Ironwood Pharmaceuticals Inc (IRWD) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ironwood Pharmaceuticals 1Q 2018 Investor Update Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like introduce your host for today's conference, Ms. Meredith Kaya. Ma'am, you may begin.

Good morning, and thank you for joining us for our first quarter 2018 Investor Update. Our press release has crossed the wire earlier this morning and can be found on our website, www.ironwoodpharma.com.

Today's call and accompanying slides include forward-looking statements. Such statements involve risks and uncertainties that may cause actual results to differ materially. A discussion of these statements and risk factors is available on the current safe harbor statement slide as well as under the heading Risk Factors in our annual report on Form 10-K for the year ended December 31, 2017, and in our future SEC filings. All forward-looking statements speak as of the date of this presentation, and we undertake no obligation to updates such statements.

Joining me for today's call are Peter Hecht, Chief Executive officer, who'll provide additional information on the planned separation that we announced earlier this morning; and Gina Consylman, Chief Financial Officer, who will review our first quarter 2018 financial performance; Bill Huyett, Chief Operating Officer; Tom McCourt, Chief Commercial Officer; Mark Currie, Chief Scientific Officer; and Chris Wright, Chief Development Officer will also be available during the question-and-answer portion of the call. Peter and Gina will be referring to slides available via the webcast. For those of you dialing in, please go to the Events section of our website to access the webcast slides.

With that, I will turn the call over to Peter.

Thanks, Meredith. Good morning, everyone, and thanks for joining us. Today is a big day for Ironwood. This morning, we announced our intention to separate our FTC business from our Commercial and GI business, resulting in 2 exciting, independent, publically traded companies. Each with a unique focus and design to have a starter competitive position.

I want to take a moment to provide some color on the separation and discuss why now is the right time to begin the separation process for these 2 companies. And then Gina will discuss our business highlights for the quarter.

Let's start on Slide 4. Over the past 20 years, we've worked tirelessly to build Ironwood into a strong and growing commercial biotech company with a valuable collection of assets and exceptional employees. We're pioneering in 2 very important areas simultaneously. We're commercializing in categories with millions of potential patients, and we're innovating to discover and develop important new medicines. We've done all this by staying focused on our singular mission of creating and commercializing drugs that can change patients' lives. We've made important progress over the past few years, both commercially and within our pipeline. Here's just a few key highlights: LINZESS continues to be the branded prescription market leader in the IBS and CIC category with a clear growth trajectory into the early 2030s. We've introduced DUZALLO and ZURAMPIC into the uncontrolled gout market. As you're going to hear from Gina in a few minutes, we now expect to advance 3718 into Phase III trials in the third quarter of this year.

We've made important advances with our lead sGC clinical candidates, highlighted by the recent, encouraging praliciguat Phase II data in diabetics with hypertension, reinforcing the enormous potential for our FTC drugs to play an important role in many serious and orphan diseases. And we've made exciting progress advancing tissue-targeted, pre-clinical sGC stimulators for severe CNS, liver and now lung diseases. This significant progress across our portfolio catalyzed our ability to separate these businesses into 2 focused, durable platforms that we believe are poised for long-term growth and shareholder value creation.

Through this separation, we plan to create 2 simplified businesses that are each better positioned to do what they do best. As standalone companies, we anticipate the new Ironwood and R&D, Co. to invest more effectively in their respective operations, creating nimbler, more productive businesses. We believe that they will each have a more distinct investment thesis that will attract a long-term shareholder base suited to each business and will provide for simpler and more transparent capital allocation.

We expect this separation to create 2 distinct businesses, with strength and competitive positions to facilitate business model innovation and to better enable partnerships that fit each business' distinct characteristics. Ultimately, we believe pursuing this path will enhance operational, commercial and clinical effectiveness and create significant value for patients and for our shareholders.

In terms of next steps, we plan to complete our company design work, and we'll provide (inaudible) dates on leadership and organization when they're available. The planned separation is subject to customary conditions, including receipt of regulatory approvals and final approval from our Board of Directors. We expect to complete this transaction by the first half of 2019.

