Ironwood Pharmaceuticals, Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Ironwood Pharmaceuticals Third Quarter 2014 Investor Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, the Director of Investor Relations, Ms. Meredith Kaya. You may begin, ma'am.

[Meredith Kaya:]

Good afternoon, and thanks for joining us for our third quarter 2014 investor update. By now, you should have a copy of our press release, which crossed the wire earlier this afternoon. If you need a copy of the press release, you can go to our website, www.ironwoodpharma.com, to find an electronic copy. Some of the information discussed in today's call is based on information as of today, Tuesday, November 4, 2014, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. We do not undertake any obligation to update any forward-looking statements made during this call or contained in the accompanying slides as a result of new information, future events or otherwise. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in our press release and on the current slide with the heading, Safe Harbor Statement, as well as the risks under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended, June 30, 2014, and any of our future SEC filings. Joining me for today's call are Peter Hecht, Chief Executive Officer, who will provide introductory remarks; Tom McCourt, Chief Commercial Officer, who will give an update on the commercialization of LINZESS; Mark Currie, Chief Scientific Officer, who will summarize our pipeline efforts; Tom Graney, Chief Financial Officer, who will review our financial performance and guidance; and Michael Higgins, Chief Operating Officer, who will be a available during the Q&A portion of the call. Our speakers will be referring to slides available via the webcast. For those of you dialing in, it may be helpful for you to go to the Events section of our website to access the webcast slides, if you haven't done so already. I would now like to turn the call over to Peter.

[Peter M. Hecht:]

Thanks, Meredith. Good afternoon, everyone, and thanks for joining us. The third quarter and recent period were very productive for Ironwood, and we made important progress on our path to building a leading GI therapeutics company. We're successfully commercializing LINZESS with our partner Actavis, advancing our robust pipeline and operating the business efficiently and prudently. Core to our strategy is to maximize LINZESS and the brand is demonstrating impressive growth in demand, fueled by the hard work and collaboration of our joint selling effort with Actavis and our ongoing DTC program to educate patients. LINZESS U.S. net sales were $79.7 million, up 27% quarter-over-quarter. Tom Graney will comment in a few minutes on a couple of items that negatively impacted net sales this quarter by approximately $8 million. With strong LINZESS growth through the first 7 quarters of launch, we can now expect the brand to be profitable going forward. This is a very exciting inflection point for the brand and for our company. As a cash-generating asset still in the early stages of growth, and with the potential to improve the lives of millions of underserved patients, the LINZESS brand has the potential to deliver substantial operating leverage and increasing cash flows until at least 2031, another 17 years. In addition, we're confident that our efforts to enhance linaclotide's clinical profile will further grow the brand over time. We're also generating great momentum within research and development, advancing multiple opportunities in multi-billion dollar markets targeting highly symptomatic conditions that affect millions of suffering patients. By the end of this year, we expect to have 6 Phase II or Phase III clinical trials underway, with important data readouts expected beginning early next year with the IW-3718 Phase IIa data and continuing over the next 12 to 24 months. This includes 4 mid-to-late stage linaclotide trials that are funded all or in part by our partners, as well as 2 mid-stage clinical programs that we are moving forward independently. We have a strong team and culture at Ironwood. We're incredibly passionate about our mission to bring important medicines to patients and to create meaningful value for our fellow shareholders. And we're always working to motivate our team and to keep getting better. We're attracting great talent across the organization, including 2 recent additions to our leadership team

[Thomas A. McCourt:]

