Document and Entity Information(USD $)
12 Months Ended
Dec. 31, 2011
Jun. 30, 2011
Feb. 15, 2012
Class A common stock
Feb. 15, 2012
Class B common stock
Entity Registrant Name
IRONWOOD PHARMACEUTICALS INC
Entity Central Index Key
0001446847
Document Type
10-K
Document Period End Date
Dec. 31, 2011
Amendment Flag
false
Current Fiscal Year End Date
--12-31
Entity Well-known Seasoned Issuer
Yes
Entity Voluntary Filers
No
Entity Current Reporting Status
Yes
Entity Filer Category
Large Accelerated Filer
Entity Public Float
$1,375,964,667
Entity Common Stock, Shares Outstanding
75,186,090
31,770,641
Document Fiscal Year Focus
2011
Document Fiscal Period Focus
FY
Consolidated Balance Sheets(USD $)
Dec. 31, 2011
Dec. 31, 2010
Current assets:
Cash and cash equivalents
$87,282,000
$44,321,000
Available-for-sale securities
76,734,000
203,706,000
Accounts receivable
74,000
19,000
Related party accounts receivable, net
578,000
2,876,000
Prepaid expenses and other current assets
2,899,000
5,320,000
Restricted cash
2,833,000
Total current assets
167,567,000
259,075,000
Restricted cash
7,647,000
7,647,000
Property and equipment, net
33,625,000
34,369,000
Other assets
138,000
274,000
Total assets
208,977,000
301,365,000
Current liabilities:
Accounts payable
6,436,000
4,302,000
Accrued research and development costs
7,010,000
8,140,000
Accrued expenses
11,122,000
8,938,000
Current portion of capital lease obligations
233,000
197,000
Current portion of deferred rent
4,042,000
2,799,000
Current portion of deferred revenue
36,291,000
40,050,000
Total current liabilities
65,134,000
64,426,000
Capital lease obligations, net of current portion
422,000
393,000
Deferred rent, net of current portion
12,435,000
14,612,000
Deferred revenue, net of current portion
21,130,000
62,383,000
Commitments and contingencies (Note 12 and Note 13)
  
  
Stockholders' equity:
Preferred stock, $0.001 par value, 75,000,000 shares authorized, no shares issued and outstanding at December 31, 2011 and December 31, 2010
  
  
Additional paid-in capital
542,141,000
526,991,000
Accumulated deficit
(432,392,000)
(367,540,000)
Accumulated other comprehensive income
6,000
1,000
Total stockholders' equity
109,856,000
159,551,000
Total liabilities and stockholders' equity
208,977,000
301,365,000
Class A common stock
Stockholders' equity:
Common stock
62,000
48,000
Class B common stock
Stockholders' equity:
Common stock
$39,000
$51,000
Consolidated Balance Sheets (Parenthetical)(USD $)
Dec. 31, 2011
Dec. 31, 2010
Preferred stock, par value (in dollars per share)
$0.001
$0.001
Preferred stock, shares authorized
75,000,000
75,000,000
Preferred stock, shares issued
0
0
Preferred stock, shares outstanding
0
0
Class A common stock
Common stock, par value (in dollars per share)
$0.001
$0.001
Common stock, shares authorized
500,000,000
500,000,000
Common stock, shares issued
61,801,770
48,202,089
Common stock, shares outstanding
61,801,770
48,202,089
Class B common stock
Common stock, par value (in dollars per share)
$0.001
$0.001
Common stock, shares authorized
100,000,000
100,000,000
Common stock, shares issued
38,914,080
50,970,247
Common stock, shares outstanding
38,914,080
50,970,247
Consolidated Statements of Operations(USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Collaborative arrangements revenue
$65,871
$43,857
$34,321
Operating expenses:
Research and development
86,093
77,454
76,100
General and administrative
45,920
27,169
19,037
Total operating expenses
132,013
104,623
95,137
Loss from operations
(66,142)
(60,766)
(60,816)
Other income (expense):
Interest expense
(63)
(196)
(318)
Interest and investment income
456
614
240
Remeasurement of forward purchase contracts
600
Other income
900
993
Other income (expense), net
1,293
1,411
522
Net loss from continuing operations before income tax (benefit) expense
(64,849)
(59,355)
(60,294)
Income tax (benefit) expense
3
(2,944)
(296)
Net loss from continuing operations
(64,852)
(56,411)
(59,998)
Net income (loss) from discontinued operations, net of tax provision of $2,944 in the year ended December 31, 2010
4,551
(13,314)
Net loss
(64,852)
(51,860)
(73,312)
Net (income) loss from discontinued operations attributable to noncontrolling interest
(1,121)
2,127
Net loss attributable to Ironwood Pharmaceuticals, Inc.
$(64,852)
$(52,981)
$(71,185)
Net income (loss) per share attributable to Ironwood Pharmaceuticals, Inc.-basic and diluted:
Continuing operations (in dollars per share)
$(0.65)
$(0.63)
$(8.43)
Discontinued operations (in dollars per share)
$0.04
$(1.57)
Net loss per share (in dollars per share)
$(0.65)
$(0.59)
$(10.00)
Weighted average number of common shares used in net income (loss) per share attributable to Ironwood Pharmaceuticals, Inc.-basic (in shares)
99,874,790
89,653,364
7,116,774
Weighted average number of common shares used in net income (loss) per share attributable to Ironwood Pharmaceuticals, Inc.-diluted (in shares)
99,874,790
89,653,364
7,116,774
Consolidated Statements of Operations (Parenthetical)(USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2010
Consolidated Statements of Operations
Net income (loss) from discontinued operations, tax provision
$2,944
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)(USD $)
In Thousands, except Share data, unless otherwise specified
Total
USD ($)
Class A common stock
Class B common stock
Convertible preferred stock (Note 14)
USD ($)
Convertible preferred stock (Note 14)
Series G Convertible preferred stock
USD ($)
Convertible preferred stock (Note 14)
Series H Convertible preferred stock
USD ($)
Convertible preferred stock (Note 14)
Series I Convertible preferred stock
USD ($)
Common Stock
Class A common stock
USD ($)
Common Stock
Class B common stock
USD ($)
Additional paid-in capital
USD ($)
Accumulated deficit
USD ($)
Accumulated other comprehensive income (loss)
USD ($)
Noncontrolling interest
USD ($)
Comprehensive income (loss)
USD ($)
Balance at Dec. 31, 2008
$(230,411)
$273,400
$7
$7,594
$(243,374)
$23
$5,339
Balance (in shares) at Dec. 31, 2008
67,118,858
7,083,178
Increase (Decrease) in Stockholders' Equity
Issuance of common stock upon exercise of stock options and employee stock purchase plan
272
272
Issuance of common stock upon exercise of stock options and employee stock purchase plan (in shares)
255,875
Issuance of restricted common stock awards
1
1
Issuance of restricted common stock awards (in shares)
515,549
Issuance of Convertible preferred stock
25,000
250
15,000
Issuance of Convertible preferred stock (in shares)
2,083,333
20,833
681,819
Settlement of forward purchase contract in connection with issuance of Convertible preferred stock
(8,800)
(6,500)
Share-based compensation expense related to issuance of stock options to non-employees
301
301
Share-based compensation expense related to issuance of stock options to employees and employee stock purchase plan
4,794
4,794
Share-based compensation expense from discontinued operations
149
149
Restricted common stock subject to repurchase
(111)
(111)
Comprehensive income (loss):
Unrealized gain (loss) on short-term investments
(23)
(23)
(23)
Net loss
(73,312)
(71,185)
(2,127)
(73,312)
Total comprehensive loss
(73,335)
(73,335)
Balance at Dec. 31, 2009
(298,340)
298,350
8
12,999
(314,559)
3,212
Balance (in shares) at Dec. 31, 2009
69,904,843
7,854,602
Increase (Decrease) in Stockholders' Equity
Issuance of common stock upon exercise of stock options and employee stock purchase plan
2,023
2
2,021
Issuance of common stock upon exercise of stock options and employee stock purchase plan (in shares)
30,438
1,746,184
Issuance of common stock awards
259
259
Issuance of common stock awards (in shares)
22,825
Cancellation of restricted common stock awards (in shares)
(40,000)
Conversion of convertible preferred stock into common stock upon initial public offering
298,350
70
298,280
Conversion of convertible preferred stock into common stock (in shares)
70,391,620
Conversion of convertible preferred stock into common stock upon initial public offering
(298,350)
Conversion of convertible preferred stock into common stock upon initial public offering (in shares)
(69,904,843)
Issuance of shares upon initial public offering, net of offering costs of approximately $12.4 million
203,167
19
203,148
Issuance of shares upon initial public offering, net of offering costs (in shares)
19,166,667
Conversion of Class B common stock to Class A common stock
29
(29)
Conversion of Class B common stock to Class A common stock (in shares)
28,982,159
(28,982,159)
Share-based compensation expense related to issuance of stock options to non-employees
123
123
Share-based compensation expense related to issuance of stock options to employees and employee stock purchase plan
7,114
7,114
Share-based compensation expense from discontinued operations
59
59
Restricted common stock no longer subject to repurchase
55
55
Decrease in noncontrolling interest in subsidiary
(1,400)
2,933
(4,333)
Comprehensive income (loss):
Unrealized gain (loss) on short-term investments
1
1
1
Net loss
(51,860)
(52,981)
1,121
(51,860)
Total comprehensive loss
(51,859)
(51,859)
Balance at Dec. 31, 2010
159,551
48
51
526,991
(367,540)
1
Balance (in shares) at Dec. 31, 2010
48,202,089
50,970,247
Increase (Decrease) in Stockholders' Equity
Issuance of common stock upon exercise of stock options and employee stock purchase plan
3,393
2
3,391
Issuance of common stock upon exercise of stock options and employee stock purchase plan (in shares)
112,433
1,463,449
Issuance of common stock awards
30
30
Issuance of common stock awards (in shares)
2,328
Cancellation of restricted common stock awards (in shares)
(27,500)
Conversion of Class B common stock to Class A common stock
14
(14)
Conversion of Class B common stock to Class A common stock (in shares)
13,484,920
(13,484,920)
Share-based compensation expense related to issuance of stock options to non-employees
152
152
Share-based compensation expense related to issuance of stock options to employees and employee stock purchase plan
11,550
11,550
Repurchase and retirement of shares of common stock
(7,196)
Restricted common stock no longer subject to repurchase
27
27
Comprehensive income (loss):
Unrealized gain (loss) on short-term investments
5
5
5
Net loss
(64,852)
(64,852)
(64,852)
Total comprehensive loss
(64,847)
(64,847)
Balance at Dec. 31, 2011
$109,856
$0
$62
$39
$542,141
$(432,392)
$6
$0
Balance (in shares) at Dec. 31, 2011
0
61,801,770
38,914,080
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) (Parenthetical)(USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2010
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)
Issuance of shares upon initial public offering, offering costs
$12.4
Consolidated Statements of Cash Flows(USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Cash flows from operating activities:
Net loss
$(64,852)
$(51,860)
$(73,312)
Income (loss) from discontinued operations
4,551
(13,314)
Loss from continuing operations
(64,852)
(56,411)
(59,998)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
9,999
6,161
4,763
Loss on disposal of property and equipment
7
474
80
Remeasurement of forward purchase contracts
(600)
Share-based compensation expense
11,732
7,496
5,095
Accretion of discount/premium on investment securities
2,234
1,619
239
Changes in assets and liabilities:
Accounts receivable
2,243
2,324
(648)
Restricted cash
2,833
(2,348)
(446)
Prepaid expenses and other current assets
2,421
(2,647)
(464)
Other assets
136
(253)
50
Accounts payable and accrued expenses
5,086
2,740
1,732
Accrued research and development costs
(1,130)
(4,261)
2,990
Deferred revenue
(45,012)
(23,569)
53,993
Deferred rent
(934)
6,745
1,279
Net cash provided by (used in) operating activities from continuing operations
(75,237)
(61,930)
8,065
Net cash used in operating activities from discontinued operations
(5,969)
(11,510)
Total net cash used in operating activities
(75,237)
(67,899)
(3,445)
Cash flows from investing activities:
Purchases of available-for-sale securities
(97,511)
(441,799)
(26,673)
Sales and maturities of available-for-sale securities
222,254
236,475
48,455
Purchases of property and equipment
(9,682)
(17,220)
(3,524)
Proceeds from sale of property and equipment
4
1
21
Proceeds from sale of subsidiary
9,500
Net cash provided by (used in) investing activities from continuing operations
115,065
(213,043)
18,279
Net cash provided by (used in) investing activities from discontinued operations
1
(521)
Total net cash provided by (used in) investing activities
115,065
(213,042)
17,758
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs
40,250
Proceeds from initial public offering
203,167
Proceeds from exercise of stock options, stock purchase plan and issuance of restricted stock
3,393
2,023
272
Proceeds from borrowings
1,079
Payments on borrowings
(260)
(1,957)
(1,250)
Net cash provided by financing activities from continuing operations
3,133
203,233
40,351
Net cash provided by (used in) financing activities from discontinued operations
(277)
1,312
Total net cash provided by financing activities
3,133
202,956
41,663
Net increase (decrease) in cash and cash equivalents
42,961
(77,985)
55,976
Cash and cash equivalents, beginning of period
44,321
122,306
66,330
Cash and cash equivalents, end of period
87,282
44,321
122,306
Supplemental cash flow disclosures:
Cash paid for interest (includes cash paid by Microbia)
64
325
412
Cash paid for income taxes
3
(153)
Settlement of forward purchase contracts
(15,300)
Purchases under capital leases
325
529
67
Debt and interest paid by purchaser of subsidiary
$1,075
Nature of Business
Nature of Business

1. Nature of Business

        Ironwood Pharmaceuticals, Inc. (the "Company") is an entrepreneurial pharmaceutical company that discovers, develops and intends to commercialize differentiated medicines that improve patients' lives. The Company's lead product candidate is linaclotide, a guanylate cyclase type-C ("GC-C") agonist being developed for the treatment of patients with irritable bowel syndrome with constipation ("IBS-C") and chronic constipation ("CC"). The Company and its U.S. collaboration partner, Forest Laboratories, Inc. ("Forest"), announced in August 2011 that they submitted a New Drug Application ("NDA") to the U.S. Food and Drug Administration ("FDA") for linaclotide for the treatment of IBS-C and CC. In October 2011, the FDA accepted the NDA for review, and the FDA Prescription Drug User Fee Act ("PDUFA") target action date is expected to occur in June 2012. In September 2011, the Company and its European partner, Almirall, S.A. ("Almirall") each announced that Almirall submitted a Market Authorization Application ("MAA") to the European Medicines Agency ("EMA") for linaclotide for the treatment of IBS-C. The Company also has a pipeline focused on both research and development of early development candidates and discovery research in multiple therapeutic areas, including gastrointestinal disease, CNS disorders, respiratory disease and cardiovascular disease.

