Ironwood Pharmaceuticals, Inc. (IRWD) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Ironwood Pharmaceuticals Second Quarter 2017 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded August 03, 2017. I would now like to introduce your host for today's conference, Meredith Kaya. Ma'am, you may begin.

Good afternoon, and thanks for joining us for our second quarter 2017 investor update. Our press release across the wire earlier this morning, and can be found on our website, www.ironwoodpharma.com. Today's call and accompanying slides include forward-looking statements. Such statements involve risks and uncertainties that may cause actual results to differ materially. A discussion of these statements and risk factors is available on the current Safe Harbor statement slide, as well as under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 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 update such statements. Joining me for today's call are Peter Hecht, Chief Executive Officer; Tom McCourt, Chief Commercial Officer; Mark Currie, Chief Scientific Officer; and Tom Graney, Chief Financial Officer. Our speakers 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. I would now like to turn the call over to Peter.

Thanks, Meredith. Good afternoon, everyone. We had a very good first half at Ironwood. LINZESS is generating strong volume growth as the branded prescription market leader in IBS and CIC and is on track to exceed $1 billion in U.S. sales by 2020. We continue to develop the uncontrolled gout GERD market with ZURAMPIC and expect DUZALLO, the fixed-dose combination of lesinurad and allopurinol to be approved and launched later this year. Over the near term, our commercial products LINZESS, ZURAMPIC and DUZALLO if approved are expected to drive a greater than 25% revenue CAGR between 2016 and 2020. Our investments and innovation continue to deliver as well most recently with positive 3718 top line Phase IIb results announced a few weeks ago and patients with uncontrolled GERD. The data showed robust signs of drug effect with clear dose responses, significant reduction in heartburn severity and in regurgitation. The symptom where no drug has shown benefit before. Clear separation from placebo overtime for both heartburn and regurgitation and a very encouraging safety profile. Uncontrolled GERD is another large consumer driven patient category and 3718 will be a near perfect set for our U.S. focused commercial capabilities. We intend to develop and commercialize 3718 ourselves in the U.S. and to license to our partner to get drug to patients around the world. In additional to moving 3718 into Phase III, we expect to advance DR1 into Phase III later this year for IBSC. We believe the LINZESS and DR1 if approved have the opportunity to be the two leading prescription products in this large and growing consumer driven patient category well into the 2030s. This is an incredible opportunity for us and for our partners. And we have additional exciting assets in the pipeline including DR2 and our Phase II sGC stimulators, IW-1973 and IW-1701, all of which continue to move forward with important catalyst expected on the horizon. With these assets, Ironwood has an opportunity which rarely comes along in biotech to build a multiproduct company that can deliver innovative new medicines to patients and create sustainable value for our fellow shareholders for many years to come. With that I would like to turn the call over to Tom McCourt.