Let me provide some highlights on the 2 businesses. We expect the new Ironwood to be a profitable business, focused on accelerating growth of our 3 end-market products: LINZESS, DUZALLO and ZURAMPIC; and key development candidates: 3718 and delayed-release. These products all have long IP coverage and the potential to serve millions of patients over many years, and all are, or have the potential to be, first-in-category market leaders.

Following the separation, we believe a tighter operating focus will enable new Ironwood to drive its existing portfolio, innovate in a rapidly evolving commercial landscape, allocate capital more specifically to its business and execute on a multifaceted business development strategy.

Turning to R&D Co. This company is going to harness our pioneering work in cyclic GMP pharmacology to execute on a focused and robust pipeline of sGC stimulators targeting serious and orphan diseases. Our sGC stimulator portfolio includes leaked clinical candidates praliciguat, which is in Phase II trials for HFpEF and diabetic nephropathy and IW-1701, which is now called Olinciguat, which is in Phase II trials for sickle cell disease and achalasia. The sGC portfolio also includes tissue-targeted sGC stimulators, including IW-6463, which is being evaluated for CNS diseases and exciting late-stage discovery programs targeting severe liver and lung diseases. R&D Co. intends to develop and selectively commercialize drugs treating serious and orphan diseases and to outlicense drugs targeting larger patient populations.

As an independent company, we expect R&D Co. to rapidly advance its pipeline of clinical-stage assets. Accelerating development with more parallel programs and innovative trial designs, tailoring its development approaches to serious and orphan diseases, simplifying its capital allocation decision-making and enhancing strategic partnership opportunities through a more focused strategy.

In summary, we believe we are well positioned to drive shareholder value this year and for a long time to come. We've done a lot of work to get to the point where both businesses can grow and thrive independently. We believe both the new Ironwood and R&D Co. will offer compelling investment opportunities for our shareholders and enable us to continue with our mission to provide patients with important new medical innovations.

With that, I'd like to turn the call over to Gina, who will discuss our Q1 results.

Thanks, Peter, and good morning, everyone. I am going to briefly highlight an update from IW-3718 and then we'll review financial highlights from the first quarter. Please refer to our press release for the detailed financial information.

Regarding 3718. Over the past few months, the team has had a series of highly productive meetings with the FDA and is on track to initiate 2 Phase III trials in the third quarter of 2018. These trials are designed to evaluate the safety and efficacy of 3718 in patients with persistent GERD and expected to enroll less than 800 patients each with heartburn severity response as the primary endpoint. Additional details on study design and endpoints will be provided upon the initiation of the trials.

Turning to the financials. We recorded $69 million of total revenue for the first quarter of 2018, up 33% year-over-year from $52 million. First quarter 2018 revenue primarily consisted of $61 million from our U.S. LINZESS collaboration with Allergan, up 23% year-over-year as well as $5 million from the sale of API to Astellas.

Combined net sales for DUZALLO and ZURAMPIC totaled approximately $600,000 in first quarter of 2018 compared to $300,000 in the first quarter of 2017.

For the first quarter of 2018, total operating expenses were $105 million, including $37 million in R&D and $62 million in SG&A, of which $2.4 million related to our field-based workforce reduction in January 2018.

GAAP net loss for the quarter was $43 million or $0.29 per share. Non-GAAP net loss, which excludes noncash adjustments related to our convertible note hedges and warrants, the amortization of our acquired intangible assets and the change in fair value of contingent consideration, was $40 million or $0.27 per share.

In the first quarter last year, GAAP net loss was $53 million or $0.36 per share, and non-GAAP net loss was $48 million or $0.33 per share.

Turning to LINZESS. In the first quarter, total LINZESS prescription volume grew 15% year-over-year to approximately 30 million capsules. This translated into total LINZESS net sales for the first quarter 2018 of $159 million, an 8% increase compared to the first quarter 2017. The gap between year-over-year net sales growth and volume growth is primarily due to a decrease in inventory. LINZESS commercial costs and expenses were $59 million in the first quarter, which included $5 million in cost of goods sold and $54 million of sales and marketing expenses. LINZESS brand collaboration in the U.S. generated approximately $100 million in commercial profit in the period, up 31% year-over-year. Commercial margin was 63%, up 52% in the first quarter of 2017.