Thanks, Peter, and good afternoon, everyone. LINZESS remains on a strong trajectory, supported by continued growth in prescription demand during the third quarter. Approximately 400,000 LINZESS prescriptions were filled during the third quarter, representing an increase of about 22% quarter-over-quarter, as you can see in the chart on the left. Prescription demand is the key indicator of growth for the brand, and continues to be driven by the strength of our combined sales force, as well as our multi-channel drug-to-consumer campaign. We and Actavis are encouraged by the response we are seeing, particularly noting the clear impact that our DTC efforts have had on uptake over the last 6 months. Our primary goal for DTC is to grow LINZESS prescriptions by helping patients and physicians communicate more effectively. First, by enabling patients to accurately communicate their symptoms to their physicians, and second, by helping physicians to recognize the unmet medical need and expand their view of the appropriate patient. Notably, the chart on the right side depicts the projected LINZESS total prescription trend prior to DTC compared to the actual LINZESS total prescriptions following the initiation of DTC. In the 28 weeks following the initiation of DTC, there has been an average 20% increase in total LINZESS prescriptions above the pre-DTC trend. We are pleased with the brand performance to date, as it continues to grow the entire category of prescription treatments for IBS-C and chronic constipation patients, while capturing meaningful market share within the category, which in turn is generating significant growth in total LINZESS prescriptions. The total prescription volume for the category during the third quarter this year was up by more than 12% compared to the same period next year -- last year. We believe that this is growth in the category primarily coming from patients previously on OTC laxatives. It's important to keep in mind about 2/3 of adult IBS-C and chronic constipation patients are treated with OTC laxatives. And most of them are not satisfied with current treatment, which represents an enormous opportunity ahead for LINZESS. In addition to growing the market, LINZESS also continues to capture significant market share. As you can see on the right side of the slide, total prescription market share increased by close to 3.4 percentage points, representing a 47% increase during the 22 weeks following initiation of DTC. New prescription market share increased 2.7 percentage points, representing a 41% increase in market share over the same period. The foundation on which we build LINZESS is made up of core fundamentals designed to drive demand and accelerate the growth in the marketplace. These fundamentals include the physician's ability and willingness to choose LINZESS for appropriate patients, our ability to secure payer access and reimbursement, and our ability to drive patient demand. The breadth of prescribers writing LINZESS prescriptions continues to grow. Over 95,000 health care practitioners have prescribed LINZESS. And we've added, on average, over 1,200 new prescribers per week since initiating DTC. In addition, prescribers report a high level of satisfaction with LINZESS, and are continuing to write more and more prescriptions for appropriate patients. The strength of our payer coverage continues to improve. And when combined with the LINZESS instant savings program, we are providing patients broad access to LINZESS at an affordable co-pay. Finally, patients are responding well to our DTC efforts, and persistency rates are continuing to track well ahead of our category analogues, Zelnorm and Amitiza. I want to spend a minute on this last point, as we believe persistency is one of the strongest indicators of patients' satisfaction, and is also a key driver for total prescription growth. To evaluate this, we followed 4 separate cohorts of patients starting in January 2013 for 12 months and evaluated persistency every 3 months. This graph summarizes the average persistency at each time point across all 4 cohorts. As you can see, patient persistency on LINZESS is roughly 40% to 50% greater than Zelnorm and Amitiza averaged across all cohorts. With over 440,000 patients having now filled a LINZESS prescription at least once, more than 1.5 million LINZESS prescriptions filled to date and more than 40 million adult patients suffering from either IBS-C or chronic constipation, we are still in the early stages of growth for LINZESS with significant opportunity ahead of us. In addition to our commercial efforts, we and Actavis are making progress toward enhancing the clinical profile of LINZESS and expanding labeling of LINZESS into new indications, patient populations and formulations. Continuing to further innovate around linaclotide and working to bring additional treatment options to the market is what we believe will drive long-term growth for the brand. As part of this strategy, we announced earlier today that we and Actavis are initiating a Phase III trial of linaclotide in a 72-microgram dose in adult chronic constipation patients. Mark will talk shortly about the clinical path, but I wanted to spend a moment on the commercial opportunity. As you know, linaclotide is approved in a 145-microgram and a 290-microgram once-daily dose for adult patients with chronic constipation and IBS-C, respectively. Our research indicates that physicians view LINZESS as a highly effective therapeutic option for their patients -- their chronic constipation and IBS-C patients. And importantly, both physicians and patients report a high level of satisfaction with the drug. As is common with many treatments for nonthreatening disease -- non-life-threatening diseases, many physicians initially tend to prescribe to their patients that have the greatest visible need and expand their use to a wider set of patients over time. As expected, physicians initially prescribed LINZESS to their patients with more frequent and intense symptoms and have been expanding the use as they gain more clinical experience. Keep in mind, there are as many as 35 million adults with chronic constipation suffering from a continuum of constipation-related symptoms in need of effective therapy. We believe, and we have confirmed in market research, that providing an additional dose will further accelerate the expansion of LINZESS use into its indications. With that, I will hand it over to Mark, who will talk a bit more about this progress, as well as an update on our broader pipeline. Mark?

