trending towards wholesale inventory levels approximating four weeks, as underlying script demand begins to correlate more closely with ex-factory shipments.

The LINZESS collaboration produced a total net loss of $38.9 million that resulted in a payment of $11.2 million to Forest, recorded as collaboration expense after backing out the $8.3 million we incurred in LINZESS sales and marketing. LINZESS revenue growth will continue to have an impact on our cash flows in the future, shrinking the overall net collaboration expense for creating collaboration income if LINZESS sales continue to grow as expected. Thank you, and with that I will turn it back over to Peter.

Thanks Michael. As you heard from the team this morning, we continue to make strong progress across our business objectives. The LINZESS story is just in the first few chapters in what we expect to be a big and exciting book. -- important primary care drugs and we strongly believe we have one with linaclotide. Can offer significant benefits to patients and shareholders for years and years, but they also require substantial launch investments to maximize their potential success.

To develop and commercialize linaclotide here in the US and around the world, we are building an organization that is made up of a focused, efficient team here at Ironwood, working intimately with highly-collaborative global partners. We expect the investments we are making across all of our assets to provide significant opportunity to generate additional near-term and long-term value. One thing we can assure you, Management, our employees, and our Board are all aligned with you. All of us are co-owners focused on allocating capital efficiently and effectively to build our business to maximize per share value. Thank you, and with that I will turn it over to Kevin to begin the Q&A portion of the call.

(Operator Instructions)

Ravi Mehrotra, Credit Suisse.

Congratulations on a great quarter. Let me ask this very easy one, Mark can you just run through your comments upon inventory, the street is obviously very focused on where these inventory levels are right now and where you expect them to go. Can you just give us as much granularity on how you're handling that given that you're still in the ramp phase? And then a follow up question for Tony, you guys made it incredibly clear that you just laid down the foundations for mid- to long-term success here. Can you run us through some of the lessons you've learned from these first couple of months of launch, what we should [dip] into your expectations and how you're adapting your message? Thank you.

I will take the first part and Tom can take the second. Let me reiterate a couple things. First I want to start by saying that as we stated in the past, I think it is really important to understand that we still believe that the IMS TRx data really is ultimately a great source of information for underlying demand, and we keep an eye on that and obviously we talk about that frequently and I know you all have, many of you have access to that data and it comes out on a regular basis. So that remains an important part of the equation to really understand the underlying demand. With that said, I guess I'll just make a couple of comments. Our view is that we are moving in a nice direction. As you all know from the fourth quarter of last year there was initial stocking. We believe that we moved through that initial stocking phase, and we're now getting to the stage where the underlying demand and the ex-factory sales are going to start to correlate a little more tightly. At this stage we're looking at about four weeks of inventory at the wholesaler level, and I think those are the elements that we feel are most relevant, most important. If you have a follow up, I'm happy to catch that maybe after Tom does his update.

Thanks Ravi. I guess I would go back to the basics and that is the physician, the payer, and the patient. I think what we have learned from the physician is certainly the gastroenterologist were very, very strong out of the gate, they clearly saw these patients, they clearly adopted, and they seem to be very happy with the brand. PCPs as you'd expect moved a little slower with regard to the rate of adoption, but we are clearly seeing good penetration in that market. I think the real core piece here is now that they have adopted, how do we make that patient, a broader patient population come alive to really help the doc help patients. So I think those are the key learnings on the physician side. We do not see any major obstacles on the physician side based on their high willingness to prescribe to a broader audience, as well as their willingness to honor a patient request, which really says that they feel the drug is effective and safe.

On the payer side, I think this has been really encouraging to see that the payers have moved quicker than we really expected them as far as getting to the table, contracting, and securing good solid access and healthy reimbursement, and of course that is being pulled through over time. I think the third piece is the patient, and how quickly the patient has reacted to the initial digital efforts we've made, and their willingness to come back over and over again for additional information. As we think to the future, we have a good prescriber base that is growing and a high willingness to prescribe. We have payers that clearly recognize the value and are reimbursing for the drug, and I think the critical piece now is really educating and activating the patient to raise their hand and really ask for more effective therapy. So as I look across the key learnings and lead indicators, I think we are really, really encouraged about what is out in front of us.