As you have seen, over the past few years, commercial margin fluctuates quarterly, based upon levels of demand and investment, but we continue to expect it to expand over time and to exceed 70% by 2020.

Total net profit for the U.S. LINZESS brand collaboration, including R&D expenses, was approximately $89 million in the first quarter, up 43% year-over-year. Importantly, as this next slide depicts, LINZESS of volume growth and discipline spend drives significant operating leverage for Ironwood. From 2014 to 2017, a greater than 30% LINZESS U.S. net sales CAGR drove an approximately 75% Ironwood revenue growth CAGR. This trend continued in the first quarter of 2018, with expanding commercial margin translating into enhanced revenue growth for Ironwood.

Lastly, considering today's announcement, we are currently reviewing our 2018 financial guidance and will provide an update during our second quarter 2018 investor update. We have an important year ahead of us. Our team is continuing to drive growth while seamlessly affecting the separation transaction intended to unlock shareholder value and give each business the strongest platform for success. We are excited about the opportunities ahead.

With that, I will hand it back to the operator to begin the Q&A portion of the call.

(Operator Instructions) Our first question comes from Geoff Meacham with Barclays.

This is Jason on for Geoff. I'm curious as, if you think about the 2 separate companies, in terms of driving more commercial growth through LINZESS, the smaller Ironwood-focused company, what exactly is going to help drive that versus, kind of, the greater holistic organization?

This is -- it's Tom McCourt. I'll take the first question here. And I think for us, I mean, it's really, what are we trying to do as far as creating overall value for both the company and the shareholder. And as we move forward, obviously, with the restructuring, we have a very profitable company, immediately profitable company, with really strong, durable growth with a handful of very differentiated assets for years to come. And I think we certainly have a team to execute against that. It also creates additional opportunities for us, as we continue to evolve the commercial model, but also look at other opportunities as far as future transactions, whether that's a product, a technology, maybe additional collaborations. So it gives us a lot of options with regard to, how we can provide even greater incremental growth over time. But I do think, fundamentally, being maniacally focused on a specific area, really creates a competitive advantages, kind of, what we've learned over time. And I think we -- as you know, we have a very strong collaboration with Allergan and together, I think we'll see great things to come, both with regard to what you see with LINZESS, but also what's coming from the lifecycle management plan that we're both continuing to invest in.

Excellent. I -- just in terms of where the research organization arm of the Ironwood-focused company goes? I mean, where -- what does that organization look like in terms of development with -- is it going to be primarily GI focused, or how does that fit in?

I'm sorry. The research piece of...

Of the Ironwood-specific company, now that you're moving the research and development away to the R&D Co., what's next in the pipeline for the Ironwood-separated company?

Right. I'll take that as a start. The New Ironwood will have both the lifecycle work that's ongoing for linaclotide. That includes abdominal symptoms claimed study, that's a Phase III that will start mid-'18. There's work on the delayed-release version of linaclotide, which has the opportunity to improve pain for all forms of IBS, and potentially serve as a visceral pain agent as well. And 3718, which you just heard from Gina, we've had very positive feedback from FDA recently, and we're moving into Phase III in the third quarter of this year. So there's actually quite a lot of development work and ongoing R&D in that company going forward.

And our next question comes from Jami Rubin with Goldman Sachs.

This is Divya Harikesh on behalf of Jami Rubin. I had 2 questions. One with respect to splitting the company. If there is a trapped value, you clearly believe there is trapped value in the sGC platform. I was curious why that could not have been unlocked by announcing a big strategic partnership. So if you can just walk through your rationale there in terms of choosing to split the company now versus a strategic partnership, which is what we were all anticipating. And secondly, on ZURAMPIC, that still doesn't seem to have to taken off. At what point will you get the data that will help you decide on the success of this marketing approach? Or is this a drug that's worth investing beyond at all if creating this market is going to prove to be challenging?

