Ironwood Pharmaceuticals, Inc. (IRWD) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Ironwood Pharmaceuticals 1Q 2018 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 on how to participate will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Meredith Kaya. Ma’am you may begin.

Good morning and thanks for joining us for our first quarter 2018 investor update. Our press release is 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-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 update such statements. Joining me for today's call are Peter Hecht, Chief Executive Officer who will 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 Event 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 sGC business from our Commercial and GI business, resulting in two exciting independent publicly traded companies, each with the unique and designed 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 two companies. And then Gina will discuss our business highlights for the quarter. Let’s start on Slide 4. Over the past 20 years, we have worked tirelessly to build Ironwood into a strong and growing commercial biotech company with a valuable collection of assets and exceptional employees. We are pioneering in two very important areas simultaneously. We are commercializing in categories with millions of potential patients and we are innovating to discover and develop important new medicines. We have done all of this by staying focused on our singular mission of creating and commercializing drugs that contains patients’ lives. We have made important progress over the past few years, both commercially and within our pipeline. Here is 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 have introduced DUZALLO and ZURAMPIC into the uncontrolled gout market. As you are 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 have 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 sGC drugs to play an important role in many serious and orphan diseases. And we made exciting progress advancing tissue targeted preclinical sGC simulators for severe CMS, liver and now lung diseases. This significant progress across our portfolio catalyzed our ability to separate these businesses into two focused durable platforms that we believe are poised for long-term growth and shareholder value creation. Through this separation, we plan to create two 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 and will attract a long-term shareholder base suited to each business and will provide for simpler and more transparent capital allocation. We expect the separation to create two distinct businesses with strength in competitive position 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 will provide key updates on the leadership and organization when they are 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 two businesses. We expect the new Ironwood to be a profitable business focused on accelerating growth of our three end-market products; LINZESS, DUZALLO and ZURAMPIC; and key development candidates, 3718 and delayed release. These products all have long IP coverage and a 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 with existing portfolio, innovate in a rapidly evolving commercial landscape, allocate capital more specifically to its business and execute on a multi-faceted business development strategy. Turning to R&D Co., this company is going to harness our pioneering work in cyclic PMP pharmacology to execute on a focused and robust pipeline of sGC stimulators, targeting serious and orphan diseases. Our sGC stimulator portfolio included least 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 our IW-6463 which is being evaluated for CNS diseases and exciting late stage discover programs targeting severe liver and lung diseases. R&D Co. in terms of develop and selectively commercialize drug treating serious and orphan diseases and to out license drug 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 developing 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 have 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 would like to turn the call over to Gina, who will discuss our Q1 results.

Thanks Peter and good morning everyone. I’m going to briefly highlight and update from IW-3718 and then we will 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 two Phase III trials in the third quarter of 2018. These trials are designed to evaluate the safety and efficacy of 3718 in patients with persistence 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 revenues 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 the 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 non-cash adjustments related to our convertible 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 of 2017. The gap between year-over-year net sales growth and volume growth is primarily due to a decrease in inventory. LINZESS’ commercial cost and expenses were $59 million in the first quarter which included $5 million 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 overtime 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 slide depicts, LINZESS volume growth and disciplined spend drive significant operating leverage for Ironwood from 2014 to 2017, a greater than 30% LINZESS US net sales CAGR drove an approximately 75% Ironwood revenue growth CAGR. This trend continued in the first quarter of 2018 with expanding commercial margins translating into enhanced revenue growth for Ironwood. Lastly, considering today’s announcement, we are currently reviewing our 2018 financial guidance and we 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 effecting 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. Your line is now open.

Hi, guys. Thanks so much for taking the question. This [Jason] (Ph) on for Geoff. I’m curious if you think about the two 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?

Hi its Tom McCourt. I will 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 the 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 overtime. But I do think fundamentally, being manically focused on a specific area really creates a competitive advantage, it’s kind of what we have learned overtime and I think as you know we have a very strong collaboration with Allergan and together I think we will see great things to come both with regard to what you see with LINZESS, but also what is coming from the lifecycle management plan that we are both continuing to invest in.

Excellent, thank you so much for the color. Just in terms of where the research organization arm of the Ironwood focused company goes. I mean you know what does that organization look like in terms of development, 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 are moving the research and development the way the R&D Co. what is next in the pipeline for the Ironwood separated Company?

