Ironwood Pharmaceuticals Inc (IRWD) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2014 investor update conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, the Director of Investor Relations, Ms. Meredith Kaya.

You may begin, ma'am.

Good afternoon. Thanks for joining us for our third Quarter 2014 Investor Update. By now, you should have a copy of our press release, which crossed the wire earlier this afternoon. If you need a copy of the press release, you can go to our website, www.ironwoodpharma.com, to find an electronic copy.

Some of the information discussed in today's call is based on information as of today, Tuesday, November 4, 2014, 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 June 30, 2014, and any of our future SEC filings.

Joining me for today's call are Peter Hecht, Chief Executive Officer, who will provide introductory remarks; Tom McCourt, Chief Commercial Officer, who will give an update on the commercialization of LINZESS; Mark Currie, Chief Scientific Officer, who will summarize our pipeline efforts; Tom Graney, Chief Financial Officer, who will review our financial performance and guidance; and Michael Higgins, Chief Operating Officer, who will be available during the Q&A portion of 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.

I would now like to turn the call over to Peter.

Thanks, Meredith.

Good afternoon, everyone, and thanks for joining us.

The third quarter and recent period were very productive for Ironwood. And we made important progress on our path to building a leading GI therapeutics Company. We're successfully commercializing LINZESS with our partner Actavis, advancing our robust pipeline, and operating the business efficiently and prudently. The core to our strategy is to maximize LINZESS. And the brand is demonstrating impressive growth in demand, fueled by the hard work and collaboration of our joint selling effort with Actavis and our ongoing DTC program to educate patients.

LINZESS US net sales were $79.7 million, up 27% quarter over quarter. Tom Graney will comment in a few moments on a couple of items that negatively impacted net sales this quarter by approximately $8 million. With strong LINZESS growth through the first seven quarters of launch, we can now expect the brand to be profitable going forward. This is a very exciting inflection point for the brand and for our Company.

As a cash generating asset still in the early stages of growth and with the potential to improve the lives of millions of underserved patients, the LINZESS brand has the potential to deliver substantial operating leverage and increasing cash flows until at least 2031, another 17 years. In addition, we are confident that our efforts to enhance linaclotide's clinical profile will further grow the brand over time.

We're also generating great momentum within research and development, advancing multiple opportunities in multi-billion dollar markets, targeting highly symptomatic conditions that affect millions of suffering patients. By the end of this year, we expect to have six Phase II or Phase III clinical trials underway, with important data readouts expected beginning early next year with the IW-3718 Phase II-a data and continuing over the next 12 to 24 months. This includes four mid- to late-stage linaclotide trials that are funded all, or in part, by our partners, as well as two mid-stage clinical programs that we are moving forward independently.

We have a strong team and culture at Ironwood. We're incredibly passionate about our mission to bring important medicines to patients and to create meaningful value for our fellow shareholders. And we're always working to motivate our team and to keep getting better. We are attracting great talent across the organization, including two recent additions to our leadership team: Tom Graney, as CFO and Head of Corporate Strategy, and Lisa Adler, as Head of Communications. They each have brought great new energy and fresh perspective to our organization as we prepare to drive the next stages of growth.

With that, I'll hand it over to Tom McCourt to provide more detail on LINZESS.

Thanks, Peter.

Good afternoon, everyone.

LINZESS remains on a strong trajectory supported by continued growth in prescription demand during the third quarter. Approximately 400,000 LINZESS prescriptions were filled during the third quarter, representing an increase of about 22% quarter over quarter, as you can see in the chart on the left.

Prescription demand is the key indicator of growth for the brand and continues to be driven by the strength of our combined sales force, as well as our multi-channel direct-to-consumer campaign. We and Actavis are encouraged by the response we are seeing, particularly noting the clear impact that our DTC efforts have had on uptake over the last six months.

Our primary goal for DTC is to grow LINZESS prescriptions by helping patients and physicians communicate more effectively. First, by enabling patients to accurately communicate their symptoms to their physicians; and second, by helping physicians to recognize the unmet medical need and expand their view of the appropriate patient. Notably, the chart on the right side depicts the projected LINZESS total prescription trend prior to DTC, compared to the actual LINZESS total prescriptions following the initiation of DTC. In the 28 weeks following initiation of DTC, there has been an average 20% increase in total LINZESS prescriptions above the pre-DTC trend.