Thanks for the questions, Divya. I'll take the first one, and Tom can take the questions on the gout opportunity. With respect to strategic partnerships for sGC and strategy alternatives, I would say 2 things. First is, I wouldn't rule out partnerships by any means, for either or both companies. In fact, as we highlighted in describing the 2 companies, part of the motivation for separating the 2 businesses is so that they can each focus in their strategic areas of competitive strength and output -- allocate capital more specifically to areas where they believe they can prioritize growth and shareholder value and also, work to tailor, structure and partnerships that are most appropriate to the new companies. In particular, with sGC, we do expect and continue to have conversations around partnerships for praliciguat and potentially, for Olinciguat as well actually. So it's not an either/or. And as a -- maybe slightly more general comment, I would say, we've considered a broad range of strategic alternatives for unlocking value as a company and together with our board. We do so on a regular basis. And this decision was not taken lightly and was the result of very thorough review, and we're quite confident that this is the best path forward for unlocking shareholder value at this time.

Peter, I'll take the second question with regard to ZURAMPIC and DUZALLO. We still like this market very much. There's still 2 million -- as you know, there's 2 million patients who are highly symptomatic, uncontrolled and suffering. DUZALLO, which is the fixed-dose combination, provides a clear advancement in care for these patients with allopurinol alone, and we have learned a great deal about this market over the past year. One, when the physicians do utilize either ZURAMPIC or DUZALLO, they clearly recognize the clinical efficacy of the product. It performs very, very well. Two, that being said, physicians are a little empathetic with regard to managing these patients. And they really need to recognize how much these people are suffering and to help patients speak up about their symptoms and the level of control they have with gout. And I think the third is, there's a disproportionate number of these patients that actually have Medicare Part D coverage. And obviously, it takes a little longer to get D coverage, which is certainly suppressing the growth. As you know, we're running a series of tests in the market to really figure out, what's it going to take to accelerate the growth. Those test markets are up and running. We actually will be looking at different levels of promotional frequency of speaker education programs as well as an in market consumer campaign, which just launched yesterday. And I think we'll certainly be monitoring those over the next few months and we'll have a clear line of sight with regard to, what is it going to take and how will we inform our strategy as we proceed forward.

And our next question comes from Ying Huang with Bank of America.

It's Aspen on for Ying. Just a couple of quick ones. You just mentioned that the difference in the (inaudible) revenues and volume, it's largely driven by inventory drawdown, were there any pricing dynamics there as well? And then I think, part of Allergan you had mentioned yesterday, plans for new DTC campaign, and I think you guys also said that the new Ironwood company would do some more digital advertising. Could you guys maybe elaborate a little bit more on that?

Gina, you want to take the first question, and then Tom may be, you (inaudible)...

Sure, I'm happy to take the first question. So we did do a comparison, as we typically do, of year-over-year net sale. So first quarter 2018 versus first quarter 2017. As you saw, we had very healthy volume increase year-over-year, about 15% for 2018, and the disconnect between that 15% and the 8% for our net sales is due to inventory. Other price remains stable year-over-year, and it's very seasonable -- seasonal takedown of inventory, where we see a buildup in the fourth quarter by our wholesalers and in the retail channel, and then it's -- this is our second year in a row where we've seen a drawdown on that inventory during the first quarter.

I'll take the consumer question. We launched the new DTC campaign 2, 3 weeks ago. This a whole new format, if you see in the [IJACK,] where it's called the game-frame strategy, where you get the benefit of the product up front, which allows you to more efficiently deliver the message, which also opens up additional challenges -- or excuse me, additional communication channels. What we've seen almost immediately is a significant jump in new-to-brand patients. It's one of the biggest jumps we've seen since we've started DTC and is at an all-time high, just within the first 2 weeks. So, we're very encouraged, both with regard to the performance of the concept of the ad. But equally as important is, what we're seeing as we've opened up additional communication channels, certainly, in the digital space as well as the social media space. And this is an area that we certainly have developed a strong expertise in, and I think, we believe, is an area for ongoing growth, as we continue to activate more and more consumers to raise their hand and ask for more effective therapy.

And our next question comes from David Lebowitz with Morgan Stanley.

I'll actually ask one off the restructuring or the sale-of-business topic. Just with respect to LINZESS sales going forward, should we expect that the run rate will be low in the first half of the year and pop up in the second half of the year, as it has done in recent years? Or should we have different expectations for the run rate through 2018?