        Prior to September 2010, the Company held a majority ownership interest in Microbia, Inc. (formerly known as Microbia Precision Engineering), a subsidiary formed in September 2006. Microbia, Inc. ("Microbia") engaged in a specialty biochemicals business based on a proprietary strain-development platform. In September 2010, the Company sold its interest in Microbia to DSM Holding Company USA, Inc. ("DSM") (Note 2).

        The Company was incorporated in Delaware on January 5, 1998. On April 7, 2008, the Company changed its name from Microbia, Inc. to Ironwood Pharmaceuticals, Inc. The Company currently operates in one reportable business segment, human therapeutics. Prior to September 21, 2010, the Company operated in two reportable business segments, human therapeutics and biomanufacturing (Note 19).

        The Company has generated an accumulated deficit as of December 31, 2011 of approximately $432.4 million since inception. In February 2010, the Company completed its initial public offering of Class A common stock and raised a total of approximately $203.2 million in net proceeds (Note 3).

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principles of Consolidation

        During 2006, the Company formed Microbia as a 100% wholly owned subsidiary of the Company. In September 2006, Microbia sold additional equity interests to a third party, which reduced the Company's ownership interest in Microbia to 85% (Note 21). The accompanying consolidated financial statements of Ironwood Pharmaceuticals, Inc. include the assets, liabilities, revenue, and expenses of Microbia, over which the Company exercised control until September 21, 2010, when the Company sold its interest in Microbia to DSM. The Company recorded noncontrolling interest in its consolidated statements of operations for the ownership interest of the minority owners of Microbia. All intercompany transactions and balances are eliminated in consolidation.

Sale of Subsidiary and Discontinued Operations

        On September 21, 2010, the Company sold its interest in Microbia to DSM in exchange for cash proceeds of $9.5 million, the payment of approximately $1.1 million of Microbia debt and interest by DSM and future contingent consideration based on the sale of products incorporating Microbia's technology. As a result of the sale of its interest in Microbia, the Company ceased to have any financial interest in Microbia. The Company maintained no further investment in Microbia and recorded a gain on the sale of Microbia in its consolidated statements of operations of approximately $12.2 million at the time of the sale. The Company determined that Microbia qualified for presentation as discontinued operations and accordingly, the Company classified the assets, liabilities, operations and cash flows of Microbia as discontinued operations for all periods presented.

        The agreement with DSM also included future contingent consideration in the form of a royalty on future sales of products incorporating Microbia's technology through the earlier of a) 2024, b) the invalidity of any Microbia patent, or c) the maximum agreed upon amount is reached. The Company's accounting policy is to account for the future contingent consideration, if any, as a gain contingency as the proceeds have not been received and the receipt of royalty income is uncertain. As a result, proceeds will only be recorded in future earnings as they are earned. As of December 31, 2011, no amounts have been recorded for the contingent consideration in the Company's consolidated financial statements.

Use of Estimates

        The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the U.S. requires the Company's management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company's management evaluates its estimates, including those related to revenue recognition, available-for-sale securities, impairment of long-lived assets, income taxes including the valuation allowance for deferred tax assets, research and development, contingencies, and share-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

Cash and Cash Equivalents

        The Company considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds, U.S. Treasury securities and certain U.S. government sponsored securities. The carrying amount of cash equivalents approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $77.2 million and $39.2 million at December 31, 2011 and 2010, respectively.

Restricted Cash

        The Company is contingently liable under unused letters of credit with a bank, related to the Company's facility lease agreements and credit card arrangements, in the amount of approximately $7.6 million and $10.5 million as of December 31, 2011 and 2010, respectively. As a result, the Company has restricted cash of approximately $7.6 million and $10.5 million as of December 31, 2011 and 2010, respectively, securing these letters of credit. The cash will be restricted until the termination of the leases and credit card arrangements. In January 2011, approximately $2.8 million of restricted cash was released due to the expiration of the 320 Bent Street facility lease in December 2010. As of December 31, 2010, the $2.8 million is shown as a current asset on the Company's consolidated balance sheets.

Available-for-Sale Securities

        The Company classifies all short-term investments with an original maturity when purchased of greater than three months as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in other comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest and investment income. Realized gains and losses, and declines in value judged to be other than temporary on available-for-sale securities, are included in interest and investment income.

        The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest and investment income. To determine whether an other-than-temporary impairment exists, the Company considers whether it has the ability and intent to hold the investment until a market price recovery, and whether evidence indicating the recoverability of the cost of the investment outweighs evidence to the contrary. There were no other-than-temporary impairments for the years ended December 31, 2011, 2010 and 2009.

Accounts Receivable and Related Valuation Account

        The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. The Company's receivables primarily relate to amounts reimbursed under its collaboration and license agreements. The Company believes that credit risks associated with these collaborators are not significant. To date, the Company has not had any write-offs of bad debt, and as such, the Company does not have an allowance for doubtful accounts as of December 31, 2011 and 2010.

Concentrations of Credit Risk

        Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, restricted cash, available-for-sale securities, and accounts receivable. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company's available-for-sale investments potentially subject the Company to concentrations of credit risk. The Company has adopted an investment policy which limits the amounts the Company may invest in any one type of investment, and requires all investments held by the Company to be A+ rated, thereby reducing credit risk concentration.

        Accounts receivable, including related party accounts receivable, primarily consist of amounts due under the collaboration agreement with Forest and license agreements with Almirall, S.A. ("Almirall") and Astellas Pharma Inc. ("Astellas") (Note 5) for which the Company does not obtain collateral. Effective September 1, 2009, Forest became a related party when the Company sold to Forest 2,083,333 shares of the Company's Series G convertible preferred stock and effective November 2, 2009, Almirall became a related party when the Company sold to them 681,819 shares of its Series I convertible preferred stock.

        The percentages of revenue from continuing operations recognized from significant customers of the Company in the years ended December 31, 2011, 2010 and 2009 are included in the following table:

 
   Years Ended December 31,  
 
   2011   2010   2009  

Collaborative Partner:

                    

Forest

     64 %   50 %   79 %

Almirall

     31 %   43 %   21 %

Astellas

     5 %   7 %   — %

        Tate & Lyle Investments, Ltd. ("T&L") accounted for approximately 98% and 100% of the Company's revenue from discontinued operations for the years ended December 31, 2010 and 2009, respectively. For the years ended December 31, 2011, 2010 and 2009, no additional customers accounted for more than 10% of the Company's revenue from continuing operations.

        At December 31, 2011 and 2010, accounts receivable from Forest, net of any payables due Forest, accounted for approximately 86% and 89%, respectively, of the Company's total accounts receivable. At December 31, 2011 and 2010, Almirall accounted for approximately 2% and 10%, respectively, of the Company's total accounts receivable. At December 31, 2011 and 2010, Astellas accounted for approximately 11% and 0%, respectively of the Company's total accounts receivable.

Revenue Recognition

        The Company's revenue is generated through collaborative research and development and licensing agreements. The terms of these agreements contain multiple deliverables which may include (i) licenses, (ii) research and development activities, and (iii) the manufacture of active pharmaceutical ingredient ("API") and development materials for the collaborative partner. Payments to the Company under these agreements may include non-refundable license fees, payments for research and development activities, payments for the manufacture of API and development materials, payments based upon the achievement of certain milestones and royalties on product sales. In addition, prior to September 2010, the Company generated services revenue through agreements that generally provided for fees for research and development services rendered.

        For arrangements that include multiple deliverables, the Company follows the provisions of the Accounting Standards Codification ("ASC") Topic 605-25, Revenue Recognition—Multiple-Element Arrangements, in accounting for these agreements. Effective January 1, 2011, the Company adopted Accounting Standards Update ("ASU") No. 2009-13, Multiple-Deliverable Revenue Arrangements ("ASU 2009-13"), which amends ASC Topic 605-25. Refer to Note 2, "Recently Adopted Accounting Standards," for additional discussion of this standard and its impact on the Company's accounting for collaboration and license agreements. In order to account for these agreements, the Company must identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on if certain criteria are met, including whether the delivered element has standalone value to the collaborator. The consideration received is allocated among the separate units of accounting based on the relative selling price, and the applicable revenue recognition criteria are applied to each of the separate units. If the separation criteria is not met, revenue of the combined unit of accounting is recorded based on the method appropriate for the last delivered item. The Company recognizes revenue when there is persuasive evidence that an arrangement exists, services have been rendered or delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.

        At December 31, 2011, the Company had collaboration and license agreements with Forest, Almirall and Astellas. Refer to Note 5, "Collaboration and License Agreements," for additional discussion of these agreements.

        There are no performance, cancellation, termination or refund provisions in any of the Company's arrangements that contain material financial consequences to the Company.

Collaboration and License Agreements

        The significant deliverables under the Company's collaboration and license agreements generally include the license to develop and commercialize linaclotide, the Company's GC-C agonist, and may also include deliverables related to research and development activities, and the manufacture of API and development materials for the collaborative partner.

        Generally, collaboration and license agreements contain non-refundable terms for payments and, depending on the terms of the agreement, provide that the Company will (i) provide research and development activities, including participation on a joint development committee, (ii) manufacture API and development materials which are reimbursed at a contractually determined rate, (iii) earn payments upon the achievement of certain milestones, and (iv) earn royalty payments on sales of linaclotide. In determining the separate units of accounting, management evaluates whether the license has standalone value to the partner based on the consideration of the relevant facts and circumstances for each arrangement. Factors considered in this determination include the research capabilities of the partner and the availability of peptide research expertise in the general marketplace. In addition, the Company considers whether the collaborator can use the license for its intended purpose without the receipt of the remaining deliverables, and whether the value of the license is dependent on the undelivered items and whether there are other vendors that can provide the undelivered item.

        For all of the collaboration and license agreements discussed in Note 5, the licenses and research and development activities did not qualify as separate units of accounting since the licenses did not have standalone value without the research and development activities. Up-front payments on a license are deferred if facts and circumstances dictate that the license does not have standalone value. The determination of the length of the period over which to recognize the revenue is subject to judgment and estimation and can have an impact on the amount of revenue recognized in a given period. The Company generally estimates this period as the estimated period of performance, which is typically the research and development term due to the Company's continuing involvement in the performance of research and development activities, primarily through its participation on a joint development committee. Typically the research and development term begins at the inception of the collaboration or license agreement and concludes when the Company's significant research and development obligations under the agreement have concluded. The Company believes this period of involvement is 60 months for the Forest collaboration, 41 months for the Almirall license agreement and 115 months for the Astellas license agreement. Quarterly, the Company reassesses its periods of substantial involvement over which the Company amortizes its up-front license fees and makes adjustments as appropriate. In the event that a license were to be terminated, the Company would recognize as revenue any portion of the up-front fee that had not previously been recorded as revenue, but was classified as deferred revenue at the date of such termination.

        At the inception of each agreement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific and other risks that must be overcome to achieve the milestone, as well as the level of effort and investment required. Milestones that are not considered substantive are accounted for as license payments and recognized on a straight-line basis over the remaining period of performance. Refer to Note 5 for details on the specific milestones in each of the Company's agreements.

        In those circumstances where a substantive milestone is achieved, collection of the related receivable is reasonably assured and the Company has remaining obligations to perform under the collaboration arrangement, the Company has historically recognized as revenue on the date the milestone was achieved an amount equal to the applicable percentage of the performance period that had elapsed as of the date the milestone was achieved, with the balance being deferred and recognized on a straight-line basis over the remaining period of performance. Effective January 1, 2011, the Company adopted ASU No. 2010-17, Revenue Recognition—Milestone Method ("ASU 2010-17"). Refer to Note 2, "Recently Adopted Accounting Standards," for additional discussion of the adoption of this standard and its impact on the Company's accounting for collaboration and license agreements. Under ASU 2010-17, beginning January 1, 2011, in those circumstances where a substantive milestone is achieved and collection of the related receivable is reasonably assured, the Company recognizes revenue related to the milestone in its entirety in the period in which the milestone is achieved. At the inception of each arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (1) the entity's performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity's performance to achieve the milestone, (b) the consideration relates solely to past performance and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Substantive milestones are due to the Company upon NDA approval of linaclotide in the U.S., upon the initiation of a Phase 3 study for linaclotide in Japan, upon the filing and approval of the Japanese equivalent of an NDA with the relevant regulatory authority in Japan. Milestone payments received prior to the adoption of ASU 2010-17 will continue to be recognized over the remaining period of performance.

        The Company produces development materials and API for its collaborators and is reimbursed for its costs to produce the material. The Company recognizes revenue on development material and API when the material has passed all quality testing required for collaborator acceptance, delivery has occurred, title and risk of loss have transferred to the collaborator, the price is fixed or determinable, and collection is reasonably assured.

        The Company receives research and development funding under the Forest collaboration agreement and considers the factors or indicators within this arrangement to determine whether reporting such funding on a gross or net basis is appropriate. The Company records revenue transactions gross in the consolidated statements of operations if it is deemed the principal in the transaction, which includes being the primary obligor and having the risks and rewards of ownership.

        For certain of the Company's arrangements, particularly the license agreement with Almirall, it is required that taxes be withheld on its payments. The Company has adopted a policy to recognize revenue net of these tax withholdings.

Services Revenue

        Prior to September 2010, the Company recognized services revenue when there was persuasive evidence that an arrangement existed, services had been rendered or delivery had occurred, the price was fixed or determinable, and collection was reasonably assured. Revenue from research and development services rendered was recognized as services were performed. As a result of the sale of the Company's interest in Microbia in September 2010, services revenue is included in net income from discontinued operations.

Research and Development Costs

        The Company expenses research and development costs to operations as incurred. The Company defers and capitalizes nonrefundable advance payments made by the Company for research and development activities until the related goods are received or the related services are performed.

        Research and development expenses are comprised of costs incurred in performing research and development activities, including salary and benefits; share-based compensation expense; laboratory supplies and other direct expenses; facilities expenses; overhead expenses; contractual services, including clinical trial and related clinical manufacturing expenses, including supply chain development; and other outside expenses. As a result of the sale of the Company's interest in Microbia in September 2010, costs of revenue related to the Microbia services contracts and costs associated with Microbia's research and development activities are included in net income (loss) from discontinued operations.

        The Company has entered into a collaboration agreement in which it shares research and development expenses with a collaborator. The Company records the expenses for such work as research and development expense. Because the collaboration arrangement is a cost-sharing arrangement, the Company concluded that when there is a period during the collaboration arrangement during which the Company receives payments from the collaborator, the Company records the payments by the collaborator for their share of the development effort as a reduction of research and development expense.

Share-Based Compensation

        Share-based compensation is recognized as an expense in the financial statements based on the grant date fair value. Compensation expense recognized primarily relates to stock awards, restricted stock and stock options granted, modified, repurchased or cancelled on or after January 1, 2006. Stock options granted to employees prior to that time continue to be accounted for using the intrinsic value method. Under the intrinsic value method, compensation associated with share-based awards to employees was determined as the difference, if any, between the fair value of the underlying common stock on the date compensation was measured, generally the grant date, and the price an employee must pay to exercise the award. For awards that vest based on service conditions, the Company uses the straight-line method to allocate compensation expense to reporting periods. The grant date fair value of options granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term and the fair value of the underlying common stock, among others.

