Ironwood Pharmaceuticals, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Amounts below are in U.S. dollars. Financial statement figures are in millions unless otherwise noted.
Business context and reporting period
Ironwood is a commercial biotechnology company focused on gastrointestinal, gout, vascular and fibrotic disease therapies. Its principal revenue source is its U.S. LINZESS collaboration with Allergan, under which the parties share net profits or losses equally. Ironwood also launched ZURAMPIC in the U.S. in October 2016 and is developing DUZALLO and other candidates. In July 2017, after quarter-end, Ironwood reported positive Phase IIb top-line results for IW-3718 in uncontrolled GERD.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $65.1 | $54.4 | $117.2 | $120.4 |
| Operating loss | $(41.0) | $(15.3) | $(80.7) | $(17.3) |
| Net loss | $(44.2) | $(21.7) | $(96.7) | $(35.0) |
| Net loss per share, basic and diluted | $(0.30) | $(0.15) | $(0.65) | $(0.24) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(59.1) | $(6.1) |
- Q2 collaborative arrangements revenue was $64.6 million, up 19%; product revenue was $0.5 million, from ZURAMPIC. First-half collaborative revenue was $116.5 million.
- Q2 R&D expense was $37.3 million, up 18%; SG&A was $57.8 million, up 57%. First-half R&D and SG&A were $71.0 million and $113.4 million, respectively.
- Calculated operating loss margins were approximately 63% of revenue in Q2 2017 and 69% for the first half of 2017. These are derived from reported figures, not company guidance.
- At June 30, unrestricted cash, cash equivalents and available-for-sale securities totaled $272.9 million, versus approximately $305.2 million at year-end 2016. Cash and cash equivalents were $182.1 million; available-for-sale securities were $90.8 million. Current assets were $341.5 million and current liabilities $80.0 million.
- Reported total indebtedness was approximately $485.7 million by principal amount: $335.7 million of 2.25% convertible notes due 2022 and $150.0 million of 8.375% notes due 2026. The balance-sheet carrying values were $241.5 million and $146.3 million, respectively. The 2026 Notes replaced the 11% PhaRMA Notes, redeemed in January 2017.
- Stockholders’ equity was $4.9 million, compared with $66.7 million at December 31, 2016. Accumulated deficit was $1.29 billion.
Material changes versus the prior comparable period
- Q2 revenue rose $10.7 million, principally from an $8.0 million increase in Ironwood’s share of U.S. LINZESS profits and higher linaclotide API revenue. First-half revenue declined $3.1 million, largely because 2016 included approximately $17.0 million of Astellas upfront and development milestone revenue; higher U.S. LINZESS profit share partly offset this.
- Net loss more than doubled in Q2 and widened substantially for the first half. Expense growth—particularly SG&A tied to the ZURAMPIC launch and commercialization infrastructure—outpaced revenue growth.
- First-half SG&A increased $40.3 million, including higher field-force compensation, selling and marketing, consulting, and Lesinurad transition-service costs. R&D increased $7.5 million, including greater vascular/fibrotic pipeline and lesinurad development spending.
- First-half operating cash use increased to $59.1 million from $6.1 million. Financing included $146.3 million of net proceeds from 2026 Notes issuance and $134.3 million of PhaRMA principal repayments.
Outlook, risks, contingencies and unusual items
- Management said June 30 cash and investments were expected to fund projected operating needs for at least the next 12 months. The company has not achieved positive operating cash flow and did not provide specific revenue, earnings or cash-flow guidance.
- Management expects substantial R&D and SG&A spending to continue for the foreseeable future and says profitability and cash-flow timing are uncertain. Revenue remains highly dependent on LINZESS and partner performance; ZURAMPIC uptake, reimbursement, competition and commercialization costs are also significant uncertainties.
- Ironwood recognized a $6.9 million Q2 and $8.5 million first-half loss from remeasurement of Lesinurad contingent consideration. Its fair value was $86.2 million at June 30 and is based on Level 3 estimates.
- Lesinurad post-marketing requirements are estimated to cost less than $100 million over up to ten years; responsibility is transitioning from AstraZeneca to Ironwood. Ironwood also recorded a $1.3 million first-quarter charge for excess non-cancellable ZURAMPIC sample commitments and a small Q2 supply write-down.
- Generic manufacturers challenged LINZESS patents in ANDA filings. Lawsuits were filed, triggering FDA approval stays for the five ANDAs through February 29, 2020, absent an earlier adverse court decision. Trial was scheduled for June 2019; Mylan filed a motion to dismiss for improper venue in July 2017.
- Other notable risks include reliance on partners and third-party manufacturers, product safety and post-marketing obligations, patent litigation, reimbursement and pricing pressure, and debt-service obligations. The 2026 Notes include covenants and are partly supported by LINZESS-related receipts; a shortfall may require payment from general funds.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- LINZESS U.S. prescription, net-sales and profit-share trends, and the effect of commercial costs and partner settlements.
- ZURAMPIC prescription demand, launch costs, inventory and sample commitments, and the status and commercial prospects of DUZALLO.
- Cash burn, the assumptions underlying management’s 12-month liquidity estimate, and the timing and size of future debt payments.
- Potential changes in Lesinurad post-marketing obligations and contingent consideration valuations.
- Developments in LINZESS generic litigation, patent protection, and the timing or consequences of any court decisions.
- Clinical and regulatory updates for IW-3718, linaclotide programs, and the vascular/fibrotic pipeline.