Yes, this is Tom. I'll take that -- the question. I think, as I mentioned earlier, overall, we're seeing very strong, steady growth. To be -- this -- year 5, year 6 in commercialization of a product, to see this year-on-year growth is really remarkable. I think it's important to remember that as successful as this drug has been, we've really only treated 4 million or 5 million patients out of the 30 million to 40 million that are out there. So there's tremendous headroom for growth. As far as the seasonality of the rate of growth, I think we continue to see this first quarter lull, which is generally caused by these high deductible plans. And as the patients work through the high deductible plans, the growth tends to accelerate in May and June. And then as you recall, we also see some softening over the summer months, and then it tends to accelerate again in August, September and October. So I think it's been extremely consistent over the last 4, 5 years as far as those growth trends, and we fully expect that to continue. But I think the most important thing for me is the opportunity for ongoing, durable growth in a market where there's still tremendous demand.

And our next question comes from David Maris with Wells Fargo.

I have a few questions. First, how would you respond, Peter, to someone who would argue that it's not really addressing the idea held by some, that Ironwood should offload more R&D spending on drugs that Ironwood can't market fully themselves, specifically, the GERD drug? Separately, Alex Denner is seeking a board seat. I know the company went out for a little bit of a listening toward a hear feedback. What's been the feedback that you've had from investors? What's been your interaction so far with Alex, and what's management's current position on whether or not to add him to the board? Do you think, also, that this is a plan that you announce today that he supports? And then lastly, how much do you think the GERD Phase III program will cost?

Okay, thanks for the questions. That was a bunch. Let's start with the first one. If -- let me make sure I understand. That you're saying there is a concern raised by some that we shouldn't be investing in 3718 development?

Yes. That in the end, you're not going to be able to market it, wholly yourself. It's going to be a GP sales point, and so it's better to partner it early or to spin it out to have investors -- separate investors from that separate from the LINZESS incoming. So the idea that maybe you should offset more of the R&D. I know you addressed a little bit of it as, "Well, look. We also are open to partnering. And that's part of what the solution is ". Did you contemplate moving that program into R&D Co.?

I see. Thanks. We've -- we considered the broad range of strategic alternatives, David, and we're quite confident that this is the best path forward to unlocking shareholder value. The uncontrolled GERD market and opportunity is really a terrific fit, strategically, with the IBS and visceral pain opportunities. The 3 market opportunities and commercial opportunities go fabulously together in the U.S. and frankly, around the world. As you know, we focus in the current Ironwood on commercializing in the U.S. and together with our partner, Allergen, in a collaboration that's been very successful to date, and we expect it to continue to be successful for years to come. The new structure doesn't preclude, in any way, partnering successfully the 3718 development or commercialization, if that's the right strategy for that company or partnerships for -- on the sGC side. And in particular, we're explicitly saying for -- on the sGC side that we're going to focus commercially there on markets where you can commercialize with a smaller commercial effort than it takes with these markets to serve millions of patients. And so, for instance, for HFpEF or diabetic nephropathy, which we're studying for praliciguat. If those data are highly successful, which we're excited to seeing next year, we expect to out license that program within that business. So I hope that gives you some color there. You had a -- I know I jumped out of order, but you had a question about 3718 structuring cost, and maybe Chris can take a little bit of color on the design and the feedback from the FDA. I don't think we can give you details on cost, but maybe if you can give a little bit of color on design that will help.

Sure. All right, so as was mentioned in the release, we had a number of really good meetings with the FDA that provided us with a path forward for our Phase III study to begin in Q3 this year. And some of the key elements that came out of that meeting were around needing the 2 trials that will be approximately 800 patients or less each, and it's an 8-week study. And that should give you a sense a little bit about the size of the Phase III program. We're really excited about moving this forward. It's -- there's millions of patients that are not responsive to PPIs that really could use new options. And these patients are highly symptomatic and they seek a lot of medical care as well. So we really feel like we're excited about moving this forward as quickly as we can to get this medicine to patients.