That's great. Michael I will take you up, and coming back to you. Let me push you (inaudible) I will ask the question, you talked about four week inventory, can you turn that around and give us a dollar value of how much inventory you have there? Because obviously on the launch phase, you have shown those [expodentials] so I'm not sure what a week is.

I think that is the tough question to respond to. I think we are comfortable with that, using the four weeks as reasonable guidance at this stage, and I think at this point the charge for the wholesaler is really is to ensure they have sufficient quantity as we go forward. They are already trending down, so contractually ultimately by the end of this year they will need to get down to three weeks. They are already heading in that direction. So our view is actually we're getting close to those levels where I think the underlying demand really is just going to correlate very tightly with the ex-factory sales. But we are moving that direction, we are not quite there yet and it's kind of hard to predict exactly when that is going to happen.

That's fair enough. Thank you very much.

Matthew Harrison, UBS.

Let me just follow up on inventory and just ask a separate question. What do you think the IMS capture ratio is right now and has that shifted at all from what you were seeing in the first quarter? Then as a follow up, I was interested in the data you gave around new prescriptions, and I believe you said 1,000 new prescribers are being added each week. Can you help me correlate that with what we have seen in NRx's, which looks like they have started to slow in terms of their growth. Does that mean there's a lot of turnover in terms of the new docs that are prescribing? Just help me understand how your 1,000 new prescribers each week correlates with the slowing NRx's that we have seen. Thanks.

Matthew, I will take the new RX number question first. I think with any launch, you do see fluctuations in new RX growth over time as far as acceleration in slowing down and we clearly did see some slowing of growth between Memorial Day and the July 4 holiday. What we are seeing is those physicians that did prescribe earlier continue to write and they do progress in productivity. A lot of the recent new prescribers as you can imagine tend to be primary care physicians, and right now are writing one, two, or three prescriptions and if you look at the last four to eight weeks, adding 4,000 or 8,000 new prescribers, they're largely adding, treating a few patients and are really waiting to see what happens. Again I go back to try and predict what is going to happen in the future, and I think that is where we are really trying to understand the physician's view of who the appropriate patient is and the unmet medical need, their willingness to prescribe, not only prescribe to patients that present that they are recognized, but also their willingness to honor requests as we push harder on the patient side. While we've made good investments on the digital side, we see that this group is extremely promotionally responsive. As we push harder on the patient promotion side, we certainly see the opportunity to grow new RXs.

With regard to the capture rate Matthew, we don't have an exact figure for you but we do believe the IMS data really does capture the vast majority of data. It is one of the challenges that we are working through and trying to understand in a little more detail, both the capture rate as well as we get into mail-order terms of average number of days per script. I think those are some of the things that we're getting a little more granularity on overtime. So there are some things while I fully appreciate the desire to get the number nailed down, we're still working through some of the details. But we do think the IMS data is a very good representation of the underlying demand.

Just to follow-up, do you believe it has changed at all from the first quarter to the second quarter?

We do not have any reason to believe that there has been a significant change. While over time there will be a mix change, we do not think it is a material change from Q1 to Q2. We do not have any data to suggest that it has been a material change between Q1 and Q2.

Got it, thanks.

It does look like the day per script are going up over time and the mail-order will go up over time, and this is Peter, there are certain areas where IMS won't capture, certain other health plans, and so on if their captive health plans won't be captured in IMS. So those have been coming on overtime, just for an example, Kaiser has a health plan, isn't captured under IMS, they came on board in the second quarter, so there is some change.

Okay, thanks.

Geoff Meacham, JPMorgan.

Congrats on the quarter. Want to ask you about gross net adds, what was the approximate gross to net adjustment in 2Q? Was it different from 1Q? And then are you guys still thinking about a 20% rate looking forward maybe for the next 12 months or so? And then I have a couple follow-ups.

Geoff, thanks for the question. We are in the mid-teens right now in terms of the gross to net adjustment and we do expect as we talked in the past, that is in the same range that we were in Q1. We do expect that over time that we will be moving to the high end of that 20% to 25% range. As we transfer, we're basically transfer patients onto managed care from where they are. Many of them now are being picked up through our, some of our patients programs, the RelayHealth program is one example. So we're in the mid-teens now, we expect to move up into the 20% to 25% range, and late this year sometime into next year we expect to be in that 20% to 25% range, and likely to be on the high end of that range.