Thanks Peter, and good afternoon, everyone. LINZESS continued to strengthen its position as a branded prescription market leader in the large and growing IBSC and chronic constipation category with a strong clinical profile, high patient and physician satisfaction and broad payer access. In the second quarter, LINZESS continued delivery with 90% increase in volume and a 15% in total prescriptions year-over-year. We continue to see higher growth in volume relative to growth in prescriptions due to the increasing trend toward 90-day prescriptions. As I've mentioned before, data suggest that compliance on LINZESS has increased substantially with the 90-day prescription as patients of IBSC are more likely to experience greater abdominal pain relief from LINZESS. Physicians are recognizing the need from adequate trial and are prescribing more 90-day prescriptions that in turn is increasing the average prescriptions size. As you can see in this graph, the average size of both new and total prescriptions has steadily increased since launch. In the second quarter, the average size of a total prescription was over 37 pills and new prescriptions were approaching 40 pills per prescription, which explains the difference between the reported volumes compared to the number of total prescriptions for the second quarter. Importantly, we believe LINZESS can grow and shape this category for many years to come. We are focused on bringing more OTC patients and patients who are not on branded prescription drugs into the branded prescription market. Today, 80% of the time a patient sees a doctor for IBSC and chronic constipation, they leave without a prescription, rather with a recommendation to use an OTC laxative. And when they do receive a prescription, 70% of the time it's a generic laxatives. So our competition is clearly both OTC and generic prescription laxatives. We remained focused on growing the overall IBS in chronic constipation branded market as well as market share, by converting appropriate patients to LINZESS and further expanding the clinical utility of LINZESS. Market growth starts with motivating more patients to see their physician and discuss their symptoms. And market share growth for LINZESS is driven by physicians choosing LINZESS for those symptoms or honoring its specific patient requests for LINZESS. The DTC campaigns for LINZESS have consistently demonstrated ability to drive both market share growth as well as the overall market growth. Our spring campaign drove significant momentum producing all-time highs for new to brand patients, total weekly prescription and market share. LINZESS was recently recognized as one of the top performing as across all industries, as our marketing team won its first Effie Award, the preeminent global advertising award for most effective marketing communication programs. We're extremely proud of this accomplishment as LINZESS with the only prescription brand to be recognized this year. Further, we aim to continually raise the bar. Through our innovation including Linaclotide DR1 formulation, which has designed to amplify the improvement abdominal symptoms, if approved, we feel DR1 and LINZESS could drive peak sales to greater than $2 billion. Turning to our uncontrolled gout franchise. We believe lesinurad represents a clear advancement and care for appropriate patients and we continue to make progress in developing the market. In the first half of the year, we focused on educating physicians about lesinurad and the importance of managing patients' serum uric acid level, while securing broad payer access for patients. We believe the real work horse in the uncontrolled gout franchise will be DUZALLO, which we expect to be approved later this year. DUZALLO is a once-day combination treatment option that provides a simpler solution for uncontrolled gout patients to reach their targets serum uric acid levels. We believe combined peak annul U.S. sales generated by DUZALLO and ZURAMPIC will exceed $300 million. Before I turn the call over to Mark, I want to quickly touch on the commercial opportunity for 3718 given the results we announced a couple weeks ago. Uncontrolled GERD is a highly prevalent disorder with an estimated 10 million Americans suffering from symptoms such as heartburn and regurgitation, despite receiving treatment for PPIs. This patient population are large consumers of healthcare resources resulting in high caught to system and there are really no further treatment options beyond PPIs. We've spoken to numerous GERD experts since announcing the 2b data and they have resoundingly positively responded to the profile in the data, and indicated that they believe that these data validate our hypothesis, the bio plays a key role in control GERD. And the 3718 offers hope that for the - it will be the first therapy for millions of uncontrolled GERD sufferers, and maybe on well on its way. 3718 fits perfectly into our U.S. focus commercial strategy and if approved, we intend to commercialize it on our own in the U.S. and find an ex-U.S. partner. Today, we call around 30,000 the highest prescribing physicians, who are largely the same physicians treating uncontrolled GERD patients, which will make 3718 an extremely efficient call alongside LINZESS. I'm proud of the commercial progress that we've made and what we've built here at Ironwood, and our level of collaboration with Mark and his drug development team. 3718 has the potential to be an innovative product that enables us to leverage our commercial capabilities, shaping large consumer driven category, in touch millions of patients' lives. With that I'll turn the call over to Mark Currie.

