Ironwood Pharmaceuticals, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited. Ironwood’s lead product, linaclotide, was marketed in the U.S. as LINZESS with Forest and in certain European countries as CONSTELLA through Almirall.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Collaborative arrangements revenue | $9.7m | $14.6m | $12.9m | $26.9m |
| Total costs and expenses | $69.5m | $55.4m | $161.6m | $103.3m |
| Operating loss | $59.9m | $40.8m | $148.7m | $76.5m |
| Net loss | $65.1m | $40.8m | $159.1m | $76.4m |
| Net loss per share | $0.57 | $0.38 | $1.44 | $0.73 |
Revenue fell 34% in Q2 and 52% in the first half, primarily because Forest and Almirall development-period deferred revenue amortization ended in 2012. API shipments, Almirall launch milestones, Astellas revenue and AstraZeneca collaboration revenue partly offset the decline. Reported revenue is collaborative-arrangement revenue; the filing does not provide a clear standalone figure for LINZESS U.S. net sales. Gross margin is not separately reported.
- Q2 R&D expense decreased 25% to $24.1m; first-half expense decreased 8% to $56.8m.
- Q2 SG&A rose 54% to $30.9m; first-half SG&A rose 76% to $64.2m, primarily reflecting commercial-launch staffing, sales and marketing.
- Q2 collaboration expense increased to $11.2m from $3.1m; first-half expense rose to $35.9m from $5.2m, reflecting U.S. launch and cost-sharing economics.
- Interest expense was $5.3m in Q2 and $10.4m in the first half, principally due to the 11% notes issued in January.
Cash, liquidity and capital structure
- At June 30, cash and cash equivalents were $219.5m; available-for-sale securities were $81.1m. Unrestricted cash, equivalents and securities totaled approximately $300.5m.
- First-half operating cash use was $173.3m, versus $86.2m in 2012. Investing activities used $55.3m, including net securities purchases and $4.9m of capital expenditures. Financing provided $311.4m.
- Financing included $137.8m net proceeds from a Q2 public offering of 11.2m Class A shares and $167.3m net proceeds from $175m of notes. The notes bear 11% annual interest and mature no later than June 15, 2024; payments are linked to interest and, beginning in 2014, U.S. LINZESS sales. Forest payments may not cover required debt payments, leaving Ironwood responsible for any shortfall.
- Current assets were $335.8m and current liabilities $44.0m. Notes payable were reported at $174.6m; the company estimated their fair value at $183.8m.
- Management said available cash was expected to fund projected operating needs for at least the next 12 months, while also warning that actual capital use could exceed estimates. Ironwood had an accumulated deficit of $664.1m and expected continued losses.
Developments, outlook and risks
- Ironwood and Almirall amended their license agreement in June: commercial launch milestones were reduced to $17m, sales-based milestones were added, and royalty terms were revised. Ironwood recorded $1.9m for U.K. and German launch milestones in Q2.
- Ironwood regained linaclotide rights in South Korea, Taiwan, Thailand, the Philippines and Indonesia under a March amendment with Astellas; Astellas remains responsible for Japan.
- Management expected CONSTELLA launches in additional European countries in the second half of 2013. It anticipated substantial R&D and SG&A spending and could not predict when sales would produce positive cash flow or profitability.
- Key risks include LINZESS uptake, pricing and reimbursement, safety and required post-approval studies (including pediatric work), reliance on partners and contract manufacturers, supply capacity, competition, and the potential for additional financing. The FDA label contraindicated LINZESS for children up to age six and advised against use ages 6–17 pending further evidence.
- The notes are secured by a segregated account receiving Forest collaboration payments, and include covenants and events of default. Debt-service capacity is exposed to LINZESS sales and collaboration expenses.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the period.
Investor verification priorities
- Track LINZESS U.S. sales, Forest profit/loss settlements and whether collaboration cash receipts support the note payments.
- Confirm commercialization spending, launch progress and pricing/reimbursement developments for LINZESS and CONSTELLA.
- Review cash burn against management’s stated 12-month liquidity outlook and assess potential financing needs.
- Monitor manufacturing capacity, product safety and post-marketing study progress, including pediatric requirements.
- Review the amended Almirall milestones and royalties, and the scope and value of rights regained from Astellas.