Right, I will take that as a start. The new Ironwood will have both the lifecycle work that’s ongoing for Linaclotide that includes abdominal symptoms claim study that’s the Phase III that we will start mid 2018. There is 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 have had very positive feedback from FDA recently and we are moving into Phase III in the third quarter of this year. So there is actually quite a lot of development work and ongoing R&D in that company going forward.

Great. Thanks so much.

Thank you. And our next question comes from Jami Rubin with Goldman Sachs. Your line is now open.

Thank you for taking my question. This is Divya Harikesh on behalf of Jami Rubin. I had two 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 partnerships. So if you can just walk through your rationale there in terms of choosing the split to company now versus a strategic partnership which is what we were all anticipating. And secondly on ZURAMPIC that doesn’t seem to have 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. Thank you.

Thanks for the questions Divya. I will take the first one and then Tom can take the questions on the gout opportunity. With respect to strategic partnerships for sGC and strategic alternatives, I would say two things. First is, I wouldn’t rule our partnerships by any means for either or both companies. In fact, as we highlighted in describing the two companies, part of the motivation for separating the two businesses is so that they can each focus in their strategic areas and competitive strength and both 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. And particularly that 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 either or there may be slightly more general coming out I would say. We 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 are quite confident that this is the best step forward for unlocking shareholder value at this time.

Peter I will take the second question with regards to ZURAMPIC and DUZALLO. We still like this market very much. There is still as you know it’s two million patients who are highly symptomatic uncontrolled and suffering, DUZALLO which is the fixed does combination provides a clear advancement in care for these patients versus 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 have clearly recognize the clinical efficacy of the product. It performs very, very well. Two, that being said, physicians are a little epithetic with regard to managing these patients and they really need to recognize how much of these people are suffering, and they help patients speak up about their symptoms and the level of control they have with gout. And I think the third is that a disproportionate number of these patients that actually have Medicare Part D coverage and obviously it takes a little longer to get the coverage which is certainly suppressing the growth. As you know, we are running a series of tests in the market to really figure out what is 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 end market consumer campaign which just launched yesterday. And I think we will certainly be monitoring those over the next few months and we will 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.

Thank you.

Thank you. And the next question comes from Ying Huang with Bank of America. Your line is now open.

Hey, guys. It's Aspen on for Ying. Thanks for taking the questions. Just a couple of quick ones, you just mentioned that the difference in the net revenues in volumes slowly driven by inventories drill down. 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? Thanks.

Gina, do you want to take the first question and then Tom maybe…

Sure I’m happy to take that first question. So we did do comparison as we typically do of year-over-year net sales. 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 net sales is due to inventory. Other price remains stable year-over-year and its very seasonal take down of inventory where we see a build up in the fourth quarter by our wholesalers and in the retail channel and then this is our second year in a row where we‘ve seen a drawdown of that inventory during the first quarter.

I will take the consumer question, we launched a new DTC campaign two weeks ago. This is a whole new format if you see in the ads yet where it’s called the gain frame strategy where you get the benefit of the product upfront, which allows you to more efficiently deliver the message which opens up me additional communication channels. What we have seen almost immediately is a significant jump in new to brand patients. This is one of the biggest jumps we have seen since we started DTC and its an all time high just within the first two weeks. So we are very encouraged both with regard to the performance of the concept of the ad, but equally as important is what we are seeing as we have opened up additional communication channel 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 and I think we believe it’s an area for ongoing growth as we continue to activate more and more consumers that raise their hand and ask for more effective therapy.

Thank you.

Thank you. And our next question comes from David Lebowitz with Morgan Stanley. Your line is now open.

Thank you very much for taking my question. I was actually to ask one of the restructuring area of 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 been in recent years or should we have different expectations for the run rate for 2018.

Yes, this is Tom, I will take that the question. I think as I mentioned earlier, overall we are seeing very strong steady growth. To be this year five year six in the commercialization of the product to see this year-on-year growth is really remarkable and I think it’s important to remember that as successful as this drug has been, we have really only treated four or five million patients out of the 30 million to 40 million that are out there. So there is tremendous headroom for growth. As far as the seasonality of the rate of growth, I think we continue to see this first quarter low which has 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 four, five 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 is still tremendous demand.

Thank you for taking my question.