And then you asked about (inaudible). There I think what I can tell you today is, the board is addressing that topic and will have its recommendation and definitive proxy when that gets filed shortly and our focus for today is really on discussing our separation plans and the opportunity we see for unleashing 2 very exciting businesses.

And our next question comes from Tim Chiang with BTIG.

Peter, could you talk a little bit just about some of the partnering discussions you've had with 3718 and for 1973. Do you think you'll get partnerships for these 2 assets this year? That's my first question. And then secondly, could you update me on the timing of some of the Phase II study readouts for 1973 and 1701? I know you've got 4 Phase II trials going on. Will some of those Phase II trials finish right around the time of your planned spinout of the R&D Co.?

Bill, can you take the first question about partnerships?

Sure. We're going to be, if anything accelerating the intensity of the partnership discussions on both the praliciguat and 3718. We've had a series of quite promising discussions, and our team understands, there's nothing about this separation that should get in the way of moving to a partnership structure that creates the most value for our shareholders. As Peter explained, we believe that the new structure will, in many ways, simplify the structuring of those transactions, the partnership objectives and even the likely partners between the 2 companies who are different for all the right reasons. So we're actually quite excited about the prospects for partnerships on both of them. As to whether we achieve them this year. Our goal is to get a value-creating set of partnerships for those assets. And the faster it happens, the better. But we're not going to compromise the value-creation structure just to get it done in a specific time period.

Chris, can you talk to the Phase II study and relative timing?

Sure. So, as you know, we recently started several studies at the end of last year. The initial study that we began was the diabetic nephropathy study with praliciguat, and we expect that we'll have data from that towards the end of 2019, so second half of 2019. That study is progressing well. It's still quite early for the other studies that began after the diabetic nephropathy study. So those are in the process of getting up and running, and we're adding sites as we speak. And so I'll be able to give you more color on the timing for the data in those at our future conferences.

And then just one financial question for Gina. Is the spend guidance being maintained as you guys highlighted back in February? I think, back then, you had targeted what SG&A cost of around $230 million to $250 million for the year, about $160 million to $180 million of R&D spend. Is that the same?

So we actually noticed that -- noted that our guidance is now under review, and we will make sure to provide an update with our second quarter investor update. And the reason we have noted that is because the transaction will most likely have fees that are customary with this type of undertaking, and we would like to provide a better estimate of those transaction costs and the impact on our guidance, which may impact the SG&A spend for the year.

And our next question comes from Anupam Rama with JPMorgan.

Just a quick one from me. Any comments or thoughts about how you think about the cost share structure for the new Co. relative to the new Ironwood?

No. We expect both of these companies to be publicly traded companies.

And then on the Ironwood side, you guys mentioned a business development strategy. Maybe a little bit more color on how you think about BD supplementing the pipeline.

On the new Ironwood, the inbound business development will be a critical part of complementing the clinical work that Peter and Tom described earlier, the lifecycle management on LINZESS and 3718. Actually, one of the huge advantages of the separation is it deconstrains, what we can do in the inbound business development with respect to both the size of potential product opportunities and even the therapeutic area scope, the operative word is going to be -- is highly symptomatic diseases that serve large patient populations, where the new Ironwood will build on the distinctive capabilities to motivate patients and prescribers in those areas. So the inbound business development will be the -- more active. On R&D Co., the business development focus will be making sure that -- of this larger output of pock compounds that we find the best commercialization structure for each one of them. And as Peter described, the commercialization for the larger population, products will be partnered out in a full range of structures or as the new R&D company will consider commercializing in the smaller diseases, where that makes economic sense. So if you will the direction of business development is different in both companies, and again, that's one of the reasons we believe that the separation makes great sense.

And Anupam, I think I didn't quite understand your first question. If you're asking about the dual-class voting structure that we currently have, that expires at the end of 2018, December 31. So it should be, and we expect this transaction to close and the separation to be finalized in early 2019.

And our next question comes from Vamil Divan with Credit Suisse.