We are pleased with the brand performance to date, as it continues to grow the entire category of prescription treatments for IBSC and chronic constipation patients. While capturing meaningful market share within the category which, in turn, is generating significant growth in total LINZESS prescriptions. The total prescription volume for the category during the third quarter this year was up by more than 12% compared to the same period last year. We believe that this is growth in the categories primarily coming from patients previously on OTC laxatives.

It is important to keep in mind about two-thirds of adult IBSC and chronic constipation patients are treated with OTC laxatives. And most of them are not satisfied with current treatment, which represents an enormous opportunity ahead for LINZESS.

In addition to growing the market, LINZESS also continues to capture significant market share. As you can see on the right side of this slide, total prescription market share increased by close to 3.4 percentage points representing a 47% increase during the 22 weeks following initiation of DTC. New prescription market share increased 2.7 percentage points, representing a 41% increase in market share over the same period.

The foundation on which we've built LINZESS is made up of core fundamentals designed to drive demand and accelerate the growth in the marketplace. These fundamentals include the physicians' ability and willingness to choose LINZESS for appropriate patients, our ability to secure payer access and reimbursement, and our ability to drive patient demand.

The breadth of prescribers writing LINZESS prescriptions continues to grow. Over 95,000 healthcare practitioners have prescribed LINZESS. And we've added, on average, over 1,200 new prescribers per week since initiating DTC. In addition, prescribers report a high level of satisfaction with LINZESS and are continuing to write more and more prescriptions for appropriate patients.

The strength of our payer coverage continues to improve. And when combined with the LINZESS instant savings program, we are providing patients broad access to LINZESS at an affordable co-pay. Finally, patients are responding well to our DTC efforts. And persistency of rates are continuing to track well ahead of our category analogs, Zelnorm and Amitiza.

I want to spend a minute on this last point. As we believe persistency is one of the strongest indicators of patient satisfaction and is also a key driver for total prescription growth. To evaluate this, we followed four separate cohorts of patients, starting in January 2013, for 12 months and evaluated persistency every 3 months. This graph summarizes the average persistency at each time point across all four cohorts.

As you can see, patient persistency on LINZESS is roughly 40% to 50% greater than Zelnorm and Amitiza averaged across all cohorts. With over 440,000 patients having now filled a LINZESS prescription at least once, more than 1.5 million LINZESS prescriptions filled to date, and more than 40 million adult patients suffering from either IBSC or chronic constipation, we are still in the early stages of growth for LINZESS with significant opportunity ahead of us.

In addition to our commercial efforts, we and Actavis are making progress toward enhancing the clinical profile of LINZESS. And expanding labeling of LINZESS into new indications, patient populations, and formulations. Continuing to further innovate around linaclotide and working to bring additional treatment options to the market is what we believe will drive long-term growth for the brand.

As part of this strategy, we announced earlier today that we and Actavis are initiating a Phase III trial of linaclotide in a 72-microgram dose in adult chronic constipation patients. Mark will talk shortly about the clinical path, but I wanted to spend a moment on the commercial opportunity.

As you know, linaclotide is approved in a 145 microgram and a 290 microgram once daily dose for adult patients with chronic constipation and IBSC, respectively. Our research indicates that physicians view LINZESS as a highly effective therapeutic option for their chronic constipation and IBSC patients. And importantly, both physicians and patients report a high level of satisfaction with the drug.

As is common with many treatments for non-life-threatening diseases, many physicians initially tend to prescribe to their patients that have the greatest visible need and expand their use to a wider set of patients over time. As expected, physicians initially prescribe LINZESS to their patients with more frequent and intense symptoms, and have been expanding the use as they gain more clinical experience.

Keep in mind, there are as many as 35 million adults with chronic constipation suffering from a continuum of constipation-related symptoms in need of effective therapy. We believe, and we have confirmed in market research, that providing an additional dose will further accelerate the expansion of LINZESS use into its indications.

With that, I will hand it over to Mark, who will talk a bit more about this progress, as well as an update on our broader pipeline.