        The Company records the expense for stock option grants subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date.

        The Company records the expense of services rendered by non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of unvested non-employee awards are remeasured at each reporting period and expensed over the vesting term of the underlying stock options.

Accounting for Sabbatical Leave

        The Company accrues an employee's right to a compensated absence under a sabbatical, or other similar benefit arrangement that requires the completion of a minimum service period and the benefit increases with additional years of service, accumulates, and for arrangements in which the individual continues to be a compensated employee and is not required to perform duties for the entity during the absence. Therefore, the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the requisite service period. During the years ended December 31, 2011, 2010 and 2009, the Company recorded expense for sabbatical costs of approximately $0.3 million, $0.3 million and $0.1 million, respectively. These values exclude any amounts recorded for sabbatical costs from discontinued operations.

Noncontrolling Interest

        Noncontrolling interest represents the noncontrolling stockholder's proportionate share of equity and net income or net loss of the Company's former consolidated subsidiary, Microbia. On September 21, 2010, the Company sold its interest in Microbia, resulting in the deconsolidation of its former subsidiary bringing the noncontrolling interest balance to zero. Immediately prior to the sale, the Company converted certain intercompany debt and payables into preferred stock of Microbia, which resulted in an approximately $2.9 million decrease in the noncontrolling interest. Prior to the sale of Microbia, the noncontrolling stockholder's proportionate share of the equity in Microbia was reflected as noncontrolling interest in the Company's consolidated balance sheets as a component of stockholders' equity (deficit). The proportionate share of the net loss attributable to noncontrolling interest is reflected in the accompanying consolidated statements of operations.

Net Loss Per Share

        The Company calculates basic and diluted net loss per common share by dividing the net loss by the weighted average number of common shares outstanding during the period. The Company has excluded unvested restricted stock and shares that are subject to repurchase by the Company from the weighted average number of common shares outstanding. The Company's potentially dilutive shares, which include convertible preferred stock, outstanding common stock options and unvested shares of restricted stock, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive. The loss attributable to the noncontrolling interest is included in the net income (loss) per share from discontinued operations.

Property and Equipment

        Property and equipment, including leasehold improvements, are recorded at cost, and are depreciated when placed into service using the straight-line method based on their estimated useful lives as follows:

Asset Description
  Estimated Useful Life
(In Years) 		 

Laboratory equipment

     5  

Computer and office equipment

     3  

Furniture and fixtures

     7  

Software

     3  

        Included in property and equipment are certain costs of software obtained for internal use. Costs incurred during the preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs related to software obtained for internal use are expensed as incurred.

        Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term. Costs for capital assets not yet placed into service have been capitalized as construction in progress, and will be depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred.

Income Taxes

        The Company provides for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

        The Company accounts for uncertain tax positions recognized in the consolidated financial statements by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Impairment of Long-Lived Assets

        The Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist, which warrant adjustments to carrying values or estimated useful lives. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset's value is recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value. There were no indicators of impairment at December 31, 2011 or December 31, 2010. At December 31, 2009, the Company concluded that impairments of certain long-lived assets existed at its former subsidiary, Microbia, resulting from its restructuring in the fourth quarter of 2009 (Note 21). Such long-lived assets were written down to their estimated fair value, which resulted in a charge of approximately $0.9 million. This charge is shown as part of net income (loss) from discontinued operations.

Comprehensive Income (Loss)

        All components of comprehensive income (loss) are required to be disclosed in the consolidated financial statements. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources and currently consists of net loss and changes in unrealized gains and losses on available-for-sale securities.

Segment Information

        Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance.

        Prior to the sale of its interest in Microbia in September 2010, the Company had two reportable business segments: human therapeutics and biomanufacturing (Note 19). Revenue from the Company's human therapeutics segment is shown in the consolidated statements of operations as collaborative arrangements revenue. Revenue from the Company's biomanufacturing segment is presented as a component of the net income (loss) from discontinued operations.

New Accounting Pronouncements

        From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.

Recently Adopted Accounting Standards

        In October 2009, the FASB issued ASU 2009-13. ASU 2009-13 amended existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21")). The consensus to ASU 2009-13 provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management's estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. EITF 00-21 previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. Under EITF 00-21, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. On January 1, 2011, the Company adopted ASU 2009-13 on a prospective basis. The adoption did not have a material impact on the Company's consolidated financial position or results of operations.

        In April 2010, the FASB issued ASU 2010-17. ASU 2010-17 provides guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance, management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This ASU is effective on a prospective basis for research and development milestones achieved in fiscal years beginning on or after June 15, 2010. On January 1, 2011, the Company adopted ASU 2010-17 to change its accounting policy to begin applying the milestone method on a prospective basis. As the Company elected prospective adoption, there was no material impact on its consolidated financial position or results of operations at the time of adoption. However, during the fourth quarter of 2011, the Company recognized two milestone payments for a total of $20 million in revenue due to substantive milestones achieved after ASU 2010-17 was adopted. The adoption resulted in approximately $2.7 million ($0.03 per share) of additional revenue recognized in 2011 upon the achievement of the milestones as compared to recognition under the Company's prior milestone accounting policy. The Company's prior milestone accounting policy recorded as revenue the portion of the milestone payment equal to the applicable percentage of the performance period that had elapsed as of the date the milestone was achieved.

        In December 2010, the FASB issued ASU No. 2010-27, Fees Paid to the Federal Government by Pharmaceutical Manufacturers ("ASU 2010-27") which provides guidance on how to recognize and classify the fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (together, the "Acts"). The Acts impose an annual fee for each calendar year beginning on or after January 1, 2011 payable by branded prescription drug manufacturers and importers on branded prescription drugs. The liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation over the calendar year that it is payable. ASU 2010-27 is effective for calendar years beginning on or after December 31, 2010, when the fee initially becomes effective. On January 1, 2011, the Company adopted ASU 2010-27 on a prospective basis. As the Company does not currently have a commercial product, the effect of this guidance will be limited to future transactions.

Recently Issued Accounting Standards

        In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"). ASU 2011-04 amends ASC 820, Fair Value Measurement, to ensure that fair value has the same meaning in GAAP and International Financial Reporting Standards ("IFRS") and improves the comparability of the fair value measurement and disclosure requirements in GAAP and IFRS. ASU 2011-04 applies to all entities that measure assets, liabilities or instruments classified in shareholder's equity at fair value, or provide fair value disclosures for items not recorded at fair value. ASU 2011-04 results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, ASU 2011-04 will not result in a change in the application of the requirements in ASC 820. Some of the requirements in ASU 2011-04 clarify the FASB's intent about the application of existing fair value measurement requirements. Other requirements change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. ASU 2011-04 is effective for public companies for interim and annual periods beginning after December 15, 2011 and should be applied prospectively. Early application is not permitted. The Company will adopt this standard beginning in 2012. The Company is currently evaluating the impact, if any, that its adoption of ASU 2011-04 will have on its consolidated financial statements.

        In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income ("ASU 2011-05") which is intended to facilitate the convergence of U.S. GAAP and IFRS as well as to increase the transparency of items reported in other comprehensive income. As a result of ASU 2011-05, all nonowner changes in stockholders' equity are required to be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present other comprehensive income in the statement of changes in equity has been eliminated. ASU 2011-05 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-12") which defers the effective date of the provisions of ASU 2011-05 pertaining to the presentation of reclassification adjustments out of accumulated other comprehensive income. All other requirements in ASU 2011-05 are not affected by ASU 2011-12. ASU 2011-12 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company will adopt these standards beginning in 2012. As ASU 2011-05 and ASU 2011-12 impact presentation only, they will have no effect on the Company's consolidated financial position or results of operations.

Initial Public Offering
Initial Public Offering

3. Initial Public Offering

        In February 2010, the Company completed its initial public offering of Class A common stock pursuant to a registration statement that was declared effective on February 2, 2010. The Company sold 19,166,667 shares of its Class A common stock, which included 2,500,000 shares of the Company's Class A common stock sold pursuant to an over-allotment option granted to the underwriters, at a price to the public of $11.25 per share. As a result of the initial public offering, the Company raised a total of $215.6 million in gross proceeds, and approximately $203.2 million in net proceeds after deducting underwriting discounts and commissions of $10.5 million and offering expenses of approximately $1.9 million.

        Upon the closing of the initial public offering, 69,904,843 shares of the Company's outstanding convertible preferred stock automatically converted into 70,391,620 shares of its Class B common stock.

Net Loss Per Share
Net Loss Per Share

4. Net Loss Per Share

        Basic and diluted net loss per share is calculated as follows (in thousands, except share and per share amounts):

 
   Years Ended December 31,  
 
   2011   2010   2009  

Numerator:

                    

Net loss from continuing operations. 

   $ (64,852 ) $ (56,411 ) $ (59,998 )

Net income (loss) from discontinued operations

     —     4,551     (13,314 )

Less: Net (income) loss from discontinued operations attributable to noncontrolling interest

     —     (1,121 )   2,127  
               

Net income (loss) from discontinued operations attributable to Ironwood Pharmaceuticals, Inc. 

     —     3,430     (11,187 )
               

Net loss attributable to Ironwood Pharmaceuticals, Inc. 

   $ (64,852 ) $ (52,981 ) $ (71,185 )
               

Denominator:

                    

Weighted average number of common shares used in net loss per share attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted

     99,874,790     89,653,364     7,116,774  
               

Net loss per share associated with continuing operations.—basic and diluted

   $ (0.65 ) $ (0.63 ) $ (8.43 )

Net income (loss) per share from discontinued operations attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted

     —     0.04     (1.57 )
               

Net loss per share attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted

   $ (0.65 ) $ (0.59 ) $ (10.00 )
               

        The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as of December 31, 2011, 2010 and 2009, as they would be anti-dilutive:

 
   Years Ended December 31,  
 
   2011   2010   2009  

Convertible preferred stock

     —     —     69,904,843  

Options to purchase common stock

     16,424,500     14,603,229     13,691,579  

Shares subject to repurchase

     160,413     284,960     434,156  
               

 

     16,584,913     14,888,189     84,030,578  
               
Collaboration and License Agreements
Collaboration and License Agreements

5. Collaboration and License Agreements

Forest Laboratories, Inc.

        In September 2007, the Company entered into a collaboration agreement with Forest to jointly develop and commercialize linaclotide, a drug candidate for the treatment of IBS-C, CC and other gastrointestinal conditions, in North America. Under the terms of this collaboration agreement, the Company shares equally with Forest all development costs, as well as potential future profits and losses from the development and sale of linaclotide in the U.S. The Company will receive royalties from Forest for sales in Canada and Mexico. The Company retained the rights to commercialize linaclotide outside of North America. Forest made non-refundable, up-front payments totaling $70.0 million to the Company in order to obtain rights to linaclotide in North America. Because the license to jointly develop and commercialize linaclotide did not have standalone value without the research and development activities provided by the Company, the Company is recognizing the up-front license fee as revenue on a straight-line basis over 60 months, which is the Company's estimate of the period over which linaclotide will be jointly developed under the collaboration. At December 31, 2011, approximately $9.9 million of the up-front license fee remains deferred and is being recognized on a straight-line basis over the remaining estimated development period. The collaboration agreement also includes contingent milestone payments, as well as a contingent equity investment based on the achievement of specific development and commercial milestones. These payments, including the up-front license fee, could total up to $330.0 million if certain development and sales milestones are achieved for linaclotide. At December 31, 2011, $120.0 million in license fees and milestone payments had already been received, as well as a $25.0 million equity investment in the Company's capital stock. Of the remaining milestones, each of which the Company considers substantive, pre-commercial milestone payments could total up to $85.0 million upon NDA approval. The Company can also achieve up to approximately $100.0 million in a sales related milestone if certain conditions are met.

        The collaboration agreement included a contingent equity investment, in the form of a forward purchase contract, which required Forest to purchase shares of the Company's convertible preferred stock, upon achievement of a specific clinical milestone. Based on the Company's evaluation, this financial instrument was considered an asset or liability, which was required to be carried at fair value. At the inception of the arrangement, the Company valued the contingent equity investment and recorded a $9.0 million asset and incremental deferred revenue. The $9.0 million of incremental deferred revenue is being recognized as revenue on a straight-line basis over the period of the Company's continuing involvement, which was estimated to be 60 months from the inception of the arrangement. At December 31, 2011, approximately $1.3 million of the incremental deferred revenue remains deferred. In July 2009, the Company achieved the clinical milestone triggering the equity investment and reclassified the forward purchase contract as a reduction to convertible preferred stock. The Company issued the 2,083,333 shares to Forest on September 1, 2009.

        Additionally, the Company has achieved four of the development milestones under this agreement, all of which the Company determined to be substantive. In September 2008, the Company achieved a clinical milestone which triggered a $10.0 million milestone payment and in July 2009, the Company achieved a second clinical milestone which triggered a $20.0 million milestone payment. At December 31, 2011, approximately $1.4 million and $2.8 million of the milestone payments, respectively, remain deferred and are being recognized on a straight-line basis over the remaining estimated development period. In October 2011, the Company achieved the pre-commercial milestones of FDA acceptance of the linaclotide NDA for both IBS-C and CC and received milestone payments of $20.0 million from Forest. In accordance with ASU 2010-17, adopted in January 2011, these milestones were recognized as revenue in their entirety upon achievement.

        The Company recognized revenue from the Forest collaboration agreement totaling approximately $41.8 million, $21.8 million and $27.0 million during the years ended December 31, 2011, 2010 and 2009, respectively.

        Further, because the Company shares development costs equally with Forest, payments from Forest with respect to research and development costs incurred by the Company are recorded as a reduction to expense, and not as revenue. As a result of the cost-sharing arrangements under the collaboration, the Company offset approximately $8.2 million, $15.5 million and $15.1 million during the years ended December 31, 2011, 2010 and 2009 respectively, against research and development expense.

Almirall, S.A.

        In April 2009, the Company entered into a license agreement with Almirall for European rights to develop and commercialize linaclotide for the treatment of IBS-C, CC and other lower gastrointestinal conditions. Under the terms of the license agreement, Almirall is responsible for the expenses associated with the development and commercialization of linaclotide in the European territory. The license agreement requires the Company to participate on a joint development committee over linaclotide's development period. The Company will receive escalating royalties from the sales of linaclotide in the European territory. In May 2009, the Company received a $38.0 million payment from Almirall representing a $40.0 million non-refundable up-front payment net of foreign withholding taxes. The Company elected to record the non-refundable up-front payment on a net basis. Because the license to develop and commercialize linaclotide did not have standalone value without the research and development activities provided by the Company, the Company is recognizing the up-front license fee as revenue on a straight-line basis over the development period, the Company's estimate of the period over which linaclotide will be developed under the license agreement for the European territory. In June 2011, the Company revised its estimate of the development period from 50 months to 41 months and based on the Company's assessment of approval timelines adjusted its amortization of the remaining deferred revenue accordingly. This resulted in the recognition of an additional approximately $5.0 million of revenue in 2011. At December 31, 2011, approximately $10.7 million of the up-front license fee remains deferred. The license agreement also includes contingent milestone payments, as well as a contingent equity investment, that could total up to $55.0 million upon achievement of specific clinical and sales milestones. At December 31, 2011, $19.0 million, net of foreign withholding taxes, in milestone payments has already been received, as well as a $15.0 million equity investment in the Company's capital stock. Remaining pre-commercial milestone payments, each of which the Company considers substantive, consist of $4.0 million due upon the first commercial launch in each of the five major E.U. countries set forth in the agreement.