Got you. Okay. Can you talk about the covered lives under tier 2 reimbursement you guys have today? I know you made some progress surrounding the 1Q call, was curious if there was any new transition to tier 2. And then maybe what's the timing of getting the majority of potential patients to tier 2 and what that means to the overall trajectory in the first 12 to 24 months of the launch?

Thanks Geoff, this is Tom. I think we continue to make a good progress not only with the national plans but also the regional plans to tier 2. Again the way I described it, we do have contracts in hand that estimate about 50% of that commercial population, which is really the focus, the primary source of our patients, 50% will be at a tier 2. A lot of those will be implemented in July, August, and September as we mentioned in the last call. I think as Michael mentioned, the instant savings program that we have also put in place is helping to supplement those patients that do have commercial coverage but have higher co-pays.

In addition, as you know the Medicare part D payers tend to move a bit slower, but we are also making good progress with Med D plans. And even though they account for about 15% maybe 20% of our target patient population, we feel that it is really critical to secure the Med D plans as well. So I think over the summer, by the end of the summer, early fall I think we're going to be in a very, very strong position with the payer in addition to the prescriber base that we feel very good about pushing harder on the patient.

If I can just add a little bit on this, I think the payer has been an exciting area for us where I think we all recognize going into the launch that the payer and the reimbursement space has become much more challenging over the last 5 or 10 years in general and especially in primary care. We and I know all of you expected it to be a very substantial barrier early in launch, and there's no question it had an impact and it is taking time to work through the payer situation, and we continue to block and tackle our way through there. Having said that, I think we're quite pleased with the progress that we and Forest have made here, and continue to make now and over the couple of quarters. So there's been no question it has been a break on early adoption and early launch trajectory and we are quite enthusiastic about our ability to solve for that going forward.

Okay, thanks.

Mario Corso, Mizuho USA.

Congratulations on a good quarter. I was wondering if maybe Tom could talk about what you learned or take aways from the early experience program you did, and what kind of return you received on that and then whether that might be worth doing again if getting the drug in the hands of patients and physicians is most important in a large population. I'm also wondering if you could describe the expanded digital efforts you talked about and anything specific ongoing there. And then finally maybe just a little bit, from Michael on the use of cash and how you see that going forward to the end of this year. Thanks.

Let me take them one at a time. First I think as far as we mentioned, I think in many calls, observed patient response is the most important driver for physician behavior as well as certainly ongoing patient behavior. There is no question the early experience kits enables physicians, particularly the high volume, early adopting physicians who by the way are the physicians that got out of the gate faster than anybody else, a good opportunity to initiate therapy and observe the patient response. The intention of the early-use kit was really to establish the uptake curve and I think that has been successfully achieved. It is something we will come back and revisit, to your point Mario. There's no question it has an impact, it was positive, certainly the sampling program, we will continue to support that over time, but I think it is a resource that we will take another look at if it makes sense. We will certainly consider it.

I think overall, the response has been positive. I mentioned, we just finished a pretty broad physician market research project involving 200 very productive prescribers as well as physicians that were waiting a bit to really understand of their impression of the drug and their willingness to prescribe moving forward. As I mentioned, that data looks very strong with regard to physicians' impression of the drug and their intention to prescribe to a broader patient audience over time. Which really gets to the patient piece.

What we have seen so far, we have been very surgical in how we have implemented our digital program going after sites where we know there's high traffic, we knew we could engage patients, and they responded extremely positively and in high volumes. So there is no question, educating the patient will activate the patient as far as them seeking more information, but also going to the physician. Part of the research also revealed that a significant portion of patients are walking in, describing their symptoms and specifically asking for the brand, which again further supports moving forward, how do we broaden not only the digital investment but also through other channels. I think as we move forward with the digital program we will look at broader healthcare sites where we know these patients are seeking all kinds of information, whether it is nutritional, whether it's other health related topics to make sure that we can broaden our reach for the patient, because we clearly have evidence that the patient will respond to the message.

Mario, it is Michael, with regard to the investments and use of cash, I guess I will start with the biggest component. Obviously as we saw this quarter as the LINZESS net sales increased, that has a very significant impact on our cash flows as we go forward. With regard to the investments, starting again with LINZESS, we've talked for some time about the total investment for the year in the range of $250 million to $300 million. We're comfortable that while Tom and team are talking about changes in mix over time, we're comfortable that that is still the appropriate range, so we feel we are in the right zone with regard to LINZESS investments, we're fully funding that. In terms of our other investments, you can see quarter over quarter there is going to be changes, for instance in R&D you will see quarter over quarter changes. But I think the first two quarters give you a good indication of what you should expect over the course of the remainder of the year.