Mark?

Thanks, Tom.

It has been a very productive few months for the R&D team. And we continue to advance our pipeline of novel therapeutics based on our leadership and expertise in GI and guanylate cyclase. Our research has resulted in robust, scientific exchange through data presentations at seven, high-caliber scientific meetings this fall, including the ACG annual meeting and UEGW.

Our focus is linaclotide. And with our partner, Actavis, we are seeking opportunities to strengthen its clinical utility within its current indications through additional regulatory approvals, as well as to expand Linaclotide into new indications, populations, and formulations.

Linaclotide is the first and only GC-C agonist to gain FDA approval. It represents innovative pharmacology and is thought to work in two ways: by helping to calm pain-sensing nerves and by accelerating bowel movements. We see significant opportunity to leverage these two mechanisms, either together or separately, to develop multiple treatment options for patients suffering from a broad range of GI conditions.

We are particularly excited about linaclotide colonic release, one of our highest priorities within R&D with the potential to help millions of suffering adult patients. Through our colonic release formulation, linaclotide has the potential to further enhance relief of lower abdominal pain with faster onset. We are working diligently towards getting the Phase II trial in IBSC up and running mid-next year.

We are also exploring expanding its use in additional GI disorders, with severe lower abdominal pain as a predominant symptom, such as other forms of IBS, ulcerative colitis, and diverticulitis. As Tom mentioned, we also recently initiated a Phase III clinical trial of a 72 microgram dose of linaclotide, which we and Actavis are exploring for adult CIC patients whose prominent symptoms are constipation-related.

We are utilizing the same trial design that was used in our phase III clinical program for CIC and expect top-line data in 2016. If approved, we believe that the additional dose will provide physicians with more options that may enable them to more broadly serve their adult CIC patients.

Beyond IBSC or chronic constipation, we and Actavis recently begin enrolling patients in a Phase II trial with linaclotide in adult patients with opioid-induced constipation. We believe a GC-C agonist has the potential to represent a different approach to the treatment of patients suffering from OIC, and look forward to seeing the data from this trial, which we expect in the second half of 2015.

Moving on to our broader pipeline, we filed an IND with the FDA for IW-9179, a GC-C agonist designed to target the upper GI tract that we are studying for the treatment of adults with gastroparesis. We are preparing for a Phase II-a trial in patients with diabetic gastroparesis, which we expect to initiate by the end of the year. This study will explore whether IW-9179 provides symptomatic relief in gastroparetic patients. Data are expected in the first half of 2016.

We are also applying our expertise in GI to advance IW-3718, an investigational gastric retentive bile acid sequestrant being studied in adults with GERD who have not responded adequately to treatment with a PPI. We recently completed enrollment in our Phase II-a trial of IW-3718 in patients with refractory GERD. This trial enrolled more rapidly than we anticipated, which we believe underscored the unmet need in this patient population. We look forward to seeing the data, which we now expect early next year.

In this exploratory trial, we will be looking at proof of mechanism data suggesting whether IW-3718 binds bile and prevents bile reflux. As well as potential proof of concept data indicating whether the molecule improved refractory GERD symptoms.

Building on our research with linaclotide, GC-C and other guanylate cyclases, we are continuing our efforts in advancing our soluble guanylate cyclase or SGC platform. Our first two candidates are moving forward nicely towards the clinic. And we expect IW-1973 to advance into clinical development early in the first half of 2015.

Turning to slide 17, our global partners continue to make progress in advancing linaclotide worldwide. Astellas has initiated a Phase III clinical trial for linaclotide in adult IBSC patients in Japan, with patient enrollment expected to begin in the coming weeks, which will trigger a $15 million development milestone. Astellas also plans to expand their development of linaclotide in Japan, and is entering into a Phase II clinical trial with linaclotide in adult chronic constipation patients.

In addition, we and AstraZeneca are continuing to enroll adult patients in a Phase III trial of linaclotide in IBSC for China. Data from this trial are now expected in the second half of 2015. And we believe, if approved, linaclotide could be commercialized in China in 2017.

