Ironwood Pharmaceuticals, Inc. — Q3 2019 Form 10-Q
Period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts below are in U.S. dollars, generally millions unless noted.
Business context and reporting period
Ironwood is a GI-focused therapeutics company whose commercial business is centered on linaclotide, marketed as LINZESS and CONSTELLA through partners. On April 1, 2019, Ironwood completed the tax-free spin-off of its sGC business into Cyclerion; sGC results are presented as discontinued operations. The company also exited its U.S. lesinurad business. Its pipeline includes linaclotide development, MD-7246 for IBS-D abdominal pain, and IW-3718 for persistent GERD.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $131.2 | $65.7 | $302.1 | $215.9 |
| Operating income (loss) | $65.9 | $(146.6) | $70.5 | $(180.5) |
| Net income (loss) from continuing operations | $20.6 | $(151.8) | $11.1 | $(202.5) |
| Net income (loss), including discontinued operations | $20.6 | $(174.4) | $(26.4) | $(266.9) |
| Basic and diluted earnings (loss) per share | $0.13 | $(1.14) | $(0.17) | $(1.75) |
- Q3 revenue increased 100%; nine-month revenue increased 40%. Collaborative arrangements revenue was $130.5 million in Q3 and $274.0 million for nine months. Q3 included $32.4 million recognized for the AstraZeneca China license and a $10.0 million Astellas upfront payment.
- Ironwood’s reported share of U.S. LINZESS net profits was $75.4 million in Q3 and $194.1 million for nine months. Q3 revenue also included $32.4 million from AstraZeneca and $10.0 million from Astellas, so reported revenue growth was not solely from recurring product demand.
- Operating margin, calculated as operating income divided by revenue, was approximately 50.2% in Q3 and 23.3% for nine months. These margins reflect collaboration/license revenue and unusual items; the filing does not present a standalone gross margin.
- Research and development expense was $27.6 million in Q3 and $88.5 million for nine months. Nine-month R&D rose 22%, principally due to higher IW-3718 and linaclotide development costs. Selling, general and administrative expense was $40.9 million and $133.3 million, respectively; nine-month expense declined 21% year over year.
- Cash and cash equivalents were $139.2 million at September 30, 2019, down from $173.2 million at December 31, 2018. Including restricted cash, cash and equivalents totaled $147.9 million. Current assets were $257.6 million and current liabilities $52.8 million. Stockholders’ deficit was $153.0 million.
- For nine months, net cash used in continuing operating activities was $28.2 million; discontinued operations provided $11.4 million, leaving total operating cash use of $16.9 million. Investing activities used $8.5 million and financing activities used $7.6 million. Cash, cash equivalents and restricted cash declined $33.0 million overall.
- At quarter-end, convertible senior notes had a carrying value of $402.7 million; their combined principal was approximately $520.7 million ($120.7 million due 2022 and $200 million each due 2024 and 2026). The 2026 8.375% notes were redeemed. The quarter included $10.5 million of interest expense and a $31.0 million loss on extinguishment of debt.
Material changes versus prior comparable periods
- Q3 and nine-month 2019 operating results improved substantially against 2018, when results included a $151.8 million lesinurad intangible impairment. Prior-year Q3 also included a $33.5 million gain on contingent-consideration remeasurement; the 2019 periods do not include that gain.
- Q3 2018 collaborative revenue was reduced by a $29.7 million adjustment for prior estimates of LINZESS gross-to-net reserves, primarily rebates. This makes year-over-year revenue comparisons less directly indicative of underlying growth.
- Nine-month 2019 consolidated net loss includes $37.4 million of sGC discontinued-operation losses before the April spin-off; Q3 2019 had no discontinued-operation loss.
- In August, Ironwood issued $200 million each of 0.75% 2024 notes and 1.50% 2026 notes, receiving approximately $391 million net. Proceeds funded capped calls, a $215 million principal repurchase of the 2022 notes, and redemption of the 8.375% notes due 2026.
- The Astellas agreement was amended: Ironwood received a $10 million upfront payment, will stop supplying API to Astellas beginning in 2020, and will receive revised royalties. The AstraZeneca China agreement was amended to grant AstraZeneca exclusive development, manufacturing and commercialization rights; Ironwood recognized $32.4 million of license revenue and is eligible for $35 million of non-contingent payments through 2024, up to $90 million in sales milestones, and tiered royalties.
- Adoption of lease accounting standard ASC 842 led to recognition of operating lease assets and liabilities. At September 30, lease liabilities were $32.6 million. The new Summer Street headquarters lease runs to 2030; the prior headquarters lease termination was effective in Q4 2019 and required an approximately $9 million payment.
Outlook, commentary, risks and contingencies
- Management said cash on hand at September 30 was expected to fund projected operating needs for at least the next 12 months. The company’s stated goal is to become cash-flow positive, but it cautioned that forecasts depend on uncertain revenue, development costs and commercialization assumptions.
- Ironwood expects substantial spending for the foreseeable future on LINZESS and its GI pipeline. It depends significantly on Allergan’s U.S. LINZESS collaboration for revenue and cash flow, and reported revenue can fluctuate with partner-reported sales, costs, royalties, milestones and license payments.
- Development and regulatory outcomes remain uncertain. IW-3718 was in two Phase III trials, MD-7246 entered Phase II, and pediatric linaclotide studies and other post-approval commitments were ongoing. Management cannot estimate with certainty timing, costs, or eventual product revenues.
- Generic LINZESS patent litigation involving Teva and Sandoz was scheduled for trial beginning January 7, 2020. The parties’ order barred commercial sale or importation of the proposed generics until the earlier of a trial decision or September 20, 2020. The outcome could affect LINZESS exclusivity and revenue.
- Other key risks include partner execution or changes in control (including the proposed Allergan–AbbVie combination), manufacturing and supply continuity, reimbursement and pricing pressure, product safety, clinical failures, patent challenges, and the possibility that the Cyclerion separation may not qualify as tax-free. Ironwood disclosed no material weakness: management concluded disclosure controls were effective and no period change materially affected internal control over financial reporting.
Important facts for investors to verify
- How much of the revenue increase is recurring LINZESS collaboration performance versus the AstraZeneca license recognition, Astellas upfront payment, and prior-year gross-to-net adjustment.
- LINZESS U.S. demand, Allergan-reported net sales and cost allocations, and the implications of Allergan’s proposed combination with AbbVie.
- Progress and results of the Teva/Sandoz patent trial, associated stay dates, and any further generic filings or settlements.
- Cash burn, milestone and royalty receipts, debt service and conversion exposure, and whether management’s stated 12-month liquidity expectation remains supportable.
- Clinical milestones, spending and potential outcomes for IW-3718, MD-7246, and pediatric linaclotide programs; also verify manufacturing transitions to Astellas and AstraZeneca.
- Potential tax, indemnification and operating costs arising from the Cyclerion separation, and the final cash costs of the headquarters move and lease termination.