Good afternoon, everyone, and thanks Tom. I echo your comments about the partnership between R&D and commercial here at Ironwood. It is an exciting time and we have a number of innovative pipeline assets advancing. I'll start with 3718. As Peter mentioned earlier, add efficient to advance this program was unambiguous. We confirm that bio laxatives hypothesis successfully defined the clinically meaningful degree of heartburn improvement for the uncontrolled GERD patient population, demonstrated a clear drug effect with encouraging reductions and both heartburn severity and regurgitation and identified the optimal dose to take forward and to pay three, all with encouraging safety and tolerability. For the heartburn responder endpoint, we utilize pay to reported outcome measures to define a clinically meaningful degree of improvement. Patient regardless of treatment were asked at the end of each week to categorize their heartburn severity improvement. These categorizations were then compared with their magnitude of heartburn severity improvement and the primary endpoint. With this approach, we identified a 45% improvement as an effective threshold for assessing clinical meaningfulness. And importantly, what we observe with that 53% of patient treated with the 1500 milligram dose of 3718 plus a PPI were responders. Experiencing at least a 45% reduction from heartburn - from baseline and heartburn severity for at least four out of eight weeks, including at least one of the last two. This compared to 37% for patient treated with PPI and placebo representing a 15% improvement. We expect that the primary endpoint in the Phase III will be a heartburn responder similar to this and we'll be working closely with the FDA to appropriately define the primary and secondary endpoint. In the Phase IIb trial, the primary endpoint where the percent change in weekly heartburn severity from baseline to week eight. As you can see on this time core slide, when looking at heartburn severity on the left hand side, the 1500 milligram dose of 3718 plus a PPI showed a 58% reduction in heartburn severity compared to 46% for PPI alone at week eight. Data showed a clear separating from placebo an effect that continue to increase throughout the treatment period. We also looked at the effect on regurgitation in the study, a highly problematic symptom for the uncontrolled GERD population. We saw a positive effect here with the chart on the right hand side showing a 55% decrease in regurgitation frequency compared to 38% for PPI alone at week eight. We believe these effects could further differentiate 3718 as nothing have been shown to improve this symptom. We plan to advance 3718 forward at expeditiously as possible with the Phase III expected to begin in the second half of 2018. Given this as a new space, where no drug has been approved before, we want to be thoughtful and coordinate closely with the FDA to design a trial that will give us an unequivocal read on safety and efficacy of this investigational drug. We're also be seeking to utilize our gastric retentive formulation to reduce the pill count to two pills twice a day in the Phase III. In addition to 3718 Phase IIb data, we look forward to the following expected catalyst from our mid to late date pipeline in the second half of 2017. The value approval and launch as Jeff mentioned, the Phase III initiation of Linaclotide DR1 in IBSC, Phase IIa result for IW-1973 and for 1701 and three Phase IIa initiation for IW-1973. Delivering on these opportunities will help to fuel our next wave of innovative products. With that, I'm going to turn the call over to Tom Graney.

Thanks Mark. I'll spend last few minutes providing some color on LINZESS performance as well as recapping our financial results and guidance. You can find the detailed financial statements in our press release. LINZESS continued to demonstrate strong demand in the second quarter with 19% increase in volume year-over-year. Total LINZESS net sales for the second quarter were up 12% year-over-year at $168 million. The difference in growth in net sales compared to growth in volume is largely due to changes in inventory levels year-over-year. As we saw last quarter, inventory levels came down and they have continue to stay at these low levels through the second quarter. This makes the year-over-year comparison difficult. We can't predict whether this trend will persist throughout the remainder of the year or not. Importantly, our focus remained on growth and demand measured by volume gains and net price. We're seeing very strong growth in demand and while there may be fluctuations quarterly in net price, we expect both metrics to be favorable overtime. The LINZESS brand collaboration in the U.S. generated 72 million in total net profits and a 52% commercial margin in the second quarter. With a focused investment into the brand against strong volume growth, we continue to expect commercial margins to expand overtime and to exceed 70% by 2020, resulting in a greater contribution to Ironwood's top line. We ended the second quarter with $273 million in cash. Cash used in operations was $31 million compared to $6 million in the second quarter of 2016. We recorded $65 million in Ironwood total revenue for the second quarter compared to $54 million in the second quarter of 2016 for a growth rate of 20%. Total operating expenses were $106 million in the second quarter including $58 million in SG&A expenses and $37 million in R&D expenses. Turning to our non-GAAP disclosures, we exclude three non-cash adjustments derived at our non-GAAP measures. The mark-to-market adjustment related to the convertible note, warrants and hedges, the amortization of acquired intangible assets and the change in fair value of the contingent consideration associated with our licensing agreement with AstraZeneca for lesinurad. These three adjustments resulted in a net gain of 2 million of $0.01 per share penny for the quarter. GAAP net loss for the quarter was $44 million or $0.30 per share and non-GAAP net loss was $42 million or $0.28 per share. We've remained on track to achieve our 2017 financial guidance, detailed guidance is highlighted on the current slide as well as included in today's press release. In closing, we are on track to build a top forming commercial biotech. With our commercial product expected to generate a greater than 25% revenue CAGR between 2016 and 2020 and then innovation engine that continues to advance. We believe we are poised to deliver new medicines to patients and to create sustainable value for our fellow shareholders into the late 2020 and then beyond. With that I'll turn the call over to operator to being the Q&A portion of the call.