[Mark G. Currie:]

Thanks, Tom. It's been a very productive few months for the R&D team, and we continue to advance our pipeline of novel therapeutic based on our leadership and expertise in GI and guanylate cyclase. Our research has resulted in robust scientific exchange [ph] through data presentations at 7 high-caliber scientific meetings this fall, including the ACG Annual Meeting and UEGW. Our focus is linaclotide, and with our partner Actavis, we are seeking opportunity to strengthen its clinical utility within its current indication through additional regulatory approvals, as well as to expand linaclotide into new indication, populations and formulations. Linaclotide is the first and only GC-C agonist to gain FDA approval. It represents innovative pharmacology and is thought to work in 2 ways

[Thomas Graney:]

Thanks, Mark, and thanks, everyone, for joining us this afternoon. I joined Ironwood about 2 months ago, and I'm thrilled to be part of the team. Ironwood is at an exciting point in its trajectory. We have a great team, great assets and a solid financial profile that enables us to continue investing within our key areas of growth, as we seek to bring important new medicines to patients and long-term returns to our shareholders. We had a strong quarter, as you've been hearing from the team. So I will now take a moment to highlight some of the key financials. Beginning with LINZESS, U.S. net sales for the third quarter of 2014 were $79.7 million compared with 26 -- $62.7 million in the second quarter of 2014. This is an approximately 27% increase quarter-over-quarter, reflecting the strong prescription demand. During the quarter, there were a couple of items that, when combined, represent approximately $8 million in unfavorable impact to total LINZESS net sales. First, wholesaler inventory levels decreased one half-week during the quarter, ending the third quarter on the lower end of the 2- to 3-week range. Based on inventory levels at the end of the third quarter, this half-week represents approximately $4 million in U.S. net sales. Actavis operates at a lower level of wholesaler inventory than Forest and expects inventory levels to be within a 2- to 3-week range going forward. Second, gross to net adjustments increased to approximately 30% for the quarter compared with approximately 23% last quarter. A significant driver of this increase is Actavis' accounting for co-pay assistance programs. This change does not affect net profit or loss for the brand, as costs have simply moved within the P&L. But it does have an approximately $4 million negative impact to U.S. net sales. Prior to the third quarter, certain costs related to the LINZESS co-pay assistance programs, including the LINZESS instant savings program, were recorded as sales and marketing expenses. Beginning this quarter, as a result of the recent integration of Forest into Actavis, these costs are being recognized as gross to net adjustments in conformity with Actavis accounting methodology. In the third quarter, this resulted in approximately $4 million related to the LINZESS co-pay assistance programs being recognized as part of gross to net adjustment as opposed to sales and marketing expense. So combined, the approximately $8 million negative impact to LINZESS net sales includes the change in accounting methodology and decrease in wholesale -- wholesaler inventory levels. Turning to the remainder of the LINZESS P&L. During the third quarter, total commercial expenses were $69 million compared with $79.4 million during the second quarter. We now expect 2014 total LINZESS marketing and sales expenses to be in the lower- to- mid-range of our previously guided $240 million to $270 million. The 50-50 net profit share resulted in a receivable due from Actavis of $13.5 million in the third quarter recorded as collaborative arrangements revenue on Ironwood's P&L. Now focusing on the Ironwood-specific financial highlights for the quarter. Beginning with our balance sheet, total cash and investments, as of September 30, were $265 million. Approximately $39 million in cash was used for operations during the quarter compared with $36 million in cash used during the second quarter of 2014. While there will be fluctuations on a quarterly basis, we expect cash use to continue to decline over time due to disciplined expense management and revenue growth from LINZESS. GAAP revenue for the third quarter was $16.9 million, including the $13.5 million in collaborative arrangements revenue associated with our share of LINZESS profit from the commercialization activities with Actavis in the U.S., as previously described. Also included in revenue was approximately $3.4 million related to amortization from our existing collaboration with Astellas, revenue recognized in connection with our collaboration with AstraZeneca, and royalty payments from our partners in other territories outside of the U.S. Total operating expenses, excluding cost of revenue, during the third quarter were $53.6 million compared with $51.4 million in the second quarter of 2014. Our R&D expenses for the third quarter were $25.1 million compared with $22.1 million last quarter, and SG&A expenses for the third quarter were $28.5 million compared with $29.3 million last quarter. Finally, our net loss for the third quarter was $42 million or $0.30 per share versus a net loss of $60.4 million or $0.44 per share in the second quarter of 2014. In addition to the 2014 LINZESS marketing and sales expense guidance, we previously provided guidance for 2014 total operating expenses to be in the range of $215 million to $245 million. This consists of $105 million to $120 million in R&D expenses, and $110 million to $125 million in SG&A expenses. We now expect to end 2014 in the lower end of each of these ranges and continue to expect non-linaclotide R&D to be approximately 45% of total R&D expenses. Thank you. And with that, I'll turn it back over to Andrew to begin the Q&A portion of the call.