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

Hi, 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 that company will now look for a little bit of a listening toward to hear a feedback. What has been the feedback that you had from investors, what has been your interaction so far with Alex and what is management’s current position on whether or not to add them to the Board. Do you think also that this is a plan that you announced 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. let me make sure I understand. You are saying there is a concern raised by some that we shouldn’t be investing in 3718 development?

Yes, and in the end you are not going to be able to market it wholly yourself, it’s going to be a GP sales and so it’s better to partner it early or to spin it out to have 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 “We look 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 consider the broad range as strategic alternative and we are quite confident that this is a best path towards unlocking shareholder value. The uncontrolled GERD market and opportunity is really a terrific fit strategically with the IBS and visceral pain opportunity. The three 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 Allergan a collaboration that’s been very successful to-date. And we expected 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 on the sGC side. And in particular, we are explicitly saying on sGC side that we are going to focus commercially there on markets where you can commercialize with the smaller commercial effort than it takes with these markets that serve millions of patients. And so for instance for HFpEF diabetic nephropathy which we are studying for Praliciguat if those data are highly successful which we are excited to seeing next year, we expect to out license that program within that business. So I hope that could give some color there. The other question I know I’m getting jumped out of order, but you had a question about 3718 structure in 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, 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 for the key elements were around meeting with two trials that will be approximately 800 patients or less each and it’s an eight week study and that should give you a sense a little bit about the size of the Phase III program. We are really excited about moving this forward, there is 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 are excited about moving this forward as quickly as we can to get this medicine to patients.

And then you asked about [indiscernible]. I think what I can tell you that is the Board is addressing that topic and will have its recommendation in definitive proxy when that gets filed shortly and you know our focus for today is really on discussing our separation plans and the opportunity we see for unleashing two very exciting businesses.

Okay. Thank you very much.

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

Hi thanks. Peter could you talk a little bit just about some of the partnering discussions you have had 3718 and for 1973. I mean do you think you will get partnerships for these two 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 read outs for 1973 and 1701, I know you have got four Phase II trials going on. Will some of the Phase II trials finish right around the time of your planed spin out of the R&D Co..

Bill, can you take the first question with our partnerships?

Sure. We are going to be if anything accelerating the intensity of the partnership discussions on both on Praliciguat and 3718, we have had a series of quite promising discussions and our team understand there is nothing about this separating 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 restructuring of those transaction, the partnership objectives and even the likely partners between the two companies are different for all the right reasons. So we are actually quite excited about the prospects for partnerships on both of them. As to whether we achieved 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 are 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 studies and relative timing?

Sure, sure. So as you know we recently started several studies at the end of last year. The initial study that we began was a diabetic nephropathy study with Praliciguat and we expect that we will 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 are adding sites as we speak. And so, I will be able to give you more color on the timing for the data of those at our future conferences.

Thanks. 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 notice that our guidance is now under review and we will make sure to provide an update with our second quarter investor update. And I recently 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.

Okay, great. Thanks.

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

Hey, guys. Just a quick one from me. Any comments or thoughts about how you think about the cost share structure for the new Co relative the new Ironwood? Thanks so much.

No, we expect both of these companies to be publically traded companies.

And then on the Ironwood side, you guys mentioned business development strategy. May be a little bit more color on how you think about VD supplementing the pipeline? Thanks so much.

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

Anupam I think I didn’t quite understand your first question. If you are asking about the dual class loading structure that we currently have that expires at the end of 2018, December 31st and we expect this transaction to close in the separation to be finalized in early 2019.

Got it. Thanks so much.

Thank you. And our next question comes from Vamil Divan with Credit Suisse. Your line is now open.

Hi, this is Michael Morgan on for Vamil. I just wanted to ask you a little bit more around, I know you mentioned that there would 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 in the middle at least you know 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 it what way does spinning off R&D Co. generate more value for shareholders then an actual sale would have?

Thanks I will take both questions. On the question of leadership teams, we feel quite strongly that we have really fabulous people here you know starting with the Board, terrific Board, great leadership team and very talented and passionate people throughout the organization and I can tell you we are all very excited about today’s news and I think early returns even this morning that everyone heard contributors as best we can to grow two great new focused businesses and deliver shareholder value. And frankly one of the big reasons we are 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 talents. So that we can’t give you the details today, this is really day one for us to begin having those kinds of conversations. With respect to the question of the sale, absolutely we are always considering the broader and strategic options. I would say 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 you have the real chance to generate great growth and great shareholders returns and to build market leadership. In this case, in two very distinct spaces and so we are eager to unleash those teams in fee growth and shareholder value creation.

