Ironwood Pharmaceuticals, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; comparisons are with the corresponding 2014 periods. Ironwood is a GI-focused pharmaceutical company whose marketed product is linaclotide (LINZESS/CONSTELLA), commercialized with partners.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Collaborative arrangements revenue | $39.6m | $16.9m | $96.2m | $38.4m |
| Operating loss | $26.2m | $36.7m | $96.3m | $136.2m |
| Net loss | $47.4m | $42.0m | $128.6m | $152.0m |
| Net loss per share, diluted | $0.33 | $0.30 | $0.91 | $1.12 |
| Operating cash flow | Not separately reported for the quarter | $(87.6)m | $(132.8)m |
Q3 revenue increased 134%, principally from higher U.S. LINZESS profit share and the new Exact Sciences Cologuard co-promotion. Nine-month revenue rose 151%; Ironwood’s U.S. LINZESS share of net profit was $59.5m versus a $0.3m share loss in 2014. Net losses narrowed year over year for the nine-month period, but increased in Q3. No gross margin is presented; reported operating losses reflect operating costs and inventory-related charges.
- Expenses: R&D was $25.8m in Q3 and $81.1m year to date; SG&A was $30.4m and $93.7m, respectively. Total costs and expenses were $65.8m for Q3 and $192.5m year to date.
- Cash and liquidity: At September 30, cash and cash equivalents were $248.1m and available-for-sale securities were $214.2m, or $462.3m combined unrestricted liquidity. Cash and cash equivalents increased $173.8m from year-end 2014; cash used in investing activities was $44.1m.
- Debt: Management reported approximately $501.1m of total indebtedness. This includes $335.7m principal of 2.25% convertible senior notes due 2022 and PhaRMA notes bearing 11% interest, with repayment linked to LINZESS U.S. sales. The convertible notes’ balance-sheet carrying value was $217.4m; the PhaRMA notes had $161.9m shown as current and noncurrent liabilities.
Material changes and unusual items
- Q3 included $9.5m of inventory write-down and non-cancellable purchase commitment charges; the nine-month charge was $17.6m. This included a $5.0m inventory write-down in Q2 and charges associated with reduced European demand forecasts, delayed China commercialization, and European supply commitments. At September 30, accrued excess purchase commitments totaled about $12.6m.
- Interest expense rose to $10.0m in Q3 and $21.1m year to date, largely reflecting the 2022 notes. Derivative fair-value changes generated losses of $11.3m in Q3 and $11.5m year to date; the new note hedges and warrants are Level 3 instruments and their valuations depend on stock-price and volatility assumptions.
- Ironwood issued $335.7m of 2022 notes in June, receiving approximately $324.0m net proceeds. It spent $91.9m on convertible note hedges and received $70.8m from related warrants, for a net hedge cost of about $21.1m. The hedge is intended to reduce conversion dilution; warrants could dilute shares above their initial $21.50 strike price.
- Subsequent to quarter-end, Almirall transferred its European linaclotide license to Allergan, which also assumed European API manufacturing responsibility. The amended terms provide for royalties starting in the mid-single digits and escalating to the upper teens by 2019, and up to $42.5m in remaining combined milestones. Mexico rights also returned to Allergan.
- Ironwood and Allergan reported positive top-line Phase III results in October 2015 for a 72 mcg linaclotide dose in adult CIC patients. This is not an approval. China Phase III top-line data for IBS-C were also positive in July 2015.
Outlook, risks and contingencies
Management expects continued net losses and substantial R&D and commercialization spending for the foreseeable future. It stated that September 30 liquidity should fund projected operating needs for at least the next 12 months, while cautioning that forecasts may prove inaccurate. No specific revenue or earnings guidance is provided. The company said it cannot predict when, if ever, it will become profitable or cash-flow positive.
- Commercial performance depends heavily on U.S. LINZESS demand, Allergan’s execution and cost sharing, and access, pricing and reimbursement. German CONSTELLA commercialization had been suspended over reimbursement pricing.
- Ironwood relies on partners and contract manufacturers for product development, supply and commercialization; demand changes or regulatory delays have already contributed to inventory and purchase-commitment charges. Commercial supply obligations total about $34.9m through 2023, including $2.5m due within one year.
- Clinical, regulatory and safety uncertainties include required post-approval studies and pediatric development; LINZESS has a boxed warning concerning pediatric use. The pipeline and proposed indication or dose expansions remain subject to trial outcomes and regulatory review.
- Debt service and repayment depend in part on LINZESS-related cash flows. The 2022 notes include conversion and fundamental-change repurchase provisions; PhaRMA payments are tied to sales and have restrictive covenants. Liquidity, partner performance, competition, intellectual property, reimbursement and product safety are material risks.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm LINZESS U.S. demand, partner-reported net-profit calculations and the sustainability of the revenue increase.
- Track the European license transfer, revised royalties and milestones, Germany reimbursement status, and Allergan’s assumption of API manufacturing.
- Assess whether remaining API purchase commitments are supportable by partner demand forecasts, and monitor further inventory or commitment charges.
- Review debt service obligations, PhaRMA sales-linked repayments, convertible-note conversion and repurchase terms, and the assumptions behind the note hedge and warrant valuations.
- Verify regulatory progress and full data for the 72 mcg CIC dose, China and Japan programs, pediatric studies, and other pipeline candidates; top-line results are not regulatory approvals.
- Reassess the stated 12-month liquidity runway against operating cash burn, development spending and commercial requirements.