Ironwood Pharmaceuticals, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial statements are unaudited. Unless stated otherwise, amounts below are in millions of dollars.
Business context
Ironwood is a commercial biotechnology company focused on gastrointestinal, gout, and vascular and fibrotic disease programs. Its principal revenue source was its U.S. LINZESS collaboration with Allergan, under which the parties share U.S. net profits or losses. Ironwood acquired U.S. lesinurad rights from AstraZeneca in June 2016 and began commercializing ZURAMPIC in October, after quarter-end. The company reported one operating segment: human therapeutics.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Collaborative arrangements revenue | $66.1 | $39.6 | $186.5 | $96.2 |
| Research and development | $37.5 | $25.8 | $101.1 | $81.1 |
| Selling, general and administrative | $45.0 | $30.4 | $118.1 | $93.7 |
| Operating loss | $(28.3) | $(26.2) | $(45.6) | $(96.3) |
| Net loss | $(33.2) | $(47.4) | $(68.2) | $(128.6) |
| Net loss per share, diluted | $(0.23) | $(0.33) | $(0.47) | $(0.91) |
- Revenue increased 67% in Q3 and 94% for the nine months, primarily reflecting higher U.S. LINZESS profit share and Astellas milestone revenue. Nine-month 2016 revenue also included increased API shipments and a $15.0 million Astellas milestone related to its Japanese NDA filing.
- Q3 operating loss widened despite higher revenue, as R&D and SG&A increased and the company recorded $3.2 million of acquired-intangible amortization and an $8.7 million contingent-consideration remeasurement loss. Nine-month operating loss narrowed, partly because 2015 included $17.6 million of inventory and purchase-commitment charges.
- Net loss improved year over year in both periods. Derivative fair-value changes were volatile: a $4.5 million gain in Q3 2016 versus an $11.3 million loss in Q3 2015, and a $6.0 million gain for nine months 2016 versus an $11.5 million loss in 2015.
- Operating margin was approximately negative 43% in Q3 and negative 24% for the nine-month period. No conventional gross margin is presented for the collaboration-led revenue model.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $182.9 million and available-for-sale securities were $136.9 million, totaling $319.9 million of unrestricted liquid resources. This compares with $439.4 million at December 31, 2015.
- Nine-month operating cash use was $6.7 million, versus $87.6 million in 2015. Investing cash use was $62.3 million, including the $100.0 million lesinurad license payment, partly offset by net securities maturities. Financing cash use was $9.4 million, including $18.5 million of PhaRMA principal payments.
- Current assets were $382.8 million and current liabilities $95.3 million. Related-party receivables, net, were $52.5 million. Stockholders’ equity was $59.5 million, down from $95.1 million at year-end 2015.
- The filing cites approximately $478.4 million of total indebtedness, based on principal obligations. Balance-sheet carrying amounts included $230.7 million of convertible notes and $140.3 million of PhaRMA notes. The 2022 notes have $335.7 million principal and a 2.25% cash coupon; the PhaRMA notes carry an 11% rate.
- A September 2016 private placement provides for $150.0 million of 8.375% notes due 2026, expected to fund January 5, 2017, with proceeds intended to redeem the remaining PhaRMA notes. The new notes are secured by specified payment rights and account balances; payments are tied in part to LINZESS U.S. sales. Funding and redemption were pending at quarter-end.
- Management stated that cash on hand was expected to fund projected operating needs for at least the next 12 months, while cautioning that forecasts could prove wrong. The company had not achieved positive operating cash flow and could not predict when, or if, it would become cash-flow positive or profitable.
Material changes, outlook and risks
- Lesinurad acquisition: Ironwood paid $100.0 million upfront and recorded $87.6 million of acquisition-date contingent consideration. Preliminary purchase accounting included $167.9 million for developed ZURAMPIC technology, $19.1 million for fixed-dose-combination in-process R&D, and $0.6 million of goodwill. Contingent consideration rose to $96.3 million by September 30, creating the $8.7 million noncash charge. The ZURAMPIC intangible is amortized over an estimated 13 years.
- ZURAMPIC launch and revenue recognition: Initial wholesaler shipments occurred in September, but no product revenue was recognized because Ironwood could not yet reliably estimate returns and other allowances. Related product costs remained in other current assets. The launch began in October 2016.
- Development and commercial outlook: The FDA accepted the LINZESS 72 mcg supplemental application for review in June; Ironwood and Allergan anticipated a 2017 U.S. launch if approved. Astellas filed a Japanese linaclotide NDA in February 2016. The lesinurad/allopurinol fixed-dose combination was submitted for FDA review in October 2016.
- Pipeline change: Ironwood discontinued IW-9179 after Phase IIa data did not show meaningful symptom reduction in diabetic gastroparesis, and later ended evaluation for functional dyspepsia. It continued development of IW-3718, IW-1973 and IW-1701.
- Other commercial change: The Cologuard co-promotion ended in August 2016 after promotion through July; royalty payments were expected to continue through July 2017. VIBERZI co-promotion with Allergan continued.
- Significant lesinurad obligation: Ironwood must reimburse AstraZeneca up to $100.0 million over up to ten years for required post-marketing development, including a study of renal and cardiovascular safety. Ironwood relies exclusively on AstraZeneca for ZURAMPIC commercial supply and certain transition, regulatory and support services.
- Generic competition: After quarter-end, Ironwood disclosed Paragraph IV notices concerning LINZESS ANDAs from Teva and Aurobindo in October and Sandoz and Mylan in November. The companies challenged listed patents; Ironwood was evaluating infringement suits. LINZESS NCE exclusivity was stated to expire August 30, 2017, with a potential 30-month FDA approval stay for ANDAs subject to timely patent litigation.
- Principal risks: Dependence on LINZESS and partner performance; execution, reimbursement and adoption risks for the new ZURAMPIC launch; safety and post-marketing requirements; reliance on third-party manufacturing; clinical and regulatory uncertainty; patent challenges and generic entry; and substantial debt service. Management reported disclosure controls and procedures were effective and no other material internal-control changes, apart from controls implemented for the acquisition and product launch.
Most important facts for investors to verify
- LINZESS U.S. sales, profit-share calculations and the resulting cash receipts from Allergan.
- ZURAMPIC launch uptake, channel inventory, returns and when revenue-recognition criteria are met.
- Funding of the 2026 notes and completion and terms of the planned PhaRMA redemption.
- Lesinurad post-marketing study costs, contingent-consideration estimates, supply continuity and fixed-dose-combination review progress.
- Status and timing of LINZESS generic patent litigation, including any additional ANDA notices and the potential effect on exclusivity.
- Cash consumption, liquidity runway, and whether management’s stated 12-month funding outlook remains supported by operating results and obligations.