Hi. This is Amanda on for Ying. Thanks for taking our questions. So for this quarter, we see that there is increasing demand in LINZESS as seen in the continuous volume growth, can you give some color or elaborate on the potential cost, the inventory change here or the inventory decrease level? And then also on the formulary, we saw that Express Scripts released their 2018 Preferred Formulary List, LINZESS is now listed at the preferred alternative to Trulance, can you provide some color around the formulary discussions of the payers and what the implication maybe for growth to that going forward?

Hey Amanda, this is Tom Graney. I'll take the first part of your question and then Tom McCourt can take the formulary question. As you noted, we did see continued strong demand growth year-over-year and also sequentially for LINZESS, which we're really pleased where they certain validates the size of the market and also the high degree of the physician and patient satisfaction on LINZESS including the 72 microgram which as you know we just launched in the first quarter. With respect to changes in wholesale and retail inventory year-over-year, we really can't predict or have much inside into the reasons there may be drawing down inventory or that inventory is not growing as fast as the demand is growing. We remained focused on ensuring that patients get access to LINZESS who can benefit from it. And then once they get access that access is covered with payer coverage that we think is pitched at the right level for us. And with that we'll switch it over to the formulary question.

Yeah, thanks Tom. As we said before, job one and one of our top priority is ensuring broad payer access and reimbursement for our patients. We know that there is tens of millions of patients out there suffering and it's going to - will continue to be a critical part of our commercial strategy to maintain access. We are delighted with the current level of access and reimbursement that we've been able to secure across all the major payers. We are in constant negotiation with them and constant communication with them to make sure that we are aligned and we have ongoing access. And as Tom mentioned, we are critically assessing where we need to be as values - as far as our value proposition to maintain that access. So I think moving forward, we are going to continue to do everything within our power to maintain broad access which is critical to the longer term strategy as we see this is an ongoing growth brand for many, many years to come.

Okay, thank you.

Thank you. And our next question comes from the line of Geoff Meacham from Barclays. Your line is now open.

Great, afternoon, guys. Thanks for the question. On 3718 in GERD, I know you guys probably want to make progress in Phase III but maybe help us with how you are thinking about this, strategically it would make a lot of sense to keep owner to the asset leverage-wise but down the road are you thinking about developing more of a global organization, the European, Asian sales and marketing. Just wanted to get a bigger picture sense for that. And I have on the LINZESS commercial launch for the perspective?

Yeah, thanks. Let me - it's Peter. Let me take the first question. 3718 is a really great asset for us. It's really a - nearly a perfect fit the capabilities we built to support the LINZESS launch and growth that we've seen in the market place. And we have our eyes focused very much on building a focused U.S. primary care capability and we expect our focus to stay there for some time to come in for 3718 and other large volume, large patient number categories. I don't expect us to go outside the U.S. anytime soon certainly for 3718. Specifically we - we absolutely expect to find partner for getting this drug to million who suffers all around the world. We believe may be able to benefit from it. So I think that maybe answers the first question. What was the second one, Geoff?

Yeah, so on I guess more for common on LINZESS demand, I know it has the decent amount, but I just wanted to get the latest on duration of therapy trends? And then obviously you guys have seen good trends across the board but what can you say about overall market growth, are you starting to see some real leverage on the awareness of things and maybe just give us a sense for going forward whether you think that because it has another tipping point?