        The license agreement included a contingent equity investment, in the form of a forward purchase contract, which required Almirall to purchase shares of the Company's convertible preferred stock, upon achievement of a specific clinical milestone. Based on the Company's evaluation, this financial instrument was considered an asset or liability, which was required to be carried at fair value. The contingent equity investment was valued at inception at its fair value. At the inception of the arrangement, the Company valued the contingent equity investment and recorded a $6.0 million asset and incremental deferred revenue. The $6.0 million of incremental deferred revenue is being recognized as revenue on a straight-line basis over the period of the Company's continuing involvement, which was originally estimated to be 50 months and was revised in June 2011 to 41 months. The reduction in the development period was recorded as a change in estimate and deferred revenue will be recorded over the revised period on a prospective basis. At December 31, 2011, approximately $1.7 million of the incremental deferred revenue remains deferred. In November 2009, the Company achieved the clinical milestone triggering the equity investment and reclassified the forward purchase contract as a reduction to convertible preferred stock. On November 13, 2009, the Company received $15.0 million from Almirall for the purchase of 681,819 shares of convertible preferred stock.

        In November 2010, the Company achieved a second development milestone under the Almirall license agreement, which the Company determined to be substantive, which resulted in a $19.0 million payment, representing the $20.0 million milestone, net of foreign withholding taxes. The Company recognized revenue of approximately $7.2 million upon achievement of the milestone. This amount represents the portion of the milestone payment equal to the applicable percentage of the performance period that had elapsed as of the date the milestone was achieved. The remainder of the balance was deferred, and is being recognized on a straight-line basis over the remaining development period. At December 31, 2011, approximately $5.3 million of the milestone payment remains deferred.

        The Company recognized approximately $20.5 million, $18.9 million and $7.4 million in total revenue from the Almirall license agreement during the years ended December 31, 2011, 2010 and 2009, respectively, including approximately $0.5 million, $0.7 million and $0.3 million, respectively, from the sale of API to Almirall.

Astellas Pharma Inc.

        On November 9, 2009, the Company entered into a license agreement with Astellas. Astellas has the right to develop and commercialize linaclotide for the treatment of IBS-C, CC and other gastrointestinal conditions in Japan, South Korea, Taiwan, Thailand, the Philippines and Indonesia. Under the terms of the agreement, Astellas paid the Company an up-front licensing fee of $30.0 million on November 16, 2009. The license agreement requires the Company to participate on a joint development committee over linaclotide's development period. The agreement includes additional development milestone payments, each of which the Company considers substantive, that could total up to $45.0 million. These milestone payments consist of $15.0 million upon initiation of a Phase 3 study for linaclotide in Japan, $15.0 million upon filing of the Japanese equivalent of an NDA with the relevant regulatory authority in Japan, and $15.0 million upon approval of such equivalent by the relevant regulatory authority. In addition, the Company will receive escalating royalties on linaclotide sales should Astellas receive approval to market and sell linaclotide in the Asian market. Astellas will be responsible for activities relating to regulatory approval and commercialization. Because the license to develop and commercialize linaclotide did not have standalone value without the research and development activities provided by the Company, the Company is recognizing the up-front license fee as revenue on a straight-line basis over 115 months, which is the Company's estimate of the period over which linaclotide will be developed under the license agreement for the Asian market. At December 31, 2011, approximately $24.3 million of the up-front license fee remains deferred. During the years ended December 31, 2011 and 2010, the Company recognized approximately $3.5 million and $3.2 million, respectively, in revenue from the Astellas license agreement, including approximately $0.4 million and $0.6 million, respectively, from the sale of API to Astellas. The Company did not recognize any revenue associated with the Astellas agreement in 2009 because the expected performance period of the Company's significant continuing obligations could not be reasonably and reliably estimated until the first quarter of 2010.

Protagonist Therapeutics, Inc.

        The Company entered into a collaboration agreement with Protagonist Therapeutics, Inc. and Protagonist Pty Ltd. (collectively "Protagonist") in January 2011. Under this agreement, Protagonist will use its proprietary technology platform to discover peptides against certain targets and the Company has the rights to develop and commercialize these peptides. In connection with entering into the agreement, the Company made an up-front payment to Protagonist of approximately $2.8 million. In accordance with the applicable accounting guidance, the Company expensed the up-front payment as research and development expense. The Company also funds full-time equivalents for Protagonist's drug discovery activities, and will make certain milestone and royalty payments for each product pending the achievement of certain development and commercialization milestones. These contingent milestones could total up to approximately $111.5 million per product if all milestones are achieved. The Company will expense these payments as incurred. During the year ended December 31, 2011, the Company recorded approximately $5.0 million in research and development expense, including the up-front payment, associated with the Protagonist agreement.

Fair Value of Financial Instruments
Fair Value of Financial Instruments

6. Fair Value of Financial Instruments

        The tables below present information about the Company's assets that are measured at fair value on a recurring basis as of December 31, 2011 and 2010 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the Company to develop its own assumptions for the asset or liability.

        The Company's investment portfolio includes many fixed income securities that do not always trade on a daily basis. As a result, the pricing services used by the Company applies other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. In addition, model processes were used to assess interest rate impact and develop prepayment scenarios. These models take into consideration relevant credit information, perceived market movements, sector news and economic events. The inputs into these models may include benchmark yields, reported trades, broker-dealer quotes, issuer spreads and other relevant data.

        The following tables present the assets the Company has measured at fair value on a recurring basis (in thousands):

 
    
   Fair Value Measurements at Reporting Date Using  
Description
  December 31,
2011 		  Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 		  Significant Other
Observable
Inputs
(Level 2) 		  Significant
Unobservable
Inputs
(Level 3) 		 

Money market funds (included in cash and cash equivalents)

   $ 77,158   $ 77,158   $ —   $ —  

U.S. Treasury securities

     21,821     21,821     —     —  

U.S. government-sponsored securities

     54,913     —     54,913     —  
                   

Total

   $ 153,892   $ 98,979   $ 54,913   $ —  
                   

 

 
    
   Fair Value Measurements at Reporting Date Using  
Description
  December 31,
2010 		  Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 		  Significant Other
Observable
Inputs
(Level 2) 		  Significant
Unobservable
Inputs
(Level 3) 		 

Money market funds (included in cash and cash equivalents)

   $ 36,228   $ 36,228   $ —   $ —  

U.S. government-sponsored securities (included in cash and cash equivalents)

     2,998     —     2,998     —  

U.S. Treasury securities

     116,219     116,219     —     —  

U.S. government-sponsored securities

     87,487     —     87,487     —  
                   

Total

   $ 242,932   $ 152,447   $ 90,485   $ —  
                   

        During the year ended December 31, 2009, the Company held forward purchase contracts associated with the Company's collaboration agreement with Forest and license agreement with Almirall, as described in Note 5. The agreements required Forest and Almirall to purchase shares of the Company's convertible preferred stock at a pre-determined price upon meeting specific development milestones. The values of the forward purchase contracts represented the estimated probability weighted value of the premium above fair value that Forest and Almirall paid for the convertible preferred shares should the milestones be achieved. The Company estimated the fair value of the convertible preferred stock using methods consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation (the "Practice Aid"). The Company remeasured the fair value of the forward purchase contracts at each reporting period using current assumptions, with changes in value recorded as other income or expense.

        Cash equivalents, accounts receivable, including related party accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and the current portion of capital lease obligations are carried at amounts that approximate fair value due to their short-term maturities. Capital lease obligations approximate fair value as they bear interest at a rate approximating a market interest rate.

        As a result of the strategic restructuring plan implemented by Microbia in November 2009 (Note 21), the Company identified certain assets as impaired and at December 31, 2009 had measured approximately $0.7 million of assets at fair value on a nonrecurring basis, recognizing an impairment charge of approximately $0.9 million. These long-lived assets were classified as Level 2. They were initially valued at cost and when identified as impaired, valued at estimated selling price. The Company used observable inputs such as selling prices of similar equipment in similar condition. The impaired assets were associated with the biomanufacturing segment and the loss associated with the restructuring and impairment is shown as part of net income (loss) from discontinued operations on the consolidated statements of operations. The assets held at fair value were included in the sale of the Company's interest in Microbia to DSM and thus were not re-evaluated for impairment at December 31, 2010 or December 31, 2011.

Available-for-Sale Investments
Available-for-Sale Investments

7. Available-for-Sale Investments

        The following tables summarize the available-for-sale securities held at December 31, 2011 and December 31, 2010 (in thousands):

 
   Amortized Cost   Gross
Unrealized
Gains 		  Gross
Unrealized
Losses 		  Fair Value  

December 31, 2011:

                          

U.S. government-sponsored securities

   $ 54,911   $ 12   $ (10 ) $ 54,913  

U.S. Treasury securities

     21,817     4     —     21,821  
                   

Total

   $ 76,728   $ 16   $ (10 ) $ 76,734  
                   

 

 
   Amortized Cost   Gross
Unrealized
Gains 		  Gross
Unrealized
Losses 		  Fair Value  

December 31, 2010:

                          

U.S. government-sponsored securities

   $ 87,503   $ 3   $ (19 ) $ 87,487  

U.S. Treasury securities

     116,200     24     (5 )   116,219  
                   

Total

   $ 203,703   $ 27   $ (24 ) $ 203,706  
                   

        The contractual maturities of all securities held at December 31, 2011 are one year or less. There were twelve investments classified as available-for-sale securities in an unrealized loss position at December 31, 2011, none of which had been in an unrealized loss position for more than twelve months. The aggregate fair value of these securities was approximately $35.5 million. There were thirty-one investments classified as available-for-sale securities in an unrealized loss position at December 31, 2010, none of which had been in an unrealized loss position for more than twelve months. The aggregate fair value of these securities was approximately $94.7 million. The Company reviews its investments for other-than-temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment's carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. The Company did not hold any securities with an other-than-temporary impairment at December 31, 2011.

        The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. Gross realized gains and losses on the sales of investments have not been material to the Company's consolidated results of operations.

Property and Equipment
Property and Equipment

8. Property and Equipment

        Property and equipment consisted of the following (in thousands):

 
   December 31,  
 
   2011   2010  

Laboratory equipment

   $ 13,544   $ 11,375  

Computer and office equipment

     4,858     3,198  

Furniture and fixtures

     1,698     1,481  

Software

     5,254     3,299  

Construction in process

     1,860     2,701  

Leasehold improvements

     32,166     29,248  
           

 

     59,380     51,302  

Less accumulated depreciation and amortization

     (25,755 )   (16,933 )
           

 

   $ 33,625   $ 34,369  
           

        In both the years ended December 31, 2011 and 2010, the Company entered into capital leases for certain computer and office equipment. As of December 31, 2011 and 2010, the Company had approximately $1.3 million and $1.0 million, respectively, of assets under capital leases with accumulated amortization balances of approximately $0.7 million and $0.4 million, respectively.

        Depreciation and amortization expense of property and equipment associated with continuing operations, including equipment recorded under capital leases, was approximately $10.0 million, $6.2 million and $4.8 million for the years ended December 31, 2011, 2010 and 2009, respectively. Approximately $0.1 million and $0.5 million in depreciation and amortization expense associated with property and equipment of Microbia, included in net income (loss) from discontinued operations, was recorded in the years ended December 31, 2010 and 2009, respectively. In the year ended December 31, 2009, the Company recorded a charge for impairment of long-lived assets of approximately $0.9 million, which was required to adjust certain assets at Microbia to their fair value at the time Microbia implemented its strategic restructuring plan. This amount is included in net income (loss) from discontinued operations for the year ended December 31, 2009.

Accrued Expenses
Accrued Expenses

9. Accrued Expenses

        Accrued expenses consisted of the following (in thousands):

 
   December 31,  
 
   2011   2010  

Salaries and benefits

   $ 7,525   $ 5,063  

Professional fees

     820     836  

Other

     2,777     3,039  
           

 

   $ 11,122   $ 8,938  
           
Patent Costs
Patent Costs

10. Patent Costs

        The Company incurred and recorded as operating expense legal and other fees related to patents of approximately $2.2 million, $1.9 million and $1.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. These costs were charged to general and administrative expenses as incurred. Additionally, patent costs of approximately $0.1 million and $0.2 million related to Microbia are included in net income (loss) from discontinued operations for the years ended December 31, 2010 and 2009, respectively.

Debt
Debt

11. Debt

        In September 2010, the Company repaid all outstanding principal and interest under a master loan and security agreement with a financing company to finance the purchase of laboratory and other equipment agreement. The Company incurred pre-payment fees of approximately $67,000 in conjunction with the repayment of debt of which approximately $31,000 is included in net income (loss) from discontinued operations and the remainder is included in interest expense in the statement of operations.

Commitments and Contingencies
Commitments and Contingencies

12. Commitments and Contingencies

        The Company leases its facility, offsite data storage location and various equipment under leases that expire at varying dates through 2018. Certain of these leases contain renewal options, and require the Company to pay operating costs, including property taxes, insurance and maintenance.

        In January 2007, the Company entered into a lease agreement for 113,646 rentable square feet of office and lab space at 301 Binney Street, Cambridge, Massachusetts. The initial term of the lease is eight years expiring in January 2016, and the Company has the right to extend the initial term for two additional terms of five years each. The Company's occupancy of the space occurred in four distinct phases, and rent for each phase commenced at the earlier of a contractually set date or the occupancy date. Base rent for the space ranges from $49.25 to $60.50 per rentable square foot per year. Base rent escalates in January 2012 based upon a formula that is tied to the Consumer Price Index. The space was delivered to the Company in September 2007, and rent payments for the initial occupancy commenced in January 2008. The rent expense, inclusive of the escalating rent payments and free rent period is recognized on a straight-line basis over the term of the lease agreement. In accordance with the terms of the lease agreement, the Company maintains a letter of credit securing its obligations under the lease agreement of approximately $7.6 million.