We expect to end the year with six clinical trials ongoing, including four mid- to late-stage linaclotide clinical trials being advanced with our partners and two mid-stage clinical trials for wholly-owned programs. We expect to have multiple important data readouts beginning in early 2015 and continuing over the next 12 to 24 months.

With that, I will now hand it over to Tom Graney to review our financial results for the quarter.

Thanks, Mark.

And thanks, everyone, for joining us this afternoon.

I joined Ironwood about two months ago, and I am thrilled to be part of the team. Ironwood is at an exciting point in its trajectory. And we have a great team, great assets, and a solid financial profile that enables us to continue investing within our key areas of growth as we seek to bring important new medicines to patients and long-term returns to our shareholders.

We had a strong quarter, as you have been hearing from the team. So I will now take a moment to highlight some of the key financials.

Beginning with LINZESS, US net sales for the third quarter of 2014 were $79.7 million, compared with $62.7 million in the second quarter of 2014. This is an approximately 27% increase quarter over quarter, reflecting the strong prescription demand.

During the quarter, there were a couple of items that, when combined, represent approximately $8 million in unfavorable impact to total investment sales. First, wholesaler inventory levels decreased one half-week during the quarter, ending the third quarter on the lower of the two- to three-week range. Based on inventory levels at the end of the third quarter, this half-week represents approximately $4 million in US net sales. Actavis operates at a lower level of wholesaler inventory than Forest, and expects inventory levels to be within a two- to three-week range going forward.

Second, gross-to-net adjustments increased to approximately 30% for the quarter, compared with approximately 23% last quarter. A significant driver of this increase is Actavis' accounting for co-pay assistance programs. This change does not affect net profit or loss for the brand, as costs have simply moved to within the P&L. But it does have an approximately $4 million negative impact to US net sales.

Prior to the third quarter, certain costs related to the LINZESS co-pay assistance programs, including the LINZESS Instant Savings program, were recorded as sales and marketing expenses. Beginning this quarter, as a result of the recent integration of Forest into Actavis, these costs are being recognized as gross-to-net adjustments in conformity with Actavis' accounting methodology.

In the third quarter, this resulted in approximately $4 million related to the LINZESS co-pay assistance programs being recognized as part of gross-to-net adjustments as opposed to sales and marketing expense. So combined, the approximately $8 million negative impact to LINZESS net sales includes the change in accounting methodology and decrease in wholesaler inventory levels.

Turning to the remainder of the LINZESS P&L, during the third quarter, total commercial expenses were $69 million, compared with $79.4 million during the second quarter. We now expect 2014 total LINZESS marketing and sales expenses to be in the lower to mid-range of our previously guided $240 million to $270 million. The 50/50 net profit share resulted in a receivable due from Actavis of $13.5 million in the third quarter, recorded as collaborative arrangements revenue on Ironwood's P&L.

Now focusing on the Ironwood-specific financial highlights for the quarter. Beginning with our balance sheet, total cash and investments as of September 30 were $265 million. Approximate $39 million in cash was used for operations during the quarter, compared with $36 million in cash used during the second quarter of 2014. While there will be fluctuations on a quarterly basis, we expect cash use to continue to decline over time due to disciplined expense management and revenue growth from LINZESS.

GAAP revenue for the third quarter was $16.9 million, including the $13.5 million in collaborative arrangements revenue associated with our share of LINZESS profit from the commercialization activities with Actavis in the US, as previously described. Also included in revenue is approximately $3.4 million related to amortization from our existing collaboration with Astellas; revenue recognized in connection with our collaboration with AstraZeneca; and royalty payments from our partners in other territories outside of the US.

Total operating expenses, excluding cost of revenue, during the third quarter were $53.6 million, compared with $51.4 million in the second quarter of 2014. Our R&D expenses for the third quarter were $25.1 million, compared with $22.1 million last quarter. And SG&A expenses for the third quarter were $28.5 million, compared with $29.3 million last quarter.

Finally, our net loss for the third quarter was $42 million, or $0.30 per share, versus a net loss of $60.4 million, or $0.44 per share, in the second quarter of 2014.