[Operator:]

[Operator Instructions] And I'm showing our first question or comment comes from David Maris with BMO Capital Markets.

[David W. Maris:]

A couple of questions. So first, on the sales progression for next year and this year, if you could just talk a little bit about -- the prescription trends continue nicely, do you see anything that may alter that? Do you have any comments on the recent data from your potential competitor, what investors should think about that data from what you've seen? And then lastly, maybe you can talk a little bit about the reason to start the lower-dose trial now versus having started it a year ago? How was that process -- how was that decision made?

[Peter M. Hecht:]

Thanks for the questions, David. It's Peter. I'll turn the first question about ongoing sales growth trajectory and whether anything will be expected to alter that trajectory over to Tom McCourt. So Tom, you maybe you can take #1.

[Thomas A. McCourt:]

Thanks for the question. I think as far as what we see so far, all the lead indicators look very favorable, with regard to what we're seeing as far as market growth, what we're seeing as far as share growth, what we're seeing as far as the willingness to prescribe and honor a patient request. Everything seems to be heading in the right direction. And we haven't seen any leveling off at all. So as we think about next year, again we're going to be locked to the core fundamentals which is, first, how do we help docs recognize who the appropriate patient is as they expand that view over time. Certainly, how are we continuing to improve our payer access so we're not losing any business at the counter, and third, what we're seeing in the marketplace is the patients are responding very, very well to the DTC messages, which we will continue to target and evolve as we learn more and more how we can activate the patient. So as far as what we see, as far as total growth, I think it looks very, very promising for next year.

[Peter M. Hecht:]

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

[Mark G. Currie:]

Sure. So I think if you look at, there's been a couple of competitors in this space. And first response is they're still pretty good ways away from the market, still a lot of data to be gathered, still a lot of information. But I come back to Ironwood with LINZESS and with our partners Forest and Actavis, we've really set a high bar with the studies that have been done so far. We love where we positioned the product in regard to the data position, the public manuscript, the acceptance by the KOLs, the very broad understanding that we're the scientific leaders in the GC-C space and building that into overall IBS-C space. So I think we feel very confident of where we are, but we also continue to want to raise the bar. We continue to want to bring forward more data, more options for patients. There's a great deal of satisfaction with this drug. So why invest more now? I think the reason we're excited about continuing to innovate, both with the colonic release and with the 72-microgram is, we're seeing such level of satisfaction in -- as far as the efficacy for this drug and patient and physician satisfaction. So we view it as a chance to continue to accelerate the expansion of LINZESS in that current population. So we're very excited to bring forward these opportunities at this time.

[Operator:]

[Operator Instructions] And our next question or comment comes from Mario Corso with Mizuho.

[Mario Vincent Corso:]

So in terms of the LINZESS revenue number for the quarter, if I were to adjust gross-to-net to 23%, or from 23% to 30%, I get that impact being about $8 million, as opposed to about $4 million. So I'm wondering where I went wrong there? And then wasn't inventory already at the low end of 2 to 3 weeks last quarter? So are we at the very low end of 2 to 3 weeks now? And I guess as a corollary to the first question, if we're stripping out some of the expenses there, and yet you're still kind of in that low- to mid-range of $240 million to $270 million, is something else within the spending mix going up?