        The Company amended the lease agreement in February 2010, July 2010, February 2011 and October 2011 (together "the Amendments") in order to lease additional space. Pursuant to the Amendments, the Company leases an additional 96,613 rentable square feet of the 301 Binney Street building, comprised of (a) an initial phase of 35,444 rentable square feet (the "Initial Phase"), (b) a second phase of 21,589 rentable square feet (the "Second Phase"), (c) a third phase of 17,863 rentable square feet (the "Third Phase") and (d) a fourth phase of 21,717 rentable square feet (the "Fourth Phase"). Rent for the Initial Phase commenced on July 1, 2010, rent for the Second Phase commenced on March 1, 2011, rent for the Third Phase is expected to commence January 1, 2012, and rent for the Fourth Phase will commence no later than June 1, 2012. Initial base rent for the Initial Phase is $42.00 per rentable square foot per year and the initial base rent for the Second Phase, Third Phase and Fourth Phase is $42.50 per rentable square foot per year. Base rent for the Initial Phase, Second Phase, Third Phase and Fourth Phase will increase annually by $0.50 per rentable square foot. Consistent with the Company's treatment of the lease expense associated with the initial lease agreement, lease expense associated with the Amendments, inclusive of the escalating rent payments, is recognized on a straight-line basis over the term of the lease agreement. The Amendments do not change the expiration date of the lease agreement.

        The landlord has reimbursed the Company for its tenant improvements for the space occupied prior to the Amendments at a set rate per rentable square foot. Under the terms of the Amendments, the landlord has or will provide the Company with an allowance for the additional space, which consists of $55.00 per rentable square foot for tenant improvements in the Initial Phase and the Second Phase and an allowance of $40.00 per rentable square foot for the Third Phase and the Fourth Phase. As of December 31, 2011, approximately $15.9 million has been paid to the Company as reimbursement for tenant improvements under the lease agreement, including the Amendments. The reimbursement amount is recorded as deferred rent on the consolidated balance sheets and is being amortized as a reduction to rent expense over the term of the lease agreement or the Amendments, as applicable.

        The Company elected not to renew its lease of approximately 39,000 square feet of space at 320 Bent Street, Cambridge, Massachusetts, which expired in December 2010.

        The Company, and in some cases, along with its collaboration partner, Forest, has entered into multiple commercial supply agreements for the purchase of linaclotide API and drug product. Certain of the agreements contain minimum purchase commitments, the earliest of which commences in 2012. As of December 31, 2011, the Company's minimum purchase requirement across all the agreements is approximately $58.7 million through 2017. The Company's minimum purchase requirement by year is as follows: approximately $16.5 million, $7.2 million, $9.7 million, $9.7 million, $9.7 million and $5.9 million for the years ending December 31, 2012, 2013, 2014, 2015, 2016 and 2017, respectively.

        In the years ended December 31, 2011 and 2010, the Company entered into capital leases totaling approximately $0.3 million and $1.0 million, respectively, for certain computer and office equipment. The capital leases expire at various times through June 2015. At December 31, 2011 and 2010, the weighted average interest rate on the outstanding capital lease obligations was 8.0% and 10.6%, respectively.

        At December 31, 2011, future minimum lease payments under all non-cancelable lease arrangements are as follows (in thousands):

 
   Operating
Leases 		  Capital
Leases 		 

2012

   $ 11,167   $ 276  

2013

     11,648     234  

2014

     11,702     173  

2015

     11,756     50  

2016

     367     —  

Thereafter

     217     —  
           

Total future minimum lease payments

   $ 46,857     733  
             

Less amounts representing interest

           (78 )
             

Capital lease obligations at December 31, 2011

           655  

Less current portion of capital lease obligations

           (233 )
             

Capital lease obligations, net of current portion

         $ 422  
             

        Rent expense of approximately $6.6 million, $8.9 million and $9.1 million was charged to continuing operations for the years ended December 31, 2011, 2010 and 2009, respectively. Rent expense of approximately $1.3 million and $2.7 million related to Microbia for the years ended December 31, 2010 and 2009, respectively, is included in net income (loss) from discontinued operations.

Guarantees

        As permitted under Delaware law, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company's request in such capacity. The maximum potential amount of future payments the Company could be required to make is unlimited; however, the Company has directors' and officers' insurance coverage that should limit its exposure and enable it to recover a portion of any future amounts paid.

        The Company is a party to a number of agreements entered into in the ordinary course of business that contain typical provisions that obligate the Company to indemnify the other parties to such agreements upon the occurrence of certain events. Such indemnification obligations are usually in effect from the date of execution of the applicable agreement for a period equal to the applicable statute of limitations. The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain.

        The Company leases office space under a non-cancelable operating lease. The Company has a standard indemnification arrangement under the lease that requires it to indemnify its landlord against all costs, expenses, fines, suits, claims, demands, liabilities, and actions directly resulting from any breach, violation or nonperformance of any covenant or condition of the Company's lease. The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain.

        As of December 31, 2011 and 2010, the Company had not experienced any material losses related to these indemnification obligations and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible. As a result, the Company has not established any related reserves.

Litigation
Litigation

13. Litigation

        From time to time, the Company is involved in various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters, individually and in aggregate, will have a material adverse effect on the Company's consolidated financial statements.

Stockholders' Equity (Deficit)
Stockholders' Equity (Deficit)

14. Stockholders' Equity (Deficit)

        In February 2010, in conjunction with the Company's initial public offering (Note 3), the Company amended its certificate of incorporation to authorize it to issue 500,000,000 shares of Class A common stock, 100,000,000 shares of Class B common stock and 75,000,000 shares of preferred stock. Upon the closing of the Company's initial public offering, 69,904,843 shares outstanding of the Company's convertible preferred stock automatically converted into 70,391,620 shares of its Class B common stock.

Preferred Stock

        The Company's preferred stock ($0.001 par value per share) may be issued from time to time in one or more series, with each such series to consist of such number of shares and to have such terms as adopted by the board of directors. Authority is given to the board of directors to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitation or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences.

Common Stock

        The Company has designated two series of common stock, Series A Common Stock ($0.001 par value per share), which is referred to as "Class A Common Stock," and Series B Common Stock ($0.001 par value per share), which is referred to as "Class B Common Stock." All shares of common stock that were outstanding immediately prior to August 2008 were converted into shares of Class B Common Stock. The holders of Class A Common Stock and Class B Common Stock vote together as a single class. Class A Common Stock is entitled to one vote per share. Class B Common Stock is also entitled to one vote per share with the following exceptions: (1) after the completion of an initial public offering of the Company's stock, the holders of the Class B Common Stock are entitled to ten votes per share if the matter is an adoption of an agreement of merger or consolidation, an adoption of a resolution with respect to the sale, lease, or exchange of the Company's assets or an adoption of dissolution or liquidation of the Company, and (2) Class B common stockholders are entitled to ten votes per share on any matter if any individual, entity, or group seeks to obtain or has obtained beneficial ownership of 30% or more of the Company's outstanding shares of common stock. Class B Common Stock converts to Class A Common Stock, on a one-for-one basis, if transferred or sold after the completion of a public offering. Class B Common Stock can be sold at any time and irrevocably converts to Class A Common Stock upon sale or transfer.

        The Class B Common Stock will be entitled to a separate class vote for the issuance of additional shares of Class B Common Stock (except pursuant to dividends, splits or convertible securities), or any amendment, alteration or repeal of any provision of the Company's charter. All Class B Common Stock will automatically convert into Class A Common Stock upon the earliest of:

  • •
    the later of (1) the first date on which the number of shares of Class B Common Stock then outstanding is less than 25% of the number of shares of Class B Common Stock outstanding immediately following the completion of an initial public offering or (2) December 31, 2018;

    •
    December 31, 2038; or

    •
    a date agreed to in writing by a majority of the holders of the Class B Common Stock.

        The Company has reserved such number of shares of Class A Common Stock as there are outstanding shares of Class B Common Stock solely for the purpose of effecting the conversion of the Class B Common Stock.

        The holders of shares of Class A Common Stock and Class B Common Stock are entitled to dividends if and when declared by the board of directors. In the event that dividends are paid in the form of common stock or rights to acquire common stock, the holders of shares of Class A Common Stock shall receive Class A Common Stock or rights to acquire Class A Common Stock and the holders of shares of Class B Common Stock shall receive Class B Common Stock or rights to acquire Class B Common Stock, as applicable.

        In the event of a voluntary or involuntary liquidation, dissolution, distribution of assets, or winding up of the Company, the holders of shares of Class A Common Stock and the holders of shares of Class B Common Stock are entitled to share equally, on a per share basis, in all assets of the Company of whatever kind available for distribution to the holders of common stock.

Restricted Stock

        In 2009, the Company granted an aggregate of 515,549 shares of common stock to independent members of the board of directors under restricted stock agreements in accordance with the terms of the Company's Amended and Restated 2005 Stock Incentive Plan ("2005 Plan") and the Company's director compensation program. 115,549 shares of restricted common stock granted in 2009 vested on December 31, 2009 and the remainder vest ratably over four years beginning in January 2010. In the event that a member of the board of directors ceases to serve on the Company's board prior to December 31, 2013, the member shall forfeit all unvested shares in accordance with the terms of the restricted stock agreement.

        A summary of the unvested shares of restricted stock as of December 31, 2011 is presented below:

 
   Shares   Weighted-Average
Grant Date
Fair Value 		 

Unvested at December 31, 2010

     270,000   $ 5.69  

Granted

     —     —  

Vested

     (82,500 ) $ 5.71  

Forfeited

     (27,500 ) $ 5.48  
             

Unvested at December 31, 2011

     160,000   $ 5.72  
             
Stock Option Plans
Stock Option Plans

15. Stock Option Plans

        The Company has several share-based compensation plans. At December 31, 2011, there were 6,222,981 shares available for future grant under all plans.

        Under the 1998 Amended and Restated Stock Option Plan ("1998 Plan"), options to purchase 3,405,000 shares of common stock were available for grant to employees, directors, and consultants of the Company. The options were granted under the 1998 Plan at fair market value on the grant date, generally vest over a period of four years, and expire ten years from the grant date. There are no shares available for future grant under this plan, as it expired in accordance with its terms in 2008. At December 31, 2011, options for 25,000 shares were outstanding under the 1998 Plan.

        Under the Company's Amended and Restated 2002 Stock Incentive Plan ("2002 Plan") and 2005 Plan, stock awards may be granted to employees, officers, directors, consultants, or advisors of the Company. The 2002 Plan and 2005 Plan provide for the granting of stock options, restricted stock, restricted stock units, and other share-based awards. There were 4,700,000 shares of common stock allocated for issuance under the 2002 Plan and 12,200,000 shares allocated for issuance under the 2005 Plan. The 2002 Plan allows for the transfer of unused shares from the 1998 Plan. Upon the expiration of the 1998 Plan on July 10, 2008, 382,438 unused shares were transferred to the 2002 Plan. At December 31, 2011, there were 61,831 shares available for future grant under the 2002 Plan and 30,853 shares available for future grant under the 2005 Plan.

        During 2010, the Company's stockholders approved and amended the Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan ("2010 Plan") (together with the 2002 Plan and 2005 Plan, the "Plans") which became effective upon the closing of the Company's initial public offering on February 8, 2010. Under the 2010 Plan, stock awards may be granted to employees, officers, directors, or consultants of the Company. There are 6,000,000 shares of common stock initially reserved for issuance under the 2010 Plan. The number of shares available for future grant under the 2010 Plan may be increased on the first day of each fiscal year by an amount equal to the lesser of (i) 6,600,000; (ii) 4% of the number of outstanding shares of Class A common stock on the first day of each fiscal year; and (iii) an amount determined by the board of directors. Accordingly, during 2011, 3,966,893 shares were added to the 2010 Plan. Awards that are returned to the Company's 1998 Plan, 2002 Plan and 2005 Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for issuance under the 2010 Plan. Accordingly, during 2011, 182,575 shares were transferred to the 2010 Plan. At December 31, 2011, there were 6,130,297 shares available for future grant under the 2010 Plan.

        During 2010, the Company's stockholders approved the 2010 Employee Stock Purchase Plan ("Purchase Plan") which became effective upon the closing of the Company's initial public offering on February 8, 2010. The Purchase Plan allows eligible employees the right to purchase shares of common stock at the lower of 85% of the fair market value of a share of common stock on the first or last day of an offering period. Each offering period is six months. There were 400,000 shares of common stock initially reserved for issuance pursuant to the Purchase Plan. The number of shares available for future grant under the Purchase Plan may be increased on the first day of each fiscal year by an amount equal to the lesser of (i) 1,000,000 shares, (ii) 1% of the shares of common stock outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of shares as is determined by the board of directors. At December 31, 2011, there were 296,046 shares available for future grant under the Purchase Plan.

        Each plan, other than the Purchase Plan, provides for the granting of stock awards whereby the Company's Class B common stock is issuable upon exercise of options granted prior to the closing of the Company's initial public offering and Class A common stock is issuable upon exercise of options granted after the closing of the Company's initial public offering. At December 31, 2011, options exercisable into 10,307,587 shares of Class B common stock and 6,116,913 shares of Class A common stock were outstanding.

        The option price at the date of grant is determined by the board of directors and, in the case of incentive stock options, may not be less than the fair market value of the common stock at the date of grant. Due to the absence of an active market for the Company's common stock, prior to the Company's initial public offering on February 2, 2010, the board of directors was required to determine the fair value of the common stock for consideration in setting exercise prices for the options granted and in valuing the options granted. In determining the fair value, the board of directors considered both quantitative and qualitative factors including prices at which the Company sold shares of its convertible preferred stock, the rights, preferences and liquidity of the Company's convertible preferred and common stock, the Company's historical operating and financial performance and the status of its research and product development efforts, achievement of enterprise milestones, including the Company entering into collaboration agreements where third parties agree to purchase shares of the Company's convertible preferred stock at fixed prices sometime in the future, external market conditions affecting the biotechnology industry sector, and financial market conditions and, commencing in 2006, contemporaneous valuations provided by management.

        The option exercise period may not extend beyond ten years from the date of grant. The 1998 Plan, the 2002 Plan and the 2005 Plan provide that, subject to approval by the board of directors, option grantees may have the right to exercise an option prior to vesting. Shares purchased upon the exercise of unvested options will be subject to the same vesting schedule as the underlying options, and are subject to repurchase at the original exercise price by the Company should the employee be terminated or leave the Company prior to becoming fully vested in such shares. At December 31, 2011 and 2010, there were 413 and 14,960 shares, respectively, that had been issued pursuant to the exercise of unvested options that remain unvested and subject to repurchase by the Company. At December 31, 2011, the Company does not hold any treasury shares. Upon stock option exercise, the Company issues new shares and delivers them to the participant. The exercise of these shares is not substantive and as a result, the cash paid for the exercise prices is considered a deposit or prepayment of the exercise price and is recorded as a liability and was not material to the consolidated financial statements at December 31, 2011 and 2010.

        The Company, from time to time, issues certain time-accelerated stock options to certain employees under the Plans. The vesting of these time-accelerated stock options accelerates upon the achievement of certain performance-based milestones. If these criteria are not met, such options will vest between six and ten years after the date of grant, and expire at the end of ten years. During the years ended December 31, 2011 and 2010, 1,059,000 shares and 52,500 shares vested as a result of milestone or service period achievements, respectively. At December 31, 2011 and 2010, there were 1,210,000 and 2,279,000 shares, respectively, issuable under outstanding and unvested time-accelerated options. When achievement of the milestone is not deemed probable, the Company recognizes compensation expense associated with time-accelerated stock options initially over the vesting period of the respective stock option. When deemed probable of achievement, the Company expenses the remaining unrecognized compensation for the respective stock option over the implicit service period. At December 31, 2011, the Company has approximately $0.5 million in unrecognized share-based compensation, net of estimated forfeitures, related to these options.