In addition to the 2014 LINZESS marketing and sales expense guidance, we previously provided guidance for 2014 total operating expenses to be in the range of $215 million to $245 million. This consists of $105 million to $120 million in R&D expenses, and $110 million to $125 million in SG&A expenses. We now expect to end 2014 in the lower end of each of these ranges, and continue to expect non-linaclotide R&D to be approximately 45% of total R&D expenses.

Thank you. And with that, I will turn it back over to Andrew to begin the Q&A portion of the call.

(Operator Instructions)

David Maris, BMO Capital Markets.

Couple questions. First, on the sales progression for next year and this year, if you could just talk a little bit about the prescription trends continue nicely. Do you see anything that may alter that?

Do you have any comments on the recent data from your potential competitor? What investors should think about of that data from what you have seen?

Lastly, since I'm going to count that as one question even though it was A and B and not related. Maybe you could talk a little bit about the reason to start the lower-dose trial now versus having started it a year ago? How was that process -- how was that decision made?

This is Peter. I will turn the first question about ongoing sales growth trajectory and whether anything will be expected to alter that trajectory over to Tom McCourt. And, some time when you are here in the shop, we will have you and Tom talk about how we count to three. We do the same thing as you do. (laughter)

Tom, maybe you can take number one.

Thanks for the question. I think as far as what we see so far, all the lead indicators look very favorable with regard to what we are seeing as far as market growth, what we're seeing as far as share growth, what we're seeing as far as the willingness to prescribe and honor a patient request. Everything seems to be heading in the right direction, and we haven't seen any leveling off at all.

As we think about next year, again, we're going to be locked to the core fundamentals which is -- first, how do we help docs recognize who the appropriate patient is as they expand that view over time. Certainly, how are we continuing to improve our payer access so we're not losing any business at the counter.

And, third, what we are seeing in the marketplace is the patients are responding very, very well to the DTC messages which we will continue to target and evolve as we learn more and more how we can activate the patient. As far as what we see as far as total growth, I think it looks very, very promising for next year.

Mark, can you talk both about recent competitor data and the question about timing with the 72-microgram dose?

I think if you look at -- there have been a couple competitors in this space, and first response is they are still pretty good ways away, I think, from the market. Still a lot of data to be gathered, still a lot of information.

If I come back to Ironwood with LINZESS and with our partners, Forest and Actavis, we really set our high bar with the studies that have been done so far. [We positioned at] the product in regard to the data position, the public manuscript, the acceptance by the KOLs, the very broad understanding that we are the scientific leaders in the GC-C space and building that in the overall IBSC.

I think we feel very confident of where we are, but we also continue to want to raise the bar. We continue to want to bring forward more data, more options for patients. There's a great deal of satisfaction with this drug so why invest more now?

I think the reason we're excited about continuing to innovate both with the chronic relief and with the 72-microgram is we are seeing such a level of satisfaction as far as the efficacy for the drug in patient and physician satisfaction. So, we view it as a chance to continue to accelerate the expansion of LINZESS in that current population so we are very excited to bring forward these opportunities at this time.

(Operator Instructions)

Mario Corso, Mizuho.

In terms of the LINZESS revenue number for the quarter, if I were to adjust gross to net to 23% -- or, from 23% to 30% -- I get that impact being about $8 million as opposed to about $4 million. So, I am wondering where I went wrong there.

Wasn't inventory already at the low end of two to three weeks last quarter? So, are we at the very low end of two to three weeks now? And, as a corollary to the first question, as for stripping out some of the expenses there, and yet you're still in that low- to mid-range of $240 million to $270 million. Is something else within the spending mix going up?

Thanks for the questions, Mario. Tom G., can you take those on?

On the gross-to-net question, you're not missing anything. We had guided at the end of the second quarter to expect gross-to-net levels to be in the mid-20% excluding the accounting change which I walked through. We would be in that range of the low 20% so operationally nothing really unexpected there with respect to what is going on in the marketplace. We continue to believe that access is a really important element in driving growth for LINZESS and value for our shareholders so we absolutely keep a close eye on that as well.

On the inventory front, we had said at the end of the second quarter, we expected inventory levels to settle around three weeks post-integration with Actavis. We are now targeting within the range of two to three weeks. But, to get to the root of your question, we did see about a half a week of burn during the quarter. We did not see that impacting service levels at all as a result of the lower wholesaler inventory or as a result of Actavis taking over the Forest business.