[Peter M. Hecht:]

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

[Thomas Graney:]

Sure. Thanks, Mario. On the gross-to-net question, you're not missing anything. We had guided at the end of the second quarter to expect gross-to-net levels be kind of in the mid-20s. Excluding the accounting change, which I'll walk through, we would be in that range of the low 20s. So operationally, nothing really unexpected there with respect to what's going on in the marketplace. We continue to believe that access is a really important element in driving growth for LINZESS and value for our shareholders. So we absolutely keep a close eye on that as well. On the inventory front, we had said at the end of the second quarter, we expected inventory levels to settle around 3 weeks post-integration with Actavis. We are now targeting within the range of 2 to 3 weeks. But to get to the root of your question, we did see about 1/2 a week of burn during the quarter. We did not see that impacting service levels at all, as a result of the lower wholesaler inventory or as a result of Actavis taking over the Forest business.

[Operator:]

And our next question or comment comes from the line of Ravi Mehrotra with Crédit Suisse.

[Ravi Mehrotra:]

And I will actually stick to 2 questions. So my first question is around persistency, or looking at duration of therapy. And I know this is a difficult question to answer, but can you give us any color on how duration of therapy has changed since the launch, and whether DTC has affected that? And my second question, I have to ask a pipeline question, congrats on the progress then. It's a slightly abstract one -- on 1973 for cardiovascular indications, is this a program that we should ultimately view as a partnership proposition?

[Peter M. Hecht:]

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

[Thomas A. McCourt:]

Yes, persistency. As you mentioned, the way we thought was the most accurate way to evaluate how we're doing versus obviously, other category analogues was to follow this rather rigorous persistency, and we clearly are running somewhere between 40% and 50% ahead of Zelnorm and Amitiza with regard to overall persistency. When you look at Zelnorm, Zelnorm ranged from somewhere between 80 and 100 days a year, depending on when -- at what point in time you measured it. And to your point, DTC did impact its overall persistency -- or level of persistency. Now keep in mind that the period of time in which we're evaluating current persistency really doesn't quite capture the impact of DTC yet. But we're certainly seeing trends in that direction as you would absolutely expect to see, as far as improving the overall persistency rate and driving better adherence to the therapy.

[Peter M. Hecht:]

Mark, can you take the question on sGC.

[Mark G. Currie:]

Thanks, Ravi, for the question. So on the pipeline point of view, first of all, we did have a lot of progress this quarter, so it felt great. On -- specifically with sGC, we do view it as an overall platform opportunity, large number of potential indications that include cardiovascular, but also go beyond cardiovascular. So relative to partnership opportunity, we think certainly there are partnership opportunities. But more on the strategic, looking for strategic options there and strategic partnerships. Certainly as we continue to refine the indications where the drug, we think, will potentially offer very strong advantages, those are the areas we will continue to focus on. 1973, as we indicated, will go into the clinic early in the first half, we think, of this upcoming year. And that -- there's a lot of great information we can get from that trial that we are very excited about. Obviously, being able to get readouts on cardiovascular endpoints and even normal volunteers can help inform direct inputted [ph] program. So we think there'll be a lot of data-driven decisions ahead, and including data-driven around what makes sense from a partnering point of view.

[Peter M. Hecht:]

Maybe I can add a couple of comments and just say, the sGC program is an interesting one for us. We tend to not talk about our research efforts much until we get a little bit further along, because we don't like to inform competitors as to the status of our programs. In this case, we see such a big opportunity and so many different product opportunities. And I think we feel very good about, both our intellectual property position and the competitive landscape. I think you guys know there's a very big partnership between Merck and Bayer involving Bayer's approved drug, Adempas, but also a pipeline of opportunities. And there's us in this space. And we are interested in and finding quite a lot of interest from partners in terms of being able to combine efforts and go after the breadth of opportunities. So -- and I would say we're seeing quite a lot of interest. So we decided it was worth making sure folks knew we were here earlier than usual. We'll just work to see what the best solution is for patients and for our shareholders.

[Operator:]

Our next question or comment comes from the line of Jason Gerberry with Leerink Partners.