        During 2005, the Company granted to employees performance-based options to purchase 97,500 shares of common stock at an exercise price of $0.60 per share, which represented the fair value of the stock at that time. These options are subject to performance-based milestone vesting and expire ten years from the date of grant. The options were deemed to be variable upon grant because the number of shares that will vest was not fixed on the date of grant. Therefore, the options are remeasured at each reporting period until settlement of the option. All 97,500 options are fully vested. During the year ended December 31, 2010, 37,500 shares were exercised and will no longer be remeasured. The Company recorded share-based compensation related to these performance-based options of approximately $0.1 million, ($43,000) and $0.7 million during the years ended December 31, 2011, 2010 and 2009, respectively.

        During 2011 and 2010, the Company granted to employees options to purchase a total of 230,000 and 67,500 shares of common stock subject to performance-based milestone vesting, respectively. The vesting of these stock options will occur upon the achievement of certain performance-based milestones. During 2011 and 2010, 65,000 shares and 5,000 shares vested as a result of milestone achievements, respectively, and the Company recorded related share-based compensation expense of approximately $0.4 million and $31,000, respectively, for these options. As of December 31, 2011, the Company concluded that only two of the milestones are probable of achievement. As a result, the Company recognized approximately $0.2 million of share-based compensation expense. At December 31, 2011, the unrecognized share-based compensation related to performance-based milestone options was approximately $6.3 million.

        In calculating share-based compensation costs, the Company estimated the fair value of stock options using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived, exchange-traded options that have no vesting restrictions and are fully transferable. The Company estimates the number of awards that will be forfeited in calculating compensation costs. Such costs are then recognized over the requisite service period of the awards on a straight-line basis.

        Determining the fair value of share-based awards using the Black-Scholes option-pricing model requires the use of highly subjective assumptions, including the expected term of the award, expected stock price volatility and, up to the date of the Company's initial public offering, the fair value of the Company's common stock. The weighted average assumptions used to estimate the fair value of the stock options using the Black-Scholes option pricing model were as follows for the years ended December 31, 2011, 2010 and 2009:

 
   Years Ended December 31,  
 
   2011   2010   2009  

Weighted-average fair value of common stock

   $ 11.98   $ 11.23   $ 5.19  

Expected volatility

     49.8 %   57.4 %   62.3 %

Expected term (in years)

     6.5     6.5     6.5  

Risk-free interest rate

     2.4 %   2.9 %   2.7 %

Expected dividend yield

     — %   — %   — %

Expected Volatility

        Volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. The Company uses a blended volatility rate that blends its own historical volatility with that of comparable public companies. Prior to February 3, 2010, the Company was not publicly traded and therefore had no trading history. Therefore, stock price volatility was estimated based on an analysis of historical and implied volatility of comparable public companies.

Expected Term

        The Company has limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. As a result, for stock option grants made during the years ended December 31, 2011, 2010 and 2009, the expected term was estimated using the "simplified method." The simplified method is based on the average of the vesting tranches and the contractual life of each grant.

Risk-Free Interest Rate

        The risk-free interest rate used for each grant is based on a zero-coupon U.S. Treasury instrument with a remaining term similar to the expected term of the share-based award.

Expected Dividend Yield

        The Company has not paid and does not anticipate paying cash dividends on its shares of common stock in the foreseeable future; therefore, the expected dividend yield is assumed to be zero.

Forfeitures

        Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from the Company's estimates. Subsequent changes in estimated forfeitures are recognized through a cumulative adjustment in the period of change, and will also impact the amount of share-based compensation expense in future periods. The Company uses historical data to estimate forfeiture rates. The Company's forfeiture rates were 5.5%, 5.5% and 5.8% as of December 31, 2011, 2010 and 2009, respectively.

        The following table summarizes the expense recognized for all share-based compensation arrangements in the consolidated statements of operations (in thousands):

 
   Years Ended December 31,  
 
   2011   2010   2009  

Ironwood:

                    

Employee stock options

   $ 10,904   $ 6,545   $ 4,010  

Restricted stock awards

     431     469     784  

Non-employee stock options

     152     123     301  

Employee stock purchase plan

     215     100     —  

Stock award

     30     259     —  
               

 

     11,732     7,496     5,095  

Microbia Stock Plan (included in discontinued operations)

     —     59     149  
               

 

   $ 11,732   $ 7,555   $ 5,244  
               

        Share-based compensation is reflected in the consolidated statements of operations as follows for the years ended December 31, 2011, 2010 and 2009 (in thousands):

 
   Years Ended December 31,  
 
   2011   2010   2009  

Research and development

   $ 6,071   $ 4,112   $ 2,372  

General and administrative

     5,661     3,384     2,723  

Net income (loss) from discontinued operations

     —     59     149  

        The following table summarizes stock option activity under the Company's stock option plans, including performance-based options:

 
   Shares of
Common
Stock
Attributable
to Options 		  Weighted-
Average
Exercise
Price 		  Weighted-
Average
Contractual
Life 		  Aggregate
Intrinsic
Value 		 
 
    
    
   (in years)
   (in thousands)
  

Outstanding at December 31, 2010

     14,603,229   $ 4.25     6.44   $ 91,575  

Granted

     3,615,050   $ 11.98              

Exercised

     (1,502,366 ) $ 1.80              

Cancelled

     (291,413 ) $ 8.83              
                         

Outstanding at December 31, 2011

     16,424,500   $ 6.09     6.40   $ 98,999  
                   

Vested or expected to vest at December 31, 2011

     15,318,950   $ 5.99     6.32   $ 93,797  
                   

Exercisable at December 31, 2011(1)

     8,194,142   $ 3.39     4.87   $ 70,488  
                   
(1)
All stock options granted under the 1998 Plan, the 2002 Plan and the 2005 Plan contain provisions allowing for the early exercise of such options into restricted stock. The exercisable shares disclosed above represent those that are vested as of December 31, 2011.

        The weighted-average grant date fair value per share of options granted to employees during the years ended December 31, 2011, 2010 and 2009 was $6.21, $6.48 and $3.17, respectively. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was approximately $17.4 million, $18.6 million and $1.6 million, respectively. The intrinsic value was calculated as the difference between the estimated fair value of the Company's common stock and the exercise price of the option issued. The fair value of the Company's common stock was $11.97, $10.35 and $12.05 per share at December 31, 2011, 2010 and 2009, respectively.

        The aggregate grant-date fair value of the options granted to employees during the years ended December 31, 2011, 2010 and 2009 was approximately $20.5 million, $17.7 million and $9.1 million, respectively.

        As of December 31, 2011, there was approximately $0.9 million and $25.6 million of unrecognized share-based compensation, net of estimated forfeitures, related to restricted stock awards and unvested stock option grants with time-based vesting, respectively which are expected to be recognized over a weighted average period of 2.0 years and 3.66 years, respectively. The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures.

Microbia Stock Plan

        As a result of the sale of the Company's interest in Microbia to DSM in September 2010, the Microbia Stock Plan was cancelled, resulting in the cancellation of all existing shares.

Income Taxes
Income Taxes

16. Income Taxes

        In general, the Company has not recorded a provision for federal or state income taxes as it has had cumulative net operating losses since inception. However, the Company recorded an approximately $3,000 provision for state taxes for the year ended December 31, 2011. In addition, because of intra-period income tax allocation requirements, the Company recorded a benefit for income taxes from continuing operations of $2.9 million for the year ended December 31, 2010, offset by an identical and corresponding income tax provision from discontinued operations. The intra-period income tax allocation considers income (loss) from discontinued operations for purposes of determining the amount of tax benefit resulting from the loss from continuing operations. The Company recognized a federal income tax benefit of approximately $0.3 million for the year ending December 31, 2009 related to refundable research and development tax credits, resulting from a provision in the Housing Assistance Tax Act of 2008 that allowed the Company to claim a refund for a portion of its unused pre-2006 research tax credits on its 2008 U.S. federal income tax return.

        A reconciliation of income taxes from continuing operations computed using the U.S. federal statutory rate to that reflected in operations follows (in thousands):

 
   Years Ended December 31,  
 
   2011   2010   2009  

Income tax benefit using U.S. federal statutory rate

   $ (22,050 ) $ (20,181 ) $ (20,500 )

Permanent differences

     245     (3,126 )   2,047  

State income taxes, net of federal benefit

     (3,531 )   (3,427 )   (3,282 )

Stock compensation

     2,104     (243 )   1,300  

Tax credits

     509     (2,041 )   (4,633 )

Expiring net operating losses and tax credits

     803     912     570  

Effect of change in state tax rate on deferred tax assets and deferred tax liabilities

     98     613     1,744  

Change in the valuation allowance

     20,955     27,608     22,400  

Other

     870     (115 )   58  
               

Total before intra-period allocation

     3     —     (296 )

Intra-period tax allocation

     —     (2,944 )   —  
               

 

   $ 3   $ (2,944 ) $ (296 )
               

        Components of the Company's deferred tax assets and liabilities are as follows (in thousands):

 
   December 31,  
 
   2011   2010  

Deferred tax assets:

              

Net operating loss carryforwards

   $ 91,031   $ 57,257  

Tax credit carryforwards

     14,024     14,534  

Capitalized research and development

     22,589     27,874  

Deferred revenue

     22,555     35,758  

Other

     17,980     12,424  
           

Total deferred tax assets

     168,179     147,847  

Valuation allowance

     (168,179 )   (147,847 )
           

Net deferred tax asset

   $ —   $ —  
           

        Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Management has considered the Company's history of operating losses and concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of its deferred tax assets. Accordingly, the deferred tax assets have been fully reserved at December 31, 2011 and 2010. Management reevaluates the positive and negative evidence on a quarterly basis.

        The valuation allowance increased approximately $20.3 million during the year ended December 31, 2011, due primarily to the increase in the net operating loss carryforwards, share-based compensation expense and deferred accrued expenses. The valuation allowance increased approximately $16.0 million during the year ended December 31, 2010, due primarily to the increase in the net operating loss carryforwards and deferred revenue.

        Subject to the limitations described below at December 31, 2011 and 2010, the Company has net operating loss carryforwards of approximately $239.2 and $153.2 million, respectively, to offset future federal taxable income, which expire beginning in 2018 continuing through 2031. The federal net operating loss carryforwards exclude approximately $19.5 million of deductions related to the exercise of stock options. This amount represents an excess tax benefit and has not been included in the gross deferred tax asset reflected for net operating losses. This amount will be recorded as an increase in additional paid in capital on the consolidated balance sheet once the excess benefits are "realized" in accordance with ASC 718. As of December 31, 2011 and 2010, the Company has state net operating loss carryforwards of approximately $183.8 million and $97.7 million, respectively, to offset future state taxable income, which have begun to expire and will continue to expire through 2021. The Company also has tax credit carryforwards of approximately $15.0 million and $15.8 million as of December 31, 2011 and 2010, respectively, to offset future federal and state income taxes, which expire at various times through 2031.

        Utilization of net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986 ("IRC Section 382") and with Section 383 of the Internal Revenue Code of 1986, as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change, as defined by IRC Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Company has completed several financings since its inception which may have resulted in a change in control as defined by IRC Section 382, or could result in a change in control in the future.

        The Company applies ASC 740, Income Taxes. ASC 740 provides guidance on the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As a result of the implementation of the new guidance, the Company recognized no material adjustment for unrecognized income tax benefits. At December 31, 2011 and December 31, 2010, the Company had no unrecognized tax benefits.

        The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2011, 2010 and 2009, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company's consolidated statements of operations.

        The statute of limitations for assessment by the Internal Revenue Service ("IRS") and state tax authorities is open for tax years ended December 31, 2010, 2009 and 2008, although carryforward attributes that were generated prior to tax year 2008 may still be adjusted upon examination by the IRS or state tax authorities if they either have been, or will be, used in a future period. There are currently no federal or state audits in progress.

        The Company has not, as yet, conducted a study of its research and development credit carryforwards. This study may result in an adjustment to the Company's research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company's research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforward and the valuation allowance.

Defined Contribution Plan
Defined Contribution Plan

17. Defined Contribution Plan

        The Ironwood Pharmaceuticals, Inc. 401(k) Savings Plan is a defined contribution plan in the form of a qualified 401(k) plan in which substantially all employees are eligible to participate upon employment. Subject to certain Internal Revenue Code limits, eligible employees may elect to contribute from 1% to 100% of their compensation. Company contributions to the plan are at the sole discretion of the Company's board of directors. The Company provides a matching contribution of 50% of the employee's first $6,000 of contributions. During the years ended December 31, 2011, 2010 and 2009, the Company recorded approximately $0.6 million, $0.5 million and $0.4 million of expense in net income (loss) from continuing operations related to its 401(k) company match. Included in net income (loss) from discontinued operations for each of the years ended December 31, 2010 and 2009 is approximately $0.1 million related to the 401(k) company match.

Related Party Transactions
Related Party Transactions

18. Related Party Transactions

        The Company has and currently obtains legal services from a law firm that is an investor of the Company. The Company paid approximately $0.2 million, $0.3 million and $0.1 million in legal fees to this investor during the years ended December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, the Company had approximately $26,000 in accounts payable related to this related party. At December 31, 2010, there was no accounts payable associated with this related party.

        In September 2009, Forest became a related party when the Company sold to Forest 2,083,333 shares of the Company's convertible preferred stock and in November 2009, Almirall became a related party when the Company sold to Almirall 681,819 shares of the Company's convertible preferred stock (Note 5). These shares of preferred stock converted to the Company's common stock on a 1:1 basis upon the completion of the Company's initial public offering. Additional related party disclosure related to Microbia and T&L is included in Note 21.

Segment Reporting
Segment Reporting

19. Segment Reporting

        Prior to the sale of its interest in Microbia in September 2010, the Company had two reportable business segments: human therapeutics and biomanufacturing. The Company had no inter-segment revenues.

        The following table reports revenue and loss from operations for the Company's reportable segments for the years ended December 31, 2011, 2010 and 2009 (in thousands):

 
   Years Ended December 31,  
 
   2011   2010   2009  

Revenue:

                    

Human therapeutics

   $ 65,871   $ 43,857   $ 34,321  

Biomanufacturing (included in discontinued operations)

     —     1,985     1,781  
               

Total

   $ 65,871   $ 45,842   $ 36,102  
               

Loss from operations:

                    

Human therapeutics

   $ (66,142 ) $ (60,766 ) $ (60,816 )

Biomanufacturing (included in discontinued operations)

     —     (4,532 )   (13,161 )
               

Total

   $ (66,142 ) $ (65,298 ) $ (73,977 )
               

 

 
   December 31,  
 
   2011   2010  

Total assets:

              

Human therapeutics

   $ 208,977   $ 301,365  

Biomanufacturing (included in discontinued operations)

     —     —  
           

Total

   $ 208,977   $ 301,365  
           

        At December 31, 2011 and 2010, all of the Company's accounts receivable related to the human therapeutics segment.