Yeah, I think you know we are - as you know this is a huge market and if there is a large amount of medical needs. As far the market growth that we are seeing, it's growing year-on-year and we're seeing real healthy growth with regard to the overall market. I think we mentioned earlier the size of the prescription and the duration of therapy continues to look encouraging job. And I think the one piece that we have stumbled across is the point of which first time the doc treads the patient and the patients that we tend to lose, we lose in the first 30 days and we believe that's generally because they are not treated long enough to really see the real benefit particular on the abdominal pain relief. And a lot of these doctors are now moving to a 90-day prescription. And what we see when that happens is the overall adherence increases by 40% of 50%. So it's still beginning to - it's still continuing to evolve with regard to kind of annual days of therapy but it's largely depended on that initial patient experience, which is the reason why you know we're really encouraging our physicians to start with the 90 days. I think overall, we are still in a very strong growth mode to see this kind of demand growth year-on-year in year five looks very encouraging, yet we still have tremendous headroom ahead of us, not just with regard to LINZESS, but as I see the innovation coming through the pipeline particularly with DR1 where it looks like we've been able to amplify the benefit on the abdominal symptom, but also maintain a very sound tolerability profile. So in spite our emerging competitor the share continues to grow, the market is growing, and I think we're in a very strong position for years to come.

Okay, great. Thanks guys.

Thank you. And our next question comes from the line of Boris Peaker from Cowen. Your line is now open.

Great, thanks for taking my questions. First, I just want to probably little into LINZESS, I'm just curious is there a difference in discounting between 30 and the 90 day prescription, and also from the gross to net perspective, where is it now, which direction is it trending, and how are you seeing competition from true LINZESS?

Hey Boris, it is Tom Graney. I'll take your question. Across all three strengths and kind of regardless of the duration of the prescription our pricing is flat. So I hope that answers your first question. And the second question with respect to gross to net, it does fluctuate and sometimes meaningfully quarter-to-quarter as a result of timing of new contract negotiations and certainly timing of our price increases. If you look at for example, the sequential growth we've seen from the second quarter, from the first quarter rather to the second quarter this year, you will notice that our net trade sales grew much faster than our volume. Well inventory levels as we have said it haven't really recovered. So we do see it bounce around quite a bit, and I would say there is not a definitive trend on gross to net, what we do progress on is over time we expect net price to increase.

Gotcha.

I guess it's important also to remember you know what we've said about long term, where we're going to get volume, where we're going to get sales growth, it's coming from volume, and that's really what this brand is all about is growing the market as Tom said, and in our market leadership position it is coming from way and we've had very strong quality of sales for sure.

Boris, just one comment on your question, the Trulance coming into this equation with regard to the payers. I mean keep in mind, I mean we've been working with the payers for some time with the presence of AMITIZA, which also in the same category. So we're certainly not seeing any real pressure there, I mean keep in mind, I mean we are the market leader. We're in a very strong position. You also need to have demand not just the price to make sure that the rebates are realized by the payer. So we're going to continue to critically asses that, we'll make decisions very thoughtful way, but you know we're certainly going to make sure patients have access to our drugs.

I just have a quick question on 3718 GERD drug, can you just discuss maybe opportunity for reducing the pill burden specifically, can you make it 750 mg may then a 1500 single pill.

Yeah, thank Boris, this is Mark. So we are actively working as I've indicated in the script, taking in reducing the pill burden to two pill today, and so that would be to two times 750, that that I think right away when we look at it is within that scope of what we think the gastric retentive formulation that we currently have without having to change any characteristic for the formulation other than the five at a pill, so that we feel very comfortable with, I don't think we're ready to move to 1500 in one pill at this particular point in time. But obviously we're going to continue to try to innovate and find way to all to mid make the best drug for patient, but we're excited about that what we've seen three pill, today patient seem to accept that pretty readily, but in our view we're going to try to continue to innovate to make it even easier for him.

Great, thank you very much for taking my questions.

Thank you. And our next question comes from the line of David Maris from Wells Fargo. Your line is now open.

Good afternoon, a couple of questions. First on DUZALLO, have you given us the PDUFA date for that, I know it was submitted in January, but I don't know if we have the exact PDUFA? And can you just walk us through a little bit of your thinking on given the modest sales was to ramp and how different this is for patients? And then I have a follow up.