This Michael Morabito on for Vamil. Just wanted to ask you a little bit more around -- I know you mentioned that there'll be details on the leadership change forthcoming. But could you provide a little bit more detail on roughly how you expect the management to be divided between the new companies? If most will stay with Ironwood, if most will stay with R&D Co. or if it will be split down the middle, at least some kind of color on that. And also, in your strategic review, at any point was a sale of the sGC pipeline assets considered? And in what way does spinning off R&D Co. generate more value for shareholders than an actual sale would have?

Thanks. I'll take both questions. On the question of leadership teams, we feel quite strongly that we have really fabulous people here. Starting with the board, really a terrific board, great leadership team and very talented and passionate people throughout the organization. And I can tell you, we're all very excited about today's news, and I think early returns, even this morning, are -- that everyone is eager to contribute as best we can to grow 2 great, new, focused businesses and deliver shareholder value. And frankly, one of the big reasons we're announcing our intent to separate today, is so that we can engage in an open and public way with the broader team to define what our needs are going to be and to work together to fill them, both with internal folks and attracting some key external talent. So that -- we can't give you the details today. This is really day 1 for us to begin having those kinds of conversations. With respect to the question of the sale, absolutely, we're always considering the broad range of strategic options. I would say, we fit -- to reiterate what I said a couple of times. We are quite confident that this is the best path forward to unlocking shareholder value. And we feel very confident that these are very exciting assets and teams and a very compelling set of business opportunities. And that when you unleash strong focused teams on great opportunities, that you have the real chance to generate great growth and great shareholder returns and to build market leadership, in this case, in 2 very distinct spaces. And so, we're eager to unleash those teams and see growth and shareholder value creation.

Okay. Is this -- if you could add, you said on the last call that you are going to be speaking to your investors. Is this the direction that your investors were pushing you towards?

Yes, I would say we are frequently in -- on an ongoing basis in contact with a very broad range of our shareholders. Not to be to -- well, we have a set of principles, they are on our website called unrelated business principles. And #1 says, our shareholders own the business and we work for them. And we take that seriously. And frankly we've been considering something along these lines for a number of years and we've had suggestions from many of our shareholders to consider this kind of a structural solution for many years, as a way to unlock and maximize value. We're really pleased with the steady progress in the portfolio over the last couple of years has enabled the launch of 2 strong businesses. And it's really starting last fall that we undertook full strategic review with outside advisors and did the work to get comfortable and confident that this was the right strategic path forward. We've already heard from a number of our shareholders today and I think they are quite pleased, we're moving in the direction that we've been talking with our shareholders about for some time.

And our next question comes from Irina Koffler with Mizuho.

Can you provide a little more background about how you're going to fund the R&D Co. Who is going to hold on to the debt? You've got about $400 million in debt, and how you're going to split the company cash? And then I just wanted to understand a little bit more about the collaborative margin that you had, the profit margin. The 63% seemed quite a bit higher than the first quarter of last year. So just wondering, second quarter, could we expect it to kind of dip down a bit before it goes up again in the back half of the year on that margin question? And then lastly, can you provide a little bit more transparency around how much the company spends behind its GERD commercialization?

It's Gina. Let me at least take these first 2 questions, and then we can maybe let Tom in as well. So first just on funding. I will say we're really excited about these 2 opportunities from a finance perspective to -- I know Peter and Tom and Mark gave a lot of color about the vision of the two companies. From a financial perspective, this affords us a new opportunity to make sure that capital allocation is structured in a way that optimizes the -- both companies. Because both sides have very unique requirements and we're excited and looking at this and modeling this and thinking about all the possible ways to make sure that these companies are set up for success in the future. So there is certainly more to come on that, but we feel good about where we are and where we will be in the first half of 2019, when these companies launch independently. Regarding number 2, the second question on the 60% margin. You're absolutely right. The margin is higher this year over last year. You'll note that the LINZESS spend that we guided to this year is about $20 million less than we have guided to in the past on the spend. Sometimes they're a little bit lumpy depending on the timing of the DTC spend. In this case, our DTC spend is kicking up more in Q2 than it did in Q1. It's just that, we optimized when we wanted those commercials to hit for maximum ROI. So you'll see a bit more spend in the second quarter than you did in the first quarter.

I think the other questions she had was the spend level. Irena, I just want to make sure I'm clear on your second question. Is it for gout or is it for what we expect on GERD?