So I think we are going as always try and manage our investments so that we create significant value, but also are mindful of our cash, and I think you should expect to see that as we have always done, you should expect to see that throughout the remainder of the year. But I think your current investments are in line with what we anticipated and while it will be bumpy over the next couple of quarters I think all-in, we're still comfortable with the guidance that we have given, both from a commercial perspective and from an R&D perspective.

(Operator Instructions)

Irina Rivkind, Cantor Fitzgerald.

Nice expense cutting in the quarter. I wanted to revisit the inventory questions. You said you were running at about four weeks inventory now, but could you comment on what the inventory was at the close of the quarter? And then the other corollary to that is on the API that you sold to your European partners, did that include any stocking?

Irena, first with regard to the API in Europe, partners do take API on their schedule, so they will order that in a fashion that it is going to be bumpy over time I guess is the best way to answer it in terms of trying to correlate that to sales are going to be different. They will inventory, because they are buying API remember, it's not finished goods so they will stock that. Yes, there is some stocking that goes into those numbers and it will fluctuate quarter to quarter.

With regard to the inventory, the range that I gave actually, the four weeks is again an estimate of where we think we are as of the end of the quarter. We've talked for some time about directionally where we are going. It is ultimately the contracts of wholesalers target getting them in a range of three weeks, so we are looking to move in that direction and I guess my comments were really directed at we are moving in the right direction and over time we think that the underlying demand for LINZESS will ultimately line up nicely with the ex-factory sales, but that is the four weeks is where we are.

Thanks. And then just a follow up on the JV spending with Forest. It looked a little lower this quarter, and I was wondering if that was mostly because SG&A was lower within that agreement or the R&D piece, and is this a good run rate to look at the going forward in terms of the $250 million to $300 million range?

Yes, again I guess what I will reiterate is the quarter over quarter these numbers change based upon various investments that can happen and the timing of those. I will reiterate, the $250 million in terms of commercial spend, the $250 million to $300 million is what we would anticipate that we're still in that range for the year.

Alright, thanks.

Rachel McMinn, Bank of America.

I wanted to just follow up on duration. I know it's early days, but I would like to get your evolving thoughts on that. I think you kind of threw out like 115 days, somewhere in that range and wanted to know where Peter, you mentioned duration was steadily increasing. I also wanted to follow up on the fixed-dose combo, just broad strokes of I guess what your plans are, would you get a partner, is this going to access broader numbers of patients, just a little more color on that. Finally, Michael you mentioned that you might want to monetize your salesforce, or I guess get a little more leverage, are you considering bringing another product in, how should we think about that? And timing on that as well, thanks.

Thanks Rachel. Tom why don't you take the first question about duration.

Thanks Rachel. I think as we have said many times, it is important to keep in mind that new Rx's are actual patients, and then the question is what is the value of the patient, which really is equated into [annual days of] therapy. I think when we look, what we are seeing right now in the refill rate, it looks very, very encouraging, and is certainly comparable to what we saw with both Zelnorm and Prilosec at this point in time. The question, what does it look like moving forward which is not necessarily do they fill it once, it's do they fill it 10 times? We have given a range of what those two brands look like over time where Zelnorm was somewhere around 100 to 110 and Prilosec was 180 to 200. We've consistently suggested that we are taking the middle of the road for planning purposes right now, but again right now I am looking at our initial refill rates look really strong, and obviously we are going to need a little bit more time to see how many times those patients actually fill with the prescription. I think that we're still in the middle of those two numbers, but I think we are very encouraged by what we see so far.

If I can add a little bit to that, as Tom said it is early days, but I think as physicians are getting more experienced with the product, it is really a novel mechanism and to a large extent, a novel category when you think about chronic (technical difficulty) and IBS (technical difficulty).

One of the things that was interesting coming from the physician market research study that Tom has described a couple of times, it is a very high awareness by physicians for the way the product is indicated on the label as for when to take therapy (technical difficulty) over time and the fact that they (technical difficulty). All of that trends well as well in the patient understanding and setting expectations for their patients. On the second question around the fixed-dose combo, Mark, do you want to talk to that?