Sure, I'll take that. This is Tom. I guess that the first question with regard to the PDUFA date we never really have disclosed that officially, what we have said that will be launching early in the fourth quarter of this year, and as everything that we see right now is still on track to do that. So that looks good. As far as ZURAMPIC and DUZALLO we've always seen ZURAMPIC as really a market builder, it's certainly a market preparation for DUZALLO, and that's exactly what we're seeing in the marketplace. We're seeing physicians beginning to adopt it, they're seeing that certainly the significant benefit as far as getting patients to go. But you know as we said in the past, there's a lot of things we like about this category highly symptomatic clear on unmet medical need, there's really been no innovation here for quite some time and this is really the clear advance, first advancement in care. But to that end it's been a pretty stagnant market, physicians are pretty complete with how they're approaching the patients. But they're certainly beginning to recognize the need for more effective therapy and DUZALLO just makes a very simple solution to have one pill once a day and get twice as many people to go. So I mean everything we're hearing in market research, they see DUZALLO, physician see DUZALLO is a very, very different product than they do ZURAMPIC. And we saw that early on, when we did the first research, when we decided to license the rights in and as we move forward to launch DUZALLO, everything we're hearing from physicians very favorable.

Great. Thank you very much. That actually answers my question.

Super.

Thank you, and our next question comes from the line of David Lebowitz from Moran Stanley. Your line is now open.

Thank you very much for taking my question. The first question on IW-3718, you're going to be releasing data at some point that stratifies the patients based on the level of bio reflux they actually have?

Yeah, so this is Mark, I'll take that question. Yeah, we've got a very rich obviously at that point we've got top line data, and it's a very rich dataset that we've seen with very clear drug effect. We certainly are looking at the bio asset level than a very small number of patients that we did, so at this point we don't know what that data looks like, but I would expect that across this study because of a very interesting profile we have a patient studies that either have very severe heartburn severity or they have [indiscernible] or clear demonstration of reflux and including patient that had bio reflux, we would expect that coming up meetings in GI space to be gratifying patient for across and making that definition a little more clear.

Thanks for that. In addition what we also see data on the lower doses?

Yeah, we will release the full data set for the study once we - do a quite complete characterization of 500 to 1000 does versus the 1500 doses.

And I just had curiosity, how big is the 750 milligram pill for this drug?

Yeah, so let's talk with the 500, we saw great compliance in the study and patient over I think 95% of the patient took the drug and then found that are acceptable are just mildly inconvenient, but I think for the larger part it would very well accepted. The other part is that the pill itself actually doesn't change too much in size versus the 500 versus 750, so we don't expect to see hardly any change in that, it's a little, but not much of a vitamin type pill, lot of time but you would see.

Sure. Thanks for taking my questions.

Thank you. And our next question comes from the line of Anupam Rama from JPMorgan. Your line is now open.

Hey guys. It's Eric on for Anupam. Couple of questions. First on LINZESS, I'm wondering how we should be speaking about commercial margin for the second half of the year, sort of with guidance to spend guidance being the same it seems like that imply a bit of a chance and where we are today in a low 50s maybe can help us understand what sort of drive some of the fluctuation in spend here and how we thinking about that going forward? And I have a follow up.

Hey Eric, it's Tom Graney, I'll take that question. You're right, if you look at kind of the facing sales and marketing spend behind LINZESS you can see that it is kind of front end loaded with our actual spend representing a run rate north of $300 million and our guidance is certainly south of that. So we do expect lower spend in the back half of the year and certainly as the brand continues to grow that all bode well from our commercial margin expansion over the balance of the year.

We've seen that trend each of the last two or three years as well.

Okay, reasonable to expect that going forward as we sort of breaking out 2018 and so forth?

Yeah, as we've guided, we expect commercial margins to continue to expand and we will see you know not only quarterly fluctuations, but also seasonal fluctuations in commercial margin, but we have said, we expected to be in the 70's by 2020.