No, just gout and the commercial sales force and programs, marketing programs, et cetera, on gout?

Sure, Irena. So I would say we haven't guided to specific gout numbers, but what we have said is that we're really excited about the opportunities with project forwards and the test markets that we have kicked off earlier this year. We've also noted that, obviously, with this test market approach, we did have a shift in spend, where we have reduced our headcount by approximately 60 sales force reps during the first quarter of 2018, but we have also noted that it's not an overall savings and that we have reallocated that money into other areas of spend, where we think there will be an ROI on the test markets and the data readout.

And our next question comes from Patrick Trucchio with Berenberg Capital.

I have a few on the linaclotide pipeline. First on the label expansion to include additional symptoms, I'm wondering what in your research or experience suggests that the annual DTC campaigns or your sales reps will be more effective with these additional symptoms on the label. In other words, how should we think about the opportunity to accelerate LINZESS sales growth and when do you anticipate submitting a supplemental application? Then secondly, with regard to the delayed-release linaclotide, do you know what proportion of the 60 million IBS and CIC patients on prescription or nonprescription medications, continue to experience abdominal pain? And should we think of this as being a product that could be used together with LINZESS immediate release?

I'll take these here with Chris. But first with regard to the additional symptoms. I think, the one thing that we've learned in the marketplace, is one of the key drivers of growth is our ability to align patients and docs around a common problem to solve. And what we've learned in the marketplace is, patients don't call this abdominal pain. They call it discomfort and bloating. And not being able to utilize those terms to establish a problem that we now believe we can resolve or certainly improve, really kind of hampers our ability to accelerate growth. So having those claims, both on the consumer side to activate broader group of patients who have constipation, but they may not call it abdominal pain, but it's bloating and discomfort, clearly we believe we can activate many more of those patients to raise their hand and demand more effective therapy. And certainly, as we talk to physicians, the #1 problem they tell us, they are trying to solve is bloating in these patients. And again, to be able to show them the data and the magnitude of benefit that these patients will feel as far as relief. We believe will be a significant driver in certainly near and long-term growth. As far as the timelines, I'll kind of hand that over to Chris in a second, but obviously, we'll be kicking off those trials and Chris maybe you can comment on when we will hope to see data.

Yes, so right now we're planning to kick off this labeled extension study midyear this year. It's a bit early to give guidance about timing for the filing, but it will be -- we're really excited to start the study midyear and we're moving along nicely from that perspective.

And then just, if you could comment on the delayed-release linaclotide?

Sure, as far as pain relief, what we know across the board, pain is the primary problem for most of these patients. It isn't bowel function, there's a lot of things patients can take to either reduce their diarrhea or induce a bowel movement. The primary problem that drives these patients in to seek care is pain and discomfort. And there is really other than LINZESS, there's really not many very effective therapies. The other thing that our scientific team has discovered, is a good portion of the pain radiates out of the colon. And the challenge that we have with IR is, we get a portion of that drug into the colon, but we don't get a lot of the drug into the colon. And as we saw in the Phase IIb trial, we saw a dramatic improvement in pain by getting more drug into the colon. So this delivery system that we have, which is primarily focused on delivering the drug into the colon, we believe could act almost independently of the bowel function to relieve pain. Now the other part of your question was, do we think this could be used together with LINZESS and the answer is, yes. I think we do believe that this -- the delayed-release could amplify the analgesic effect that we see with LINZESS and it could be used not only in combination with LINZESS, but anything else you'd want to use to induce a bowel movement or control diarrhea. So there has been nothing like this out there. I mean, this is a big, big idea. To your point, we're looking at 40 million to 50 million Americans that are suffering. It really can crack open a much larger market with a huge unmet medical need that we believe that we can address.

And I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Peter Hecht, CEO, for any closing remarks.

Thanks, Julian, and thanks to all of you for your time and attention this morning. We are very grateful to you for it and we're around throughout the day, if you have questions or follow-ups for any of us, please be in touch with Meredith Kaya here in the shop. And again, have a great day. Palomina, happy 1st of May, and we're going to look forward to talking to you during the day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program and you may all disconnect. Everyone, have a great day.