[Derek C. Archila:]

This is Derek on for Jason. Just a few questions, I'll keep it to 2 though. Just looking at the DTC campaign, has the results of that been compelling enough to increase the spend associated with the initiative? And then second, has your appetite at all changed to carry out any potential product deals that you could leverage the LINZESS sales force?

[Peter M. Hecht:]

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

[Thomas A. McCourt:]

Sure. So we're -- as I mentioned, we're very pleased with what we're seeing as far as the response to the DTC campaign and very encouraged with regard to what we're intending to do moving forward, based on the learnings that we've had from the marketplace and from patients and physicians. As far as expanding the investment, one of the things that we put in place as part of the media plan was a number of test markets where we actually did heavy-up tests to see what impact more spending would actually have on driving demand. And what we learned is we were roughly at the right spending level. But in addition to that, we have seen significant geographic differences with regard to uptake, as well as what types of patients are responding through which media channel. So we have a tremendous opportunity as we evolve the campaign into next year with regard to maximizing its impact to further drive growth of the brand. But to date, we're -- again, we're very excited about what we're seeing as far as our ability to activate patients, but also the physician's willingness to honor a patient request, which is very, very strong.

[Peter M. Hecht:]

With respect to the commercial capability and how to leverage that best, I think we are looking at a lot of opportunities. But for us, it all starts with LINZESS. We build very strong commercial capabilities really across a range of functions, across marketing, patient engagement and sales with a highly skilled team of clinical sales specialists who have great relationships, both with gastros and with primary care docs now across the U.S. We did all that with the goal to make sure we were leveraging LINZESS as best we could together with our partner, Actavis. And I think that's gone quite well. And when we think about bringing in additional products, we want to make sure that whatever we bring in helps to further accelerate LINZESS growth, provide selling opportunities for our reps when they're bringing LINZESS. But we also think we have a strong capability there that we can leverage over time. And we did want the sales team to be focused on LINZESS maniacally and exclusively for the first couple of years. Again, I think that's been very beneficial to the growth of the brand. And they will continue to make that their highest priority, going forward. And at the same time, we're looking at a range of product opportunities, and we want to keep the bar high and make sure we get something that really provides value for our reps and for our shareholders. But we'll keep at it, and I think we'll find some interesting and valuable opportunities over time.

[Operator:]

And our next question or comment comes from the line of Mack Kerker with Goldman Sachs.

[Mack Kerker:]

It's Mack filling in for Gary Nachman. Just 2 questions. How much of the new scripts for LINZESS are coming from OTC products? And how incremental -- I don't know if you can comment on this or want to, but how incremental do you think the OIC opportunity would be? And is it being used off-label significantly already?

[Peter M. Hecht:]

Tom, maybe you can take both of those questions.

[Thomas A. McCourt:]

Sure. So the first question with regard to our primary source of business, we knew that in order to really enable LINZESS to reach its potential, the majority of the new business would have to come out of the OTC market. And certainly, that's exactly what we're seeing playing out. Certainly, as a market leader, we're growing the market, we're penetrating the market. But as I look at the primary source of business, over 60%, 65% of the new patients being put on drug are coming right off OTCs, which is exactly what we needed to see. So I think we feel very, very good about not only where we are, but where we're going. With regard to the opioid-induced constipation market, as you know, it's a sizable market. It's about 8 million patients out there that we estimate are in need of effective therapy. Based on certainly the early work that we've done in animal studies, I think we're encouraged that we'll see a positive outcome. But obviously, we're initiating the trial. We'll take a look at the impact that it has on the patient population. But as far as your question on how much we think we're actually getting off-label, that's very, very difficult to really understand. And certainly, something that in no way are we encouraging, but I think we're going to continue to examine that moving forward. But we do see that it's a nice opportunity. We'll take a look at what the clinical studies look like and determine how we best proceed.

[Operator:]

[Operator Instructions] And our next question or comment comes from the line of Brian Jeep with WallachBeth Capital.

[Brian E. Jeep:]

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

[Peter M. Hecht:]

Tom, can you take that question?