Got it and maybe Mark, just on the 3718 you guys talked a bit about how you saw a dose response and I'm just wondering given the tolerability profile spread of an eye and just how confident you are that you have a maximum expected dose it has 1500 mgs things with Phase b whether there's potential for higher dosing or are you kind of physically constrained at point?

Yeah, I think what we know is, we've got an active drug at the particular dotes level. We think that doses level bring meaningful benefit for potentially meaningful benefit for patient, so we're going to prosecute that it quickly and we can and as we've indicated, we will continue to innovate in the debate, we're the only innovator currently really addressing that patient population, we think is quite large, and we're looking at a lot of different ways in the future to continue to utilize the - what we've found around the bio laxatives hypothesis.

Got it. Thanks for taking the questions guys.

Thank you. And our next question comes from the line of Irina Koffler from Mizuho Securities. Your line is now open.

Hi, thanks for taking my questions. I have a couple of R&D questions and then one on the revenue. So if I understood correctly, is it possible for you to take two pills in GERD drug into Phase III? That's the first question. And the second question is on the DR2 compound, can you just remind us again what type of pain model you will be targeting there and whether or not there is an FDA pathway or some sort of guidance to help you as you design the program? So that's the R&D question. And then on revenues there is about $56 million in the collaboration, but there is about another $9 million of other revenues, and can you help us breakout a little bit more detail if there is milestones or something else in there? Thank you.

Great, Mark you take the first couple?

Yes, hi Irina. Looking at the formulation the weighted gastric retentive point formulation work, we think we can take go to two pills approach, because it's essential the same pill, it change it very dipped slightly in size, the release profile we expect to be the same, but we'll be able to test that for sure. But yes we think we can go directly into Phase III, because we're really not changing that formulate and other than a little bit on the size. If you look at the DR2, I think what we're looking at with DR2 and this is a part of the Ironwood Allergan collaboration. We're very focused on not looking at IBS pain first thinking on non-constipated IBS pain and we think that previously there's been evident in the IBS guidance, that you can get a pain only label, so we feel pretty good about that, obviously we haven't we need to go in and do a 2b study and see the effect and then go and talk to the FDA, but that would be our approach which using the guidance on getting a pain component label for IBS.

And then, this is Tom Graney, Irina just on the other sources of revenue, we got a couple of million in revenue from our two co-promotion agreements, the VIBERZI 1 and also the trailing consideration, we're getting from an arrangement that we ended. And then the bulk of the difference is from ATI sales to other collaboration partners outside of the U.S. for linaclotide.

Okay, thank you.

Thank you. And our next question comes from the line of Tim Chiang from BTIG. Your line is now open.

Hi, thanks. Just on DR1, have you guys already met with the FDA recently just wondering, and you have I mean you guys have a pretty good picture on how the Phase III study design will be set up the approach that date?

Yeah Tim, this is Mark. We are having continuous interacting with the FDA at this stage and we advance towards Phase III, there's a number obviously of discussion we have to have the PRO discussion, end point discussion, the CMP discussions, pharmacokinetic discussion, so we're in the midst of both and we certainly well once we have settled on what the final path it will update what we - what the approach will be.

And as I said in the opening remarks, we expect to advance that program into Phase III before the end of the year, and we'll certainly give you more details at that time.

Okay, great. And maybe just one follow up. And I want to ask you about just how much pricing flexibility you think you have with LINZESS, now you have a new 72 milligram formulation though getting patients to go to a 90 day pack, but you guys think you still have the flexibility to take up price even from where it is today, which is around $350 a month, I mean could you talk a little bit about just where you think the sweet spot for LINZESS pricing is?

Tim this is Tom, I kind of go back to the guidance that we've always given that this is something that we're in constant negotiation communication with the payer, because on the bottom peer access really has such a dramatic effect on the overall growth and health of the product. So I mean certainly our intention is to take appropriate price increases, but make darn sure that we're not shooting ourselves in the foot with regard to the overall value proposition. So we certainly are planning to increase price in a very appropriate responsible manner, but we also want to make sure that the value proposition holds up against emerging competitors.

