Ironwood Pharmaceuticals, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Amounts below are in U.S. dollars, millions unless noted.
Business context
Ironwood is a commercial biotechnology company whose revenue is largely tied to LINZESS, commercialized in the U.S. with Allergan under a profit-and-loss sharing arrangement. The company also sells ZURAMPIC and, beginning in October 2017, DUZALLO in the U.S.; it is investing in clinical programs including IW-3718, IW-1973 and IW-1701.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $86.8 | $66.1 | $204.1 | $186.5 |
| Collaborative arrangements revenue | $86.1 | $66.1 | $202.6 | $186.5 |
| Product revenue | $0.7 | — | $1.4 | — |
| Research and development expense | $37.1 | $37.5 | $108.1 | $101.1 |
| Selling, general and administrative expense | $61.8 | $45.0 | $175.2 | $118.1 |
| Operating loss | $(19.4) | $(28.3) | $(100.2) | $(45.6) |
| Net loss | $(32.3) | $(33.2) | $(129.0) | $(68.2) |
| Net loss per share, basic and diluted | $(0.22) | $(0.23) | $(0.87) | $(0.47) |
- Q3 revenue increased 31%; nine-month revenue increased 9%. Growth primarily reflected higher U.S. LINZESS profit share, supported by prescription demand, and increased linaclotide API sales. The nine-month comparison also reflects Astellas upfront and milestone revenue recognized in 2016.
- Q3 operating loss narrowed, while the nine-month operating loss and net loss increased. Nine-month SG&A rose $57.1 million, primarily due to expanded commercial staffing, marketing, consulting and lesinurad post-marketing costs. Nine-month R&D increased $7.1 million, reflecting greater pipeline investment and headcount.
- Q3 net loss included $12.9 million of other expense, including a $4.3 million derivative loss. Nine-month results included a $2.0 million debt-extinguishment loss from redeeming the PhaRMA Notes. Derivative fair-value changes can cause period-to-period earnings volatility.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $162.6 million and available-for-sale securities were $62.8 million, totaling $225.4 million of unrestricted liquidity. Cash and securities together were down about $79.8 million from year-end 2016.
- Operating cash used in the first nine months was $90.3 million, versus $6.7 million in the prior-year period. Investing activities provided $185.3 million, largely from sales and maturities of securities; financing activities provided $13.7 million. Ending cash was $162.6 million.
- Outstanding debt principal was approximately $485.7 million, comprising $335.7 million of 2.25% convertible notes due 2022 and $150.0 million of 8.375% notes due 2026. Their combined balance-sheet carrying amount was $391.9 million. The 2026 Notes replaced the 11% PhaRMA Notes, which were redeemed in January 2017.
- The 2026 Notes require quarterly payments beginning March 2019 based on the greater of 7.5% of prior-quarter U.S. LINZESS net sales or accrued interest; if Allergan’s deposits are insufficient, Ironwood must fund the shortfall from general funds. The 2022 Notes are senior unsecured and convertible.
- Current assets were $314.1 million versus current liabilities of $64.5 million. Stockholders’ equity was a deficit of $17.6 million, compared with positive equity of $66.7 million at year-end 2016; accumulated deficit was $1.32 billion.
Material changes, outlook and risks
- DUZALLO received FDA approval in August 2017 and launched in October. Ironwood paid AstraZeneca a $15.0 million approval milestone. After approval, the DUZALLO intangible asset began amortization.
- Ironwood reported positive top-line Phase IIb results for IW-3718 in July 2017. In November 2017, it announced a revised linaclotide life-cycle strategy: pursue additional abdominal-symptom claims and advance delayed-release-2 for pain relief across IBS subtypes, while discontinuing plans for delayed-release-1. These are forward-looking or post-quarter developments, not Q3 results.
- Management said September 30 liquidity was expected to fund projected operating needs for at least the next 12 months. It also said it had not achieved positive operating cash flow and could not assure when, or whether, it would become cash-flow positive or profitable. Substantial commercialization and R&D spending is expected to continue; additional financing may be considered.
- The FDA-required lesinurad post-marketing work is estimated to cost less than $100 million over up to ten years; responsibility transitioned to Ironwood during Q3. Commercial supply depends exclusively on AstraZeneca for lesinurad finished drug product. Lower-than-forecast ZURAMPIC demand led to supply and sample-commitment write-downs.
- Key exposures include reliance on LINZESS and Allergan, uncertain uptake and reimbursement for the newer gout products, safety and post-approval obligations, manufacturing and distribution dependence, and substantial debt service. Multiple generic manufacturers challenged LINZESS patents; litigation triggered an FDA approval stay through February 29, 2020, absent an earlier adverse court decision. Trial was scheduled for June 2019.
- The company extended its Cambridge lease through January 2025 and recorded a $1.6 million gain in Q1 2017 after the landlord retook previously subleased space. The filing reported effective disclosure controls and no other material changes in internal control; the CFO resigned in September and the chief accounting officer became interim CFO.
Most important facts for investors to verify
- LINZESS U.S. prescription trends, Allergan-reported sales and costs, and the resulting profit-share receipts.
- Commercial uptake, reimbursement, returns and inventory levels for ZURAMPIC and DUZALLO after launch.
- Cash burn, planned R&D and commercialization spending, and whether the stated 12-month liquidity outlook remains supportable.
- Debt payment capacity and covenants, especially the 2026 Notes’ sales-linked payments and any shortfall funding requirement.
- Progress and cost of lesinurad post-marketing studies, manufacturing continuity, and LINZESS patent litigation outcomes.