Ravi Mehrotra, Credit Suisse.

My first question is around persistency, or looking at duration of therapy. I know this is a difficult question to answer, but can you give us any color on how duration of therapy has changed since the launch in wherever DTC has affected that.

My second question -- I have to ask the pipeline question. Congrats on the progress there. It's a slightly abstract one. On 1973 for cardiovascular indications, is this a program that we should ultimately view as a partnership proposition?

Tom, can you take the first question on trends in duration?

Persistency, as you mentioned, the way we thought was the most accurate way to evaluate how we are doing versus obviously other category analogs was to follow this rather rigorous persistency. And we clearly are running somewhere between 40% and 50% ahead of Zelnorm and Amitiza with regard to overall persistency.

When you look at Zelnorm, Zelnorm range from somewhere between 80 days and 100 days a year depending on when at what point in time you measured it. And, to your point, DTC did impact its overall persistency -- or level of persistency.

Keep in mind, the period of time in which we are evaluating current persistency really doesn't quite capture the impact of DTC yet. But, we are certainly seeing trends in that direction as you would absolutely expect to see as far as improving the overall persistency rate and driving better adherence to therapy.

Mark, can you take the question on STC?

On the pipeline point of view, first off, we did have a lot of progress this quarter so it felt great. On specifically with SGC, we do view it as an overall platform opportunity, large number of potential indications. That include cardiovascular, but also go beyond cardiovascular.

Relative to partnership opportunities, we think certainly there are partnership opportunities. But, more on the strategic -- looking for strategic options there and strategic partnerships. Certainly, as we continue to refine the indications where the drug we think will potentially offer very strong advantages -- those are the areas we will continue to focus on.

1973, as we indicated, will go into the clinic early in the first half, we, think of this upcoming gear. That will -- there's a lot of great information we can get from that trial that we are very excited about. Obviously, being able to get readouts on cardiovascular endpoints, and even normal volunteers can help inform direction for this program. We think there will be a lot of data-driven decisions ahead, and including data driven around what makes sense from a partnering point of view.

Maybe I can add a couple of comments and just say, the STC program is an interesting one for us. We tend to not talk about our research efforts much until we get a little bit further along because we don't like to inform competitors as to the status of our programs.

In this case, we see such a big opportunity and so many different product opportunities, and I think we feel very good about both our intellectual property position and the competitive landscape. As I think you know, there is a very big partnership between Merck and Bayer involving Bayer's approved drug, Adempas, but also a pipeline of opportunities and there's us in this space.

We are interested in and finding quite a lot of interest from partners in terms of being able to combine efforts and go after the breadth of opportunities. I would say we're seeing quite a lot of interest so we decided it was worth making sure folks knew we were here earlier than usual. We will work to see what the best solution is for patients and for our shareholders.

Jason Gerberry, Leerink Partners.

This is Derek Archila on for Jason. Just a few questions. I will keep it to two though.

Just looking at the DTC campaign, has the results of that been compelling enough to increase the spend associated with the initiative? Second, has your appetite at all changed to carry out any potential product deals that you could leverage the LINZESS sales force?

Tom, can you take the first question on appropriate DTC investment?

As I mentioned, we're very pleased with what we are seeing as far as the response to the DTC campaign. And very encouraged with regard to what we're intending to do moving forward based on the learnings that we've had from the marketplace and from patients and physicians.

As far as expanding the investment, one of the things that we put in place as part of the media plan was a number of test markets where we actually did heavy [uptests] to see what impact more spending would actually have on driving demand. And, what we learned is, we were roughly at the right spending level. But, in addition to that, we have seen significant geographic differences with regard to uptake as well as what types of patients are responding through which media channels.

We have a tremendous opportunity as we evolve the campaign into next year with regard to maximizing its impact to further drive growth of the brand. To-date, again, we are very excited about what we are seeing as far as our ability to activate patients, but also the physicians' willingness to honor a patient request which is very, very strong.

With respect to the commercial capability and how to leverage that best, I think we are looking at a lot of opportunities. But, for us, it all starts with LINZESS.