Hi Rachel, I think we're looking at it obviously with our partner Forest, this is a collaboration, it falls inside the collaboration. We are in, as I explained in the earlier, we are in the early exploratory stage of really looking at the formulation, we're looking at the market potential, what type of patients would we serve. We certainly think it opens up the possibility to get to a broader access for patients as so many these patients have comorbid symptoms. Some of them have chronic constipation or IBS-C and GIRD. We're trying to be able to provide relief pretty much from the upper GI to the lower GI with this strategy. Tom, maybe want to --

Yes, I think Rachel, I think as we've said before there is a large overlapping population here that doctors are actively managing, we have began to talk to a number of [POLs] as well as other healthcare professionals about the utility of this. Again, these patients suffer from everything. They have a once-a-day treatment that really manages everything from literally GIRD, intestinal symptoms, and constipation. It is not only an attractive option but also when you think about what that does to annual days of therapy to your earlier point, that looks from a commercial perspective very attractive.

You asked about the sales force, maybe I will start on that and then if Tom wants to add. Strategically we've (technical difficulty) very strong selling team authority, here at Ironwood. And we made the decision that for the first year of the launch of LINZESS we thought it was very valuable to have that sales force be (technical difficulty) very important product and potentially a new category. Our salesforce is augmenting and complementing a very strong effort as far as getting behind the product, and feel very good about how we are supplementing and adding value thus far as how the teams are working together. Having said that, our sales team is delivering terrific access through the most valuable prescribers that are out there, and it's a very experienced and very high performing team. And we do feel for any commercial product, the opportunity to be in the bag next to an innovative product (technical difficulties) with good access with very strong selling team would be an attractive position to be in. We will expect and hope to generate value for ourselves and our shareholders by leveraging that going forward. Tom if you want to add anything to that?

I think that is right Peter, and I think if I'm looking for a partner, I want a highly skilled salesforce who has access to the most important, highest volume physicians and can ideally collaborate. I think we all know that, that is very, very hard to do and it is something that we work at every single day. The feedback that we are seeing is that we are clearly adding value to the overall selling effort. We have got a wonderful working relationship with Forest, the team works very hard at it, and I think we are a very attractive partner for somebody that really wants to bring their product to either primary care or gastroenterology.

David Friedman, Morgan Stanley.

I just wanted to clarify if you can, can you quantify in dollars the inventory change this quarter?

David we have not provided in that form yet. I think we are most comfortable just saying at the wholesaler level we are in the four-week range.

Okay, alright, thanks.

Juan Sanchez, Ladenburg.

Congratulations. The question is on frequency of prescription by gastroenterologist. I wonder whether or not the top prescribers are already treating the patients who regularly go to the practice and for them to prescribe more, do you need to bring new patients to the practice or not? The second question is whether or not on the clinical patient trial that we saw in Q3, assume it is positive and you change the label, do you expect that to have a material impact on demand or is just something additive?

Let me repeat the question, for Tom, the question was if I understood it right, Juan, with respect to gastroenterologist, have they already basically prescribed to the patients that come see them? And in order for them to become more productive, will we need to be driving new patients to them? Is that the question you are asking Juan?

Yes.

Thanks Juan. I think as we've mentioned before there is an awful lot of patients that present different profiles in the gastroenterologist and the primary care offices, gastroenterologists continue to grow and we continue to have a broad range of prescribing within gastroenterology and primary care. Just to give you the spectrum, we have over 1,000 physicians who have prescribed over 25 prescriptions all the way up to 400. There is a lot of patients that are in the office. I think our job moving forward is really to help physicians identify who the appropriate patient is for the drug and make sure they are comfortable prescribing the drug.

In addition, as far as our educational efforts, certainly one objective is to increase the number of patients actively seeking care, raising their hand, describing their symptoms, and asking for effective therapy. But a lot of that effort also goes to the patients who are already actively seeking care, who really need to more effectively communicate with the physician. I think we have a lot of growth space in both gastroenterology and primary care. I think educating the patient, there is no question the efforts thus far are impacting what is going on in the physician's office. As we expand that we fully expect that to increase over time.

Tom the second question, if I got it right Juan, if we assume success with the Phase 3b chronic constipation study, do we expect that to have an impact on the growth of the product?