And maybe just one last point, I mean even with the launch of Trulance in your competitor, I mean are you basically seeing the overall market for IBSC and CIC treatment expanding especially for LINZESS?

This is Tom again, we continue to see good healthy growth of the market overall and certainly that's not just certainly due to the addition of Trulance I mean certainly you know the overall you look at the number of ads on TV today for this category whether it's ideas or chronic constipation. People are investing in that category, because it's such a big category and there's room for multiple players and certainly we're getting some good buoyancy you know from the growth of the market, but keep in mind even in the face of competition we're continuing to increase our market share, which says an awful lot, I think about the brand itself the level of the level of satisfaction we've been able to establish with our customer, and certainly the effectiveness of the commercial efforts. So I think we still see this as a real healthy growth brand, and we're going to continue to invest behind it.

And I would just add Tim, as Tom said earlier while we've increased our market share substantially this year it's still true that 70% of patients getting a prescription are getting a generic and 80% of patients aren't getting a branded prescription therapy at all, so it's very important to focus on where the real volume is, and where the real competition is. It's really not a competition and zero sum game between branded prescription drugs that's an opportunity to grow the number of branded prescriptions.

Okay, great. That's very helpful. Thanks.

Thank you. And our next question comes from the line of Jamie Ruben from Goldman Sachs. Your line is now open.

Good afternoon, this is Divya Harikesh on behalf of Jamie Ruben. Just wanted to get some more clarity and inventory fluctuation given, I understand you have limited visibility into the leverage, but is there a risk that if you have any view on where the inventory levels are now and where is that gap between the prescription growth and inventory and the net sales increases as we go on or should we just consider similar gap as we've seen in the first two quarters to that extent that you can provide some more inside there, is it because the retailers are managing the inventory much more carefully that you're facing this kind of trend this year? And my second question is on your sGC platform you have read out some tool studies would be curious to know what your next steps would be after those read out, is it that you wait for the studies in a different indications for each of the molecules or would you proceed to the next step to the later stage Phase IIb or Phase III study based on the data you seen that particular indication? Thank you.

Hey Divya, this I Tom Graney, I'll take the first one and then Mark will think sGC question. With respect to inventory and then I guess one way to look at it is, so we've seen volume grow in capsules 19% year-over-year and what we've seen in the channel is that the actual units in the channel have grown at very low single digits, and that's really what's driving this disparity. Without really having operational insight into how both at the wholesale and retail channel, they've been able to maintain service levels while at the same time pulling down inventory, it would be a little inappropriate for us to speculate on directionally or timing wise where that would go. But also you know LINZESS has been on the market now for five years and there is not just a tighter range in forecasting and terms of you know what demand is ultimately going to be. So I think you know those things are at work and the important thing from a modeling standpoint is to remain focused on the underlying demand and also net price over time.

Okay, great. So relative to the sGC to the molecule 1973 and 1701 with upcoming data for 1973 in the diabetic hypertensive population couple of things we focused on there that we thought would be it would be very useful for our future studies, wanted the safety and tolerability in diabetic population. We intend to go into a number of diabetic indication would diabetic in property has an example, and so from there we wanted to make sure we've characterize that safety and tolerability specifically in that population before we thought it a diabetic in a property study. From that perspective then we move to we also want to understand how to drug is working in that particular population, particularly on the cardiovascular endpoint, blood flow and blood pressure. And so we'll have that characterize and then we'll also be looking at key biomarkers relative to implement and signal in metabolic signaled in new page and population. So we think the early study will be very useful, they're setting up the Phase IIb study we intend to do. And will like you indicated they really are kind of a transition study going from a normal volunteer to a diabetic to a now the more patient to have more complications such as the diabetic in the study. Okay?

Thank you.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Peter Hecht for any closing remarks.

Thank you, Liza for your help today and thanks to all of you for joining us on the call. We'll be available this evening and tomorrow morning, so please reach out to Meredith if you'd like to follow up with any additional questions. We appreciate your time. Thanks.

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