We built very strong commercial capabilities really across the range of functions -- across marketing patient engagement and sales with a highly skilled team of clinical sales specialist who have great relationships both with gastros and with primary care docs now across the US. We did all that with the goal to make sure we were leveraging LINZESS as best as we could together with our partner, Actavis. I think that has gone quite well.

When we think about to bringing in additional products, we want to make sure that whatever we bring in helps to further accelerate LINZESS growth, provide selling opportunities for our reps when they are bringing LINZESS. But, we also think we have a strong capability there that we can leverage over time, and we did want the sales team to be focused on LINZESS maniacally and exclusively for the first couple of years. Again, I think that has been very beneficial to the growth of the brand.

They will continue to make that their highest priority going forward. And, at the same time, we're looking at a range of a product opportunities, and we want to keep the bar high and make sure we get something that really provides value for our reps and for our shareholders. But, we'll keep at it, and I think we'll find some interesting and valuable opportunities over time.

[Mac Kirker], Goldman Sachs.

It's Mac filling in for Gary Nachman. How much of the new scripts for LINZESS are coming from OTC products?

And, how incremental -- I don't know if you can comment on this or want to, but, how incremental do you think the OIC opportunity would be? And, is it being used off label significantly already?

Tom, maybe you can take both of those questions?

The first question with regard to our primary source of business, we knew that in order to really enable LINZESS to reach its potential, the majority of the new business would have to come out of the OTC market. Certainly, that is exactly what we are seeing playing out.

Certainly, as a market leader, we are growing the market. We're penetrating the market, but as I look at the primary source of business, over 60%, 65% of the new patients being put on drug are coming right off OTCs which is exactly what we needed to see. I think we feel very good about, not only where we are, but where we're going.

With regard to the opioid-induced constipation market, as you know, it is a sizable market. It's about 8 million patients out there that we estimate are in need of effective therapy.

Based on certainly the early work that we've done in animal studies, I think we are encouraged that we will see a positive outcome. But, obviously, we're initiating the trial. We will take a look at the impact that it has on the patient population.

As far as your question on how much we think we're actually getting off-label, that is very difficult to really understand, and certainly something that in no way are we encouraging. But, I think we are going to continue to examine that moving forward. But, we do see it as a nice opportunity. We will take a look at what the clinical studies look like and determine how we best proceed.

(Operator Instructions)

Brian Jeep, WallachBeth Capital.

The first one -- previously you pointed us towards mid-20% gross-to-net, and I guess with the Actavis accounting for co-pay card, now we're at 30%. It seemed like we still had a ways to go -- a few points to go to get to the 25%. Are we still expecting some creep there? A little bit higher?

Tom G., can you take that question?

As we said, since the launch of LINZESS, access is something we want to ensure that patients are able to get the drug when it gets written for them. We had signaled mid-20% for gross-to-net, as I said, excluding this accounting change. We're still comfortable with that guidance for the near term.

However, we do view not only gross-to-net but other investments as part of a basket of marketing mix which we evaluate over time and ensure that the mix we have is optimizing not only access but the value of LINZESS to us and the patient. It will change over time as we get better data, and that data informs us on how to create the most value we can.

I think you said that Actavis maintains a bit lower wholesale inventory levels, and we saw that in the quarter. The revenue number was unfavorable versus past periods. But, given the accounting change for gross-to-net and potentially lower wholesaler inventory levels going forward, is Q3 a good baseline from that perspective for us to think about going forward?

I think over time with the exception of changes in price increases, et cetera, we would expect net trade sales to trend pretty closely with what we see in terms of TRX demand. I would say that Actavis does operate with a lower level of inventory with their wholesaler partners in this two- to three-week range, and we did end the third quarter at the low end of that range, as I said.

So, there will be some fluctuations, for sure, quarter-to-quarter with respect to the level of wholesale inventory. But, for us operationally, the key measure continues to be TRX growth, and that is really indicative of the strength of the brand and the patient satisfaction we're seeing in the marketplace coupled with our managed-care access position.

Mario Corso, Mizuho.