Yes, think the objective of the chronic constipation study was really to better understand our patient population, both in terms of those people that had really problematic bloating, but also overlapping, comorbid conditions such as functional dyspepsia and GIRD. I think based on everything that we've seen in the clinical trials and Mark can certainly comment on this as well, is that this drug seems to improve a number of intestinal symptoms that patients can benefit. Keep in mind, those data are not currently in our label, and we believe this study can further bolster, certainly the evidence that we've seen in previous pivotal trials to go back and have a broader discussion with FDA to make sure that we can better serve patients and docs. Mark does that reflect?

Yes, think that is great comments. I think also we're going to be able to from this study get a better understanding of patients that suffer from comorbid symptoms. So again, we have a significant number of patients who have GIRD in this population and other upper GI symptoms. So we're excited about being able to at least from a development point of view kind of help direct our future development efforts by some of the things we learned from more of the exploratory nature of this study versus also the things that we're going back and confirming and strengthening.

Got it. Thank you guys.

Patti Bank, DISCERN Securities.

Two quick questions. One on the current sampling that is ongoing. Have you worked through all the 30-day packs at this point, and is that kind of a once-and-done and are there any plans to expand that? And then the other question maybe for Tom, just in terms of dropout rate, can you maybe give me a little more color in terms of why patients wouldn't fill prescriptions, whether you're hearing anything anecdotally whether it's because of side effects, cost, or maybe doctors just are writing for the one 30-day prescription upfront.

Thanks Patti. Great questions. First of all with sampling, as I mentioned earlier the most important thing that we can do is enable physicians to observe the benefit that LINZESS can bring to their patients, which clearly is why we sample and why we did the early experience kits. The feedback on the early experience kits was extremely positive from a physician perspective with regard to enabling them to give a really strong clinical trial for the patients so they can evaluate the drug. It is something we are evaluating right now to say, does it make sense to continue that program, or do we lean primarily on samples. I think again we want to make sure that physicians have access to either samples or early experience kits, more clinical trial kits to initiate therapy for new patients and really observe the clinical performance of the drug.

I think the second piece with regard to the dropouts, as I mentioned earlier, the two main reasons that are inhibiting physicians from prescribing the drug as well as what is getting in the way at the counter is clearly the payer. As much as we talk about the progress we are making with payer, we're still bumping our heads a fair bit of time with regard to drugs that are not on formularies and regional plans, or have prior authorizations that vet it. We're doing a pretty good job on the co-pay assistance, but we still have a number of plans particularly in certain regions across the country where that is a bit problematic, but again getting better over time.

I think in the last piece of this, which I think is really important to understand, is overall how is the drug doing in the marketplace? I think this is where I think based on what we are hearing back from the sales force and what we have certainly seen in this large scale physician research project that we did is that the drug is performing very similar to what we saw in the clinical trials, in that the drug clearly is efficacious, the docs are recognizing it's efficacious, they believe that they are satisfied and the patients are quite satisfied with the drug, and that the tolerability is consistent to what they expect, we expected to see based on those clinical trials. Does that help?

It does, two quick follow-ups if I could. One, in terms of the patients and maybe I missed this, do you know at this point if they are taking the full 30-day, or if they're using it more symptomatically? And then on the samples, the early experience kits, do you know those are all out with physicians at this point? Are you able to track that, or do you know if there are some still in the salesforce's hands?

First, as far as the early experience kits, they are all distributed and they have been distributed for a number of months, and obviously there are 300,000, to 30,000 docs, those are getting pulled through the system over time. And of course as you know there is no real way to actually track that other than the sales reps observing what is in the sample closet. As far as the annual data, as far as patients adhering to therapy, we haven't finished our patient research yet, but what we are hearing from physicians as Peter mentioned before, they clearly sees this as chronic therapy and that they are fully aware that when treatment stops symptoms return, which is probably the single strongest driver for adherence in annual days of therapy. But I think we're going to learn a lot more from the patients at this point in time as we get the patient research back in the upcoming months.

That helps. Thanks.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing remarks.

Thanks Kevin. And thanks again to all of you for joining us this morning. We very much appreciate your interest and collaboration. We will be here for the rest of the day. If you have follow-up questions, please reach out to Meredith and thanks again. Have a great day.

Ladies and gentlemen this does conclude today's presentation. You may now disconnect and have a wonderful day.