Federal and State Grants
Federal and State Grants

20. Federal and State Grants

Federal Grant

        In 2010, the Company was awarded approximately $1.0 million in grants under the Qualifying Therapeutic Discovery Project Program which was created in March 2010 as part of the Patient Protection and Affordability Care Act. The total amount awarded was recognized in the fourth quarter of 2010 and is recorded as other income on the Company's consolidated statements of operations.

State Grant

        In May 2011, the Company recorded approximately $0.9 million as a receivable associated with the Life Sciences Tax Incentive Program from the Massachusetts Life Sciences Center. The program was established in 2008 in order to incentivize life sciences companies to create new sustained jobs in Massachusetts. Jobs must be maintained for at least five years, during which time the grant proceeds can be recovered by the Massachusetts Department of Revenue ("DOR") if the Company does not meet and maintain its job creation commitments. The Company received the funds in July 2011 and recognized the award as other income in its consolidated statement of operations in September 2011, as the Company believed it had satisfied its job creation commitments. The Company's hiring plan for 2011-2015 is significantly in excess of the hiring requirement for the 5 year period, as such, the Company believes that the likelihood of recovery of the award by the DOR is remote.

Microbia, Inc.
Microbia, Inc.

21. Microbia, Inc.

        On September 21, 2010, the Company sold its interest in Microbia to DSM in exchange for cash proceeds of $9.5 million, the payment of approximately $1.1 million of Microbia debt and interest by DSM and future contingent consideration based on the sale of products incorporating Microbia's technology (See Note 2).

Tate & Lyle Investments, Ltd.

        In September 2006, the Company entered into a collaboration agreement with T&L. The collaboration agreement had a five-year term with a one-year notice of termination. In connection with the execution of the collaboration agreement, the Company also issued T&L 1,823,529 shares of common stock of Microbia, the Company's wholly owned subsidiary, at the aggregate purchase price of approximately $2,000, and issued 7,000,000 shares of convertible preferred stock of Microbia at the aggregate purchase price of $7.0 million. After the sale of stock to T&L, the Company retained an 85% majority ownership interest, and T&L had a 15% noncontrolling interest in Microbia. The Company's ownership interest in Microbia was entirely comprised of convertible preferred stock with the same preferences to that held by T&L. The ownership of the convertible preferred and common stock by T&L was recorded as noncontrolling interest in the consolidated financial statements.

        On June 15, 2010, T&L and Microbia entered into an agreement to terminate their collaboration. The terms and conditions of the agreement included an exchange of intellectual property and a one-time payment to Microbia of approximately $1.8 million. All current and future obligations between Microbia and T&L were terminated as a result of this agreement.

        Revenue earned from the T&L collaboration agreement totaled approximately $1.9 million and $1.8 million during the years ended December 31, 2010 and 2009, respectively. This revenue is included in net income (loss) from discontinued operations for all periods presented. There was no accounts receivable from T&L at December 31, 2011 or December 31, 2010.

Strategic Restructuring Plan

        In November 2009, Microbia implemented a strategic restructuring plan that included an immediate reduction of its workforce by approximately 40% of its existing workforce, and a reduced workweek for an additional 12% of its existing workforce. Microbia took this action to focus on its proprietary strain-development platform and existing service agreements.

        In connection with the strategic restructuring plan, Microbia recorded restructuring charges of approximately $1.2 million in the year ended December 31, 2009. Provisions associated with the strategic restructuring are included in net income (loss) from discontinued operations in the consolidated statements of operations. Payments associated with the restructuring charges were fully paid as of December 31, 2010.

Selected Quarterly Financial Data (Unaudited)
Selected Quarterly Financial Data (Unaudited)

22. Selected Quarterly Financial Data (Unaudited)

        The following table contains quarterly financial information for 2011 and 2010. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. Amounts associated with the Company's former subsidiary, Microbia, which was sold in September 2010, have been presented as discontinued operations for all periods shown in the information below.

 
   First
Quarter 		  Second
Quarter 		  Third
Quarter 		  Fourth
Quarter 		  Total
Year 		 
 
   (in thousands, except per share data)
  

2011

                                

Collaborative arrangements revenue

   $ 10,237   $ 11,262   $ 12,218   $ 32,154   $ 65,871  

Total operating expenses

     28,779     30,214     33,834     39,186     132,013  

Other income (expense), net

     141     108     986     58     1,293  

Net loss

     (18,401 )   (18,844 )   (20,633 )   (6,974 )   (64,852 )

Net loss per share—basic and diluted

   $ (0.19 ) $ (0.19 ) $ (0.21 ) $ (0.07 ) $ (0.65 )

 

 
   First
Quarter 		  Second
Quarter 		  Third
Quarter 		  Fourth
Quarter 		  Total
Year 		 
 
   (in thousands, except per share data)
  

2010

                                

Collaborative arrangements revenue

   $ 8,838   $ 9,188   $ 9,059   $ 16,772   $ 43,857  

Total operating expenses

     23,334     26,498     25,224     29,567     104,623  

Other income (expense), net

     15     145     107     1,144     1,411  

Net loss from continuing operations

     (14,481 )   (17,165 )   (13,114 )   (11,651 )   (56,411 )

Net income (loss) from discontinued operations

     (1,772 )   (44 )   6,367     —     4,551  

Net loss

     (16,253 )   (17,209 )   (6,747 )   (11,651 )   (51,860 )

Net (income) loss from discontinued operations attributable to noncontrolling interest

     329     73     (1,523 )   —     (1,121 )

Net loss attributable to Ironwood Pharmaceuticals, Inc. 

     (15,924 )   (17,136 )   (8,270 )   (11,651 )   (52,981 )

Net loss per share from continuing operations—basic and diluted

   $ (0.23 ) $ (0.18 ) $ (0.13 ) $ (0.12 ) $ (0.63 )

Net income (loss) per share from discontinued operations attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted

     (0.02 )   —     0.05     —     0.04  
                       

Net loss per share attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted

   $ (0.25 ) $ (0.18 ) $ (0.08 ) $ (0.12 ) $ (0.59 )
                       
Subsequent Events
Subsequent Events

23. Subsequent Events

Bionomics Limited

        The Company entered into a collaboration and license agreement with Bionomics Limited ("Bionomics") in January 2012 in which it licensed the rights to Bionomics' investigational anti-anxiety compound, BNC210. Under the terms of the agreement, the Company and Bionomics will collaborate on initial research and the Company will be responsible for development and commercialization of any resulting products. In connection with entering into the agreement, the Company will make an up-front payment of $3.0 million to Bionomics. The Company will fund full-time equivalents for Bionomics to perform certain drug discovery activities, make certain milestone payments pending the achievement of certain development and regulatory milestones, and make royalty payments if BNC210 is ever successfully commercialized.

Class A Common Stock Offering

        In February 2012, the Company sold 6,037,500 shares of its Class A common stock through a firm commitment, underwritten public offering at a price to the public of $15.09 per share. As a result of the offering, the Company received aggregate net proceeds, after underwriting discounts and commissions and other estimated offering expenses, of approximately $85.3 million. The Company intends to use these proceeds for general corporate purposes, including to further strengthen its balance sheet in advance of the potential market launch of linaclotide (if approved).

State Grant

        In February 2012, the Company was notified that it was awarded an approximately $1.8 million tax incentive associated with the Life Sciences Tax Incentive Program from the Massachusetts Life Sciences Center. This program was established in 2008 in order to incentivize life sciences companies to create new sustained jobs in Massachusetts. Jobs must be maintained for at least five years, during which time the grant proceeds can be recovered by the DOR if the Company does not meet and maintain its job creation commitments.

Summary of Significant Accounting Policies (Policies)
Principles of Consolidation

Principles of Consolidation

        During 2006, the Company formed Microbia as a 100% wholly owned subsidiary of the Company. In September 2006, Microbia sold additional equity interests to a third party, which reduced the Company's ownership interest in Microbia to 85% (Note 21). The accompanying consolidated financial statements of Ironwood Pharmaceuticals, Inc. include the assets, liabilities, revenue, and expenses of Microbia, over which the Company exercised control until September 21, 2010, when the Company sold its interest in Microbia to DSM. The Company recorded noncontrolling interest in its consolidated statements of operations for the ownership interest of the minority owners of Microbia. All intercompany transactions and balances are eliminated in consolidation.

Sale of Subsidiary and Discontinued Operations

Sale of Subsidiary and Discontinued Operations

        On September 21, 2010, the Company sold its interest in Microbia to DSM in exchange for cash proceeds of $9.5 million, the payment of approximately $1.1 million of Microbia debt and interest by DSM and future contingent consideration based on the sale of products incorporating Microbia's technology. As a result of the sale of its interest in Microbia, the Company ceased to have any financial interest in Microbia. The Company maintained no further investment in Microbia and recorded a gain on the sale of Microbia in its consolidated statements of operations of approximately $12.2 million at the time of the sale. The Company determined that Microbia qualified for presentation as discontinued operations and accordingly, the Company classified the assets, liabilities, operations and cash flows of Microbia as discontinued operations for all periods presented.

        The agreement with DSM also included future contingent consideration in the form of a royalty on future sales of products incorporating Microbia's technology through the earlier of a) 2024, b) the invalidity of any Microbia patent, or c) the maximum agreed upon amount is reached. The Company's accounting policy is to account for the future contingent consideration, if any, as a gain contingency as the proceeds have not been received and the receipt of royalty income is uncertain. As a result, proceeds will only be recorded in future earnings as they are earned. As of December 31, 2011, no amounts have been recorded for the contingent consideration in the Company's consolidated financial statements.

Use of Estimates

Use of Estimates

        The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the U.S. requires the Company's management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company's management evaluates its estimates, including those related to revenue recognition, available-for-sale securities, impairment of long-lived assets, income taxes including the valuation allowance for deferred tax assets, research and development, contingencies, and share-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

Cash and Cash Equivalents

Cash and Cash Equivalents

        The Company considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds, U.S. Treasury securities and certain U.S. government sponsored securities. The carrying amount of cash equivalents approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $77.2 million and $39.2 million at December 31, 2011 and 2010, respectively.

Restricted Cash

Restricted Cash

        The Company is contingently liable under unused letters of credit with a bank, related to the Company's facility lease agreements and credit card arrangements, in the amount of approximately $7.6 million and $10.5 million as of December 31, 2011 and 2010, respectively. As a result, the Company has restricted cash of approximately $7.6 million and $10.5 million as of December 31, 2011 and 2010, respectively, securing these letters of credit. The cash will be restricted until the termination of the leases and credit card arrangements. In January 2011, approximately $2.8 million of restricted cash was released due to the expiration of the 320 Bent Street facility lease in December 2010. As of December 31, 2010, the $2.8 million is shown as a current asset on the Company's consolidated balance sheets.

Available-for-Sale Securities

Available-for-Sale Securities

        The Company classifies all short-term investments with an original maturity when purchased of greater than three months as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in other comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest and investment income. Realized gains and losses, and declines in value judged to be other than temporary on available-for-sale securities, are included in interest and investment income.

        The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest and investment income. To determine whether an other-than-temporary impairment exists, the Company considers whether it has the ability and intent to hold the investment until a market price recovery, and whether evidence indicating the recoverability of the cost of the investment outweighs evidence to the contrary. There were no other-than-temporary impairments for the years ended December 31, 2011, 2010 and 2009.

Accounts Receivable and Related Valuation Account

Accounts Receivable and Related Valuation Account

        The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. The Company's receivables primarily relate to amounts reimbursed under its collaboration and license agreements. The Company believes that credit risks associated with these collaborators are not significant. To date, the Company has not had any write-offs of bad debt, and as such, the Company does not have an allowance for doubtful accounts as of December 31, 2011 and 2010.

Concentrations of Credit Risk

Concentrations of Credit Risk

        Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, restricted cash, available-for-sale securities, and accounts receivable. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company's available-for-sale investments potentially subject the Company to concentrations of credit risk. The Company has adopted an investment policy which limits the amounts the Company may invest in any one type of investment, and requires all investments held by the Company to be A+ rated, thereby reducing credit risk concentration.

        Accounts receivable, including related party accounts receivable, primarily consist of amounts due under the collaboration agreement with Forest and license agreements with Almirall, S.A. ("Almirall") and Astellas Pharma Inc. ("Astellas") (Note 5) for which the Company does not obtain collateral. Effective September 1, 2009, Forest became a related party when the Company sold to Forest 2,083,333 shares of the Company's Series G convertible preferred stock and effective November 2, 2009, Almirall became a related party when the Company sold to them 681,819 shares of its Series I convertible preferred stock.

        The percentages of revenue from continuing operations recognized from significant customers of the Company in the years ended December 31, 2011, 2010 and 2009 are included in the following table:

 
   Years Ended December 31,  
 
   2011   2010   2009  

Collaborative Partner:

                    

Forest

     64 %   50 %   79 %

Almirall

     31 %   43 %   21 %

Astellas

     5 %   7 %   — %

        Tate & Lyle Investments, Ltd. ("T&L") accounted for approximately 98% and 100% of the Company's revenue from discontinued operations for the years ended December 31, 2010 and 2009, respectively. For the years ended December 31, 2011, 2010 and 2009, no additional customers accounted for more than 10% of the Company's revenue from continuing operations.

        At December 31, 2011 and 2010, accounts receivable from Forest, net of any payables due Forest, accounted for approximately 86% and 89%, respectively, of the Company's total accounts receivable. At December 31, 2011 and 2010, Almirall accounted for approximately 2% and 10%, respectively, of the Company's total accounts receivable. At December 31, 2011 and 2010, Astellas accounted for approximately 11% and 0%, respectively of the Company's total accounts receivable.

Revenue Recognition

Revenue Recognition

        The Company's revenue is generated through collaborative research and development and licensing agreements. The terms of these agreements contain multiple deliverables which may include (i) licenses, (ii) research and development activities, and (iii) the manufacture of active pharmaceutical ingredient ("API") and development materials for the collaborative partner. Payments to the Company under these agreements may include non-refundable license fees, payments for research and development activities, payments for the manufacture of API and development materials, payments based upon the achievement of certain milestones and royalties on product sales. In addition, prior to September 2010, the Company generated services revenue through agreements that generally provided for fees for research and development services rendered.

        For arrangements that include multiple deliverables, the Company follows the provisions of the Accounting Standards Codification ("ASC") Topic 605-25, Revenue Recognition—Multiple-Element Arrangements, in accounting for these agreements. Effective January 1, 2011, the Company adopted Accounting Standards Update ("ASU") No. 2009-13, Multiple-Deliverable Revenue Arrangements ("ASU 2009-13"), which amends ASC Topic 605-25. Refer to Note 2, "Recently Adopted Accounting Standards," for additional discussion of this standard and its impact on the Company's accounting for collaboration and license agreements. In order to account for these agreements, the Company must identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on if certain criteria are met, including whether the delivered element has standalone value to the collaborator. The consideration received is allocated among the separate units of accounting based on the relative selling price, and the applicable revenue recognition criteria are applied to each of the separate units. If the separation criteria is not met, revenue of the combined unit of accounting is recorded based on the method appropriate for the last delivered item. The Company recognizes revenue when there is persuasive evidence that an arrangement exists, services have been rendered or delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.