Okay, if you add you know you said on the last call that you want to be speaking to your investors, is this the direction that you are investors were pushing you towards?

Yes, I would say we are frequently - I mean on an ongoing basis in contract with the very broad range of our shareholders not to be too - well have a set of principles that are on our website called Owner-Related Business Principles and number one says our shareholders own the business and we work for them and we take that seriously. And frankly we have been considering something along these lines for a number of years and we have 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 are really pleased with the steady progress in the portfolio over the last couple of years, has enabled the launch of two strong businesses. And there is really started in the last fall that we undertook a full strategic review with outside advisors and did the work to get comfortable and confident that this is the right strategic path forward. We have already heard from a number of our shareholders today and I think they are quite pleased. We are moving in the direction that we have been talking with our shareholders about for some time.

Okay. Thank you for the questions.

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

Hey, thanks for taking my questions. Can you provide a little bit more background about how you are going to fund the R&D Co.., who is going to hold on to the debt, you have got about $400 million in debt and how you are 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? Thanks.

Hi, Irina. It’s Gina. Let me at least take these first two questions and then we can maybe let Tom in as well. So first just on funding, I will say we are really excited about these two opportunities from a finance perspective too. 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 both companies, because both sides have very unique requirements. And we are 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 two, the second question and the 60% margin, you are absolutely right, the margin is higher this year over last year. You will note that that LINZESS spend that we guided to this year is about 20 million less than we have guided in the past and the spend sometimes is 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 is in Q1 its just how we optimize when we wanted those commercials to hit for a maximum ROI. So you will see a bit more spend in the second quarter than you did in the first quarter.

Since one of the questions you have was the spend level. Irina 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?

You know just gout and the commercial sales force and you know programs, marketing programs, et cetera on gout.

Sure Irina. So I would say we haven’t guided to specific gout numbers but what we have said is that we are excited to about the opportunities with project forward and the tough markets that we have kicked off earlier this year. We have also noted that obviously with this tough 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 overall savings and that we have reallocated that money into other areas of spend where we think there will be an ROI on the tough market and the data readout.

Okay. Thank you.

Thank you. And our next question comes from Patrick Trucchio with Berenberg Capital. Your line is now open. Your line is now open.

Thanks, good morning. Just few on the Linaclotide pipeline. First on the label expansion to include additional symptoms. I’m wondering what in your research or experience suggest that the annual DTC campaigns for your sales reps should 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 some earning of the supplemental application. Then secondly with the regard to the delayed release Linaclotide, do you know what proportion of the 60 million IBS and CIC patients on prescription and non-prescription 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.

So I will take this Chris, but first with regard to the additional symptoms, I think the one thing that we have learned at 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 have learned in the marketplace is patients don’t call this abdominal pain, they call it discomfort and blowing 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 as bloating discomfort , clearly we believe we can activate many more of those patients to raise their hand and demand more effective therapy. It certainly as we talk to physicians, the number 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 release, we believe will be a significant driver in certainly nearer and long-term growth. As far as the timeline, I will kind of hand that over to Chris in a second, but obviously we will be kicking of those trials and Chris maybe you can comment and when we hope to see data?

Yes, so right now we are planning to kick off this labeled extension study mid-year this year and it’s a bit early to give guidance about timing for the filing, but it will be - we are really excited to start to study by mid-year and we are 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 foul function. There is a lot of things patients can take to either reduce their diarrhea or induce a bowel movement. The primary problem that drives these patients into seek care is pain and discomfort. And there is really other than the LINZESS there is really not many very effective therapies. The other thing that our scientific team has discovered is that 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 drug into the colon. And as we saw in the Phase IIIb trail, 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 release 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 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 would want to use to reduce a bowel movement or control diarrhea. So there has been nothing like this out there. I mean this is a big, big idea. So to your point, we are looking at 40 million, 50 million Americans that are suffering and really can crack open a much larger market with a huge unmet medical need that we believe that we can address.

That’s great. Thank you very much.

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

Thanks [Danny] (Ph) and thanks to all of you for your time and attention this morning. We are very grateful to you for it and we are 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 [indiscernible]. Happy 1st of May and we are going to look forward to talking to you during the day. Thanks.

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