[Thomas Graney:]

Sure. Brian, thanks for the question. As we said, since the launch of LINZESS, access is something we want to ensure that patients are able to get the drug when it gets written for them. We had signaled kind of mid-20s for gross-to-net, as I said, excluding the accounting change. We're still comfortable with that guidance for the near-term. However, we do view not only gross-to-net, but other investments as part of a basket of marketing mix, which we evaluate over time and ensure that the mix we have is optimizing not only access, but also the value of LINZESS to us and to patients. So it will change over time as we get better data, and that data informs us on how to create the most value we can.

[Brian E. Jeep:]

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

[Thomas Graney:]

Well, I think over time, with the exception of changes in price increases, et cetera, we would expect net trade sales to trend pretty closely with what we see in terms of TRx demand. I would say that Actavis does operate with a lower level of inventory with their wholesaler partners in this 2- to 3-week range. And we did end the third quarter at the low end of that range, as I said. So there will be some fluctuations, for sure, quarter-to-quarter with respect to the level of wholesale inventory. But for us, operationally, the key measure continues to be TRx growth, and that is really indicative of the strength of the brand and the patient satisfaction we're seeing out in the marketplace coupled with our managed care access position.

[Operator:]

And we have a follow-up question coming from the line of Mario Corso with Mizuho.

[Mario Vincent Corso:]

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

[Peter M. Hecht:]

Tom McCourt, DTC.

[Thomas A. McCourt:]

DTC spend. So we do -- we're very thoughtful about how we lay out the media plan over the entire year. And obviously, you're going to invest more in periods of the year in which you're going to see more rapid growth in available patients that we make sure we take advantage of those opportunities. But I think the media plan that we had in place this year was a robust plan, had the impact that we had hoped to see. I think we can make -- it is roughly the same range that we're going to go into next year with. But I think we'll have a better informed plan, a more robust plan, that we hopefully can -- actually improves the overall productivity of the spend. So I think we like where we're at with regard to the spend. We like where we are with regard to the impact. And again, I think, as we look into next year, it's really how we optimize, based on where we are geographically, what channels we invest in. And it does fluctuate. Demand does fluctuate through the year, which we've seen in the past and we certainly saw again this year.

[Mark G. Currie:]

And with respect to the staging for IW-3718, it's a Phase IIa study, exploratory, one dose strength. So we will -- if we see success on the exploratory endpoint we're measuring, we would then proceed to a Phase IIb, where we do a much more thorough dosing, full-dose response.

[Peter M. Hecht:]

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

[Thomas Graney:]

Yes, Mario, sorry for that. We were testing your patience to see if you were going to come back with another round of questions. To answer your question, we do not expect any anomalies other than we're working the plan we went into the year with. And -- but for those changes in the accounting for the patient assistance programs, there really isn't any other change in our guidance.

[Peter M. Hecht:]

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

[Operator:]

And our next question or comment comes from the line of David Nierengarten with Wedbush Securities.

[Dilip Joseph:]

This is Dilip filling in for David. So just wanted to clarify regarding the decrease in sales and marketing. Where is this coming from, exactly? Is this less being spent on advertising or from sales force? And going forward, with the guidance expected to be in the lower end of the range, should we expect this downward trend to carry into 2015?

[Thomas Graney:]

Thanks for the question. We haven't given any guidance on 2015. Look for that on the next call when we close out the year. But to get to your question on 2014, the reason we're guiding to the lower to the middle end of the range that we had previously provided is because of the fact that in the original guidance we had our patient assistance program expenses in sales and marketing for the full year. And with this change of accounting that is affecting gross-to-net for the third and fourth quarter, the geography on the P&L of those investments will be changing. So it will be reflected in net sales, not sales and marketing spending. I hope that is clear.

[Peter M. Hecht:]

And I guess, just to add a bit, I'd say we feel very good about the investments we're making across the sales and marketing mix, whether it's investing against educating patients or educating physicians further. We feel very good about the return on investment we're seeing from those investments, and we work very hard to calibrate to make sure we're making appropriate investments. And we will going forward. And I think you'll continue to see investments -- without being too specific on the numbers, very, very significant investments, both in physician and patient education going forward, as you've seen this year and last year. We feel great about the growth in the brand.

[Operator:]

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

[Peter M. Hecht:]

Thanks, Andrew, for your help today, and thanks to all of you for participating in the call this afternoon. Just to summarize quickly, what we discussed on the call today. 3 points

[Operator:]

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