        At December 31, 2011, the Company had collaboration and license agreements with Forest, Almirall and Astellas. Refer to Note 5, "Collaboration and License Agreements," for additional discussion of these agreements.

        There are no performance, cancellation, termination or refund provisions in any of the Company's arrangements that contain material financial consequences to the Company.

Collaboration and License Agreements

Collaboration and License Agreements

        The significant deliverables under the Company's collaboration and license agreements generally include the license to develop and commercialize linaclotide, the Company's GC-C agonist, and may also include deliverables related to research and development activities, and the manufacture of API and development materials for the collaborative partner.

        Generally, collaboration and license agreements contain non-refundable terms for payments and, depending on the terms of the agreement, provide that the Company will (i) provide research and development activities, including participation on a joint development committee, (ii) manufacture API and development materials which are reimbursed at a contractually determined rate, (iii) earn payments upon the achievement of certain milestones, and (iv) earn royalty payments on sales of linaclotide. In determining the separate units of accounting, management evaluates whether the license has standalone value to the partner based on the consideration of the relevant facts and circumstances for each arrangement. Factors considered in this determination include the research capabilities of the partner and the availability of peptide research expertise in the general marketplace. In addition, the Company considers whether the collaborator can use the license for its intended purpose without the receipt of the remaining deliverables, and whether the value of the license is dependent on the undelivered items and whether there are other vendors that can provide the undelivered item.

        For all of the collaboration and license agreements discussed in Note 5, the licenses and research and development activities did not qualify as separate units of accounting since the licenses did not have standalone value without the research and development activities. Up-front payments on a license are deferred if facts and circumstances dictate that the license does not have standalone value. The determination of the length of the period over which to recognize the revenue is subject to judgment and estimation and can have an impact on the amount of revenue recognized in a given period. The Company generally estimates this period as the estimated period of performance, which is typically the research and development term due to the Company's continuing involvement in the performance of research and development activities, primarily through its participation on a joint development committee. Typically the research and development term begins at the inception of the collaboration or license agreement and concludes when the Company's significant research and development obligations under the agreement have concluded. The Company believes this period of involvement is 60 months for the Forest collaboration, 41 months for the Almirall license agreement and 115 months for the Astellas license agreement. Quarterly, the Company reassesses its periods of substantial involvement over which the Company amortizes its up-front license fees and makes adjustments as appropriate. In the event that a license were to be terminated, the Company would recognize as revenue any portion of the up-front fee that had not previously been recorded as revenue, but was classified as deferred revenue at the date of such termination.

        At the inception of each agreement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific and other risks that must be overcome to achieve the milestone, as well as the level of effort and investment required. Milestones that are not considered substantive are accounted for as license payments and recognized on a straight-line basis over the remaining period of performance. Refer to Note 5 for details on the specific milestones in each of the Company's agreements.

        In those circumstances where a substantive milestone is achieved, collection of the related receivable is reasonably assured and the Company has remaining obligations to perform under the collaboration arrangement, the Company has historically recognized as revenue on the date the milestone was achieved an amount equal to the applicable percentage of the performance period that had elapsed as of the date the milestone was achieved, with the balance being deferred and recognized on a straight-line basis over the remaining period of performance. Effective January 1, 2011, the Company adopted ASU No. 2010-17, Revenue Recognition—Milestone Method ("ASU 2010-17"). Refer to Note 2, "Recently Adopted Accounting Standards," for additional discussion of the adoption of this standard and its impact on the Company's accounting for collaboration and license agreements. Under ASU 2010-17, beginning January 1, 2011, in those circumstances where a substantive milestone is achieved and collection of the related receivable is reasonably assured, the Company recognizes revenue related to the milestone in its entirety in the period in which the milestone is achieved. At the inception of each arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (1) the entity's performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity's performance to achieve the milestone, (b) the consideration relates solely to past performance and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Substantive milestones are due to the Company upon NDA approval of linaclotide in the U.S., upon the initiation of a Phase 3 study for linaclotide in Japan, upon the filing and approval of the Japanese equivalent of an NDA with the relevant regulatory authority in Japan. Milestone payments received prior to the adoption of ASU 2010-17 will continue to be recognized over the remaining period of performance.

        The Company produces development materials and API for its collaborators and is reimbursed for its costs to produce the material. The Company recognizes revenue on development material and API when the material has passed all quality testing required for collaborator acceptance, delivery has occurred, title and risk of loss have transferred to the collaborator, the price is fixed or determinable, and collection is reasonably assured.

        The Company receives research and development funding under the Forest collaboration agreement and considers the factors or indicators within this arrangement to determine whether reporting such funding on a gross or net basis is appropriate. The Company records revenue transactions gross in the consolidated statements of operations if it is deemed the principal in the transaction, which includes being the primary obligor and having the risks and rewards of ownership.

        For certain of the Company's arrangements, particularly the license agreement with Almirall, it is required that taxes be withheld on its payments. The Company has adopted a policy to recognize revenue net of these tax withholdings.

Services Revenue

Services Revenue

        Prior to September 2010, the Company recognized services revenue when there was persuasive evidence that an arrangement existed, services had been rendered or delivery had occurred, the price was fixed or determinable, and collection was reasonably assured. Revenue from research and development services rendered was recognized as services were performed. As a result of the sale of the Company's interest in Microbia in September 2010, services revenue is included in net income from discontinued operations.

Research and Development Costs

Research and Development Costs

        The Company expenses research and development costs to operations as incurred. The Company defers and capitalizes nonrefundable advance payments made by the Company for research and development activities until the related goods are received or the related services are performed.

        Research and development expenses are comprised of costs incurred in performing research and development activities, including salary and benefits; share-based compensation expense; laboratory supplies and other direct expenses; facilities expenses; overhead expenses; contractual services, including clinical trial and related clinical manufacturing expenses, including supply chain development; and other outside expenses. As a result of the sale of the Company's interest in Microbia in September 2010, costs of revenue related to the Microbia services contracts and costs associated with Microbia's research and development activities are included in net income (loss) from discontinued operations.

        The Company has entered into a collaboration agreement in which it shares research and development expenses with a collaborator. The Company records the expenses for such work as research and development expense. Because the collaboration arrangement is a cost-sharing arrangement, the Company concluded that when there is a period during the collaboration arrangement during which the Company receives payments from the collaborator, the Company records the payments by the collaborator for their share of the development effort as a reduction of research and development expense.

Share-Based Compensation

Share-Based Compensation

        Share-based compensation is recognized as an expense in the financial statements based on the grant date fair value. Compensation expense recognized primarily relates to stock awards, restricted stock and stock options granted, modified, repurchased or cancelled on or after January 1, 2006. Stock options granted to employees prior to that time continue to be accounted for using the intrinsic value method. Under the intrinsic value method, compensation associated with share-based awards to employees was determined as the difference, if any, between the fair value of the underlying common stock on the date compensation was measured, generally the grant date, and the price an employee must pay to exercise the award. For awards that vest based on service conditions, the Company uses the straight-line method to allocate compensation expense to reporting periods. The grant date fair value of options granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term and the fair value of the underlying common stock, among others.

        The Company records the expense for stock option grants subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date.

        The Company records the expense of services rendered by non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of unvested non-employee awards are remeasured at each reporting period and expensed over the vesting term of the underlying stock options.

Accounting for Sabbatical Leave

Accounting for Sabbatical Leave

        The Company accrues an employee's right to a compensated absence under a sabbatical, or other similar benefit arrangement that requires the completion of a minimum service period and the benefit increases with additional years of service, accumulates, and for arrangements in which the individual continues to be a compensated employee and is not required to perform duties for the entity during the absence. Therefore, the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the requisite service period. During the years ended December 31, 2011, 2010 and 2009, the Company recorded expense for sabbatical costs of approximately $0.3 million, $0.3 million and $0.1 million, respectively. These values exclude any amounts recorded for sabbatical costs from discontinued operations.

Noncontrolling Interest

Noncontrolling Interest

        Noncontrolling interest represents the noncontrolling stockholder's proportionate share of equity and net income or net loss of the Company's former consolidated subsidiary, Microbia. On September 21, 2010, the Company sold its interest in Microbia, resulting in the deconsolidation of its former subsidiary bringing the noncontrolling interest balance to zero. Immediately prior to the sale, the Company converted certain intercompany debt and payables into preferred stock of Microbia, which resulted in an approximately $2.9 million decrease in the noncontrolling interest. Prior to the sale of Microbia, the noncontrolling stockholder's proportionate share of the equity in Microbia was reflected as noncontrolling interest in the Company's consolidated balance sheets as a component of stockholders' equity (deficit). The proportionate share of the net loss attributable to noncontrolling interest is reflected in the accompanying consolidated statements of operations.

Net Loss Per Share

Net Loss Per Share

        The Company calculates basic and diluted net loss per common share by dividing the net loss by the weighted average number of common shares outstanding during the period. The Company has excluded unvested restricted stock and shares that are subject to repurchase by the Company from the weighted average number of common shares outstanding. The Company's potentially dilutive shares, which include convertible preferred stock, outstanding common stock options and unvested shares of restricted stock, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive. The loss attributable to the noncontrolling interest is included in the net income (loss) per share from discontinued operations.

Property and Equipment

Property and Equipment

        Property and equipment, including leasehold improvements, are recorded at cost, and are depreciated when placed into service using the straight-line method based on their estimated useful lives as follows:

Asset Description
  Estimated Useful Life
(In Years) 		 

Laboratory equipment

     5  

Computer and office equipment

     3  

Furniture and fixtures

     7  

Software

     3  

        Included in property and equipment are certain costs of software obtained for internal use. Costs incurred during the preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs related to software obtained for internal use are expensed as incurred.

        Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term. Costs for capital assets not yet placed into service have been capitalized as construction in progress, and will be depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred.

Income Taxes

Income Taxes

        The Company provides for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

        The Company accounts for uncertain tax positions recognized in the consolidated financial statements by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

        The Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist, which warrant adjustments to carrying values or estimated useful lives. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset's value is recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value. There were no indicators of impairment at December 31, 2011 or December 31, 2010. At December 31, 2009, the Company concluded that impairments of certain long-lived assets existed at its former subsidiary, Microbia, resulting from its restructuring in the fourth quarter of 2009 (Note 21). Such long-lived assets were written down to their estimated fair value, which resulted in a charge of approximately $0.9 million. This charge is shown as part of net income (loss) from discontinued operations.

Comprehensive Income (Loss)

Comprehensive Income (Loss)

        All components of comprehensive income (loss) are required to be disclosed in the consolidated financial statements. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources and currently consists of net loss and changes in unrealized gains and losses on available-for-sale securities.

Segment Information

Segment Information

        Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance.

        Prior to the sale of its interest in Microbia in September 2010, the Company had two reportable business segments: human therapeutics and biomanufacturing (Note 19). Revenue from the Company's human therapeutics segment is shown in the consolidated statements of operations as collaborative arrangements revenue. Revenue from the Company's biomanufacturing segment is presented as a component of the net income (loss) from discontinued operations.

Summary of Significant Accounting Policies (Tables)
Schedule of percentages of revenue from continuing operations recognized from significant customers

 

 

 
   Years Ended December 31,  
 
   2011   2010   2009  

Collaborative Partner:

                    

Forest

     64 %   50 %   79 %

Almirall

     31 %   43 %   21 %

Astellas

     5 %   7 %   — %

        

Schedule of estimated useful life

 

 

Asset Description
  Estimated Useful Life
(In Years) 		 

Laboratory equipment

     5  

Computer and office equipment

     3  

Furniture and fixtures

     7  

Software

     3  

        

Net Loss Per Share (Tables)
Schedule of computation of basic and diluted net loss per share

 

 

 
   Years Ended December 31,  
 
   2011   2010   2009  

Numerator:

                    

Net loss from continuing operations. 

   $ (64,852 ) $ (56,411 ) $ (59,998 )

Net income (loss) from discontinued operations

     —     4,551     (13,314 )

Less: Net (income) loss from discontinued operations attributable to noncontrolling interest

     —     (1,121 )   2,127  
               

Net income (loss) from discontinued operations attributable to Ironwood Pharmaceuticals, Inc. 

     —     3,430     (11,187 )
               

Net loss attributable to Ironwood Pharmaceuticals, Inc. 

   $ (64,852 ) $ (52,981 ) $ (71,185 )
               

Denominator:

                    

Weighted average number of common shares used in net loss per share attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted

     99,874,790     89,653,364     7,116,774  
               

Net loss per share associated with continuing operations.—basic and diluted

   $ (0.65 ) $ (0.63 ) $ (8.43 )

Net income (loss) per share from discontinued operations attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted

     —     0.04     (1.57 )
               

Net loss per share attributable to Ironwood Pharmaceuticals, Inc.—basic and diluted

   $ (0.65 ) $ (0.59 ) $ (10.00 )
               
Schedule of potentially dilutive securities that have been excluded from computation of diluted weighted average shares outstanding

 

 

 
   Years Ended December 31,  
 
   2011   2010   2009  

Convertible preferred stock

     —     —     69,904,843  

Options to purchase common stock

     16,424,500     14,603,229     13,691,579  

Shares subject to repurchase

     160,413     284,960     434,156  
               

 

     16,584,913     14,888,189     84,030,578  
               
Fair Value of Financial Instruments (Tables)
Schedule of assets measured at fair value on a recurring basis

 

 

 
    
   Fair Value Measurements at Reporting Date Using  
Description
  December 31,
2011 		  Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 		  Significant Other
Observable
Inputs
(Level 2) 		  Significant
Unobservable
Inputs
(Level 3) 		 

Money market funds (included in cash and cash equivalents)

   $ 77,158   $ 77,158   $ —   $ —  

U.S. Treasury securities

     21,821     21,821     —     —  

U.S. government-sponsored securities

     54,913     —     54,913     —  
                   

Total

   $ 153,892   $ 98,979   $ 54,913   $ —  
                   


 

 
    
   Fair Value Measurements at Reporting Date Using  
Description
  December 31,
2010 		  Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 		  Significant Other
Observable
Inputs
(Level 2) 		  Significant
Unobservable
Inputs
(Level 3) 		 

Money market funds (included in cash and cash equivalents)

   $ 36,228   $ 36,228   $ —   $ —  

U.S. government-sponsored securities (included in cash and cash equivalents)

     2,998     —     2,998     —  

U.S. Treasury securities

     116,219     116,219     —     —  

U.S. government-sponsored securities

     87,487     —     87,487     —  
                   

Total

   $ 242,932   $ 152,447   $ 90,485   $ —  
                   
Available-for-Sale Investments (Tables)
Schedule of summary of available-for-sale securities

 

 

 
   Amortized Cost   Gross
Unrealized
Gains 		  Gross
Unrealized
Losses 		  Fair Value