In terms of the direct-to-consumer, as we think about that broadly, but then try to think about the trend within the overall budget. Was the intensity of the DTC spend -- I don't know whether it's best thought about in minutes, dollars, days, whatever. Was the intensity of that spend -- is it static between Q2, Q3 and the current quarter? Or, is there much fluctuation?

My second question -- in terms of the GERD program, is that study meant to be phase III enabling? So, if you see data from that study, could that program potentially move to phase III trials next year?

Tom McCourt -- DTC spend?

DTC spend. We do -- we're for thoughtful about how we lay out the media plan over the entire year. And obviously, you're going to invest more in periods of the year in which you are going to see more rapid growth in available patients that we make sure we take advantage of those opportunities.

I think the media plan that we had in place this year was a robust plan, has impact that we had hoped to see. I think we can make, it is roughly the same range [that were going to go into next year with. But I think we will have a better informed plan, a more robust plan that we hopefully can actually improve the overall productivity of the spend. I think we like where we are at with regard to the spend.

We like where we are with regard to the impact, and again, I think as we look into next year, it is really how we might optimize] based on where we are geographically, what channels we invest in -- and it does fluctuate. Demand does fluctuate through the year, which we have seen in the past, and we certainly saw again this year.

With respect to the staging for IW-3718. It is a phase II-a study, exploratory -- one-dose strength. So, we will -- if we see success on the exploratory endpoint we are measuring, we would then proceed to a phase II-b where we do a much more thorough dosing -- full-dose response.

Mario, I think earlier when you asked your questions, you had also asked about sales and marketing expenses in 2014 and how we expected to end the year. I think we let that one slip through so, Tom G., if you wouldn't mind -- could you answer that one as well?

Mario, sorry for that. We were testing your patience to see if you were going to come back with another round of questions.

To answer your question, we do not expect any anomalies other then we're working the plan we went into the year with. For those changes in the accounting for the patient assistance programs, there really isn't any other change in our guidance.

We do expect to end the year in the low to middle zone of that $240 million to $270 million. Just to reiterate.

David Nierengarten, Wedbush Securities.

This is [Taleep] filling in for David. I just wanted to clarify regarding the decrease in sales and marketing.

Where is this coming from exactly? Is this less being spent on advertising or from the sales force? And, going forward with the guidance expected to be in the lower end of the range, should we expect this downward trend to carry into 2015?

We haven't given any guidance on 2015. Look for that on the next call when we close out the year.

But, to get your question on 2014, the reason we're guiding to the lower to the middle end of the range than we had previously provided is because of the fact that in the original guidance we had our patient assistance program expenses in sales and marketing for the full year. And, with this change of accounting that is affecting gross-to-net for the third and fourth quarter, the geography on the P&L of those estimates will be changing. So, it will be reflected in net sales, not sales and marketing spending. I hope that was clear.

I guess just to add a bit -- I'd say we feel very good about the investments we're making across the sales and marketing mix whether it is investing against educating patients or educating physicians further. We feel very good about the return on investment we're seeing from those investments, and we work very hard to calibrate to make sure we're making appropriate investments and we will going forward.

I think you will continue to see investments -- without being too specific on the numbers -- very significant investments both in physician and patient education going forward as you've seen this year and last year. We feel great about the growth in the brand.

I'm showing no further questions or comments at this time so I would like to turn the call back over to CEO of Ironwood Pharmaceuticals, Dr. Peter Hecht.

Andrew, thank you for your help today, and thanks to all of you for participating in the call this afternoon. Just to summarize quickly what was discussed on the call today, three points, LINZESS demand [is] strong, continues on a strong growing trend. We expect the brand to be profitable going forward and have a very positive long-term impact on the collaboration as well as on Ironwood.

Second with great momentum behind our R&D efforts with multiple mid- to late- stage clinical trials either ongoing or queued up to initiate over the next few months in the quarter, and opportunities for important date today readouts beginning early next year and continuing over the next 12 to 24 months.

Third, we are beginning to partner our investments and officially allocate our shareholders' capital in areas where we believe we can create the most value. Thanks for listening. We will be around this evening and tomorrow so contact Meredith if you would like to follow up with any additional questions. Exercise your right as a citizen to vote early and often and have a great evening. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.