Ironwood Pharmaceuticals, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Comparisons are with Q1 2017 unless noted. Amounts are in U.S. dollars.
Business context
Ironwood is a commercial biotechnology company focused on gastrointestinal medicines and development programs. Its main revenue source is its U.S. LINZESS collaboration with Allergan, under which the companies share U.S. commercial net profits or losses equally. Ironwood also sells ZURAMPIC and DUZALLO in the U.S. and earns revenue from linaclotide partners, including API sales to Astellas in Japan.
Financial performance and liquidity
- Revenue: $69.2 million, up 32.6% from $52.2 million. Collaborative arrangements revenue was $63.1 million, product revenue $0.6 million, and API sales $5.4 million.
- Operating results: Operating loss was $35.9 million versus $39.7 million. Net loss was $43.1 million, or $0.29 per share, versus $52.5 million, or $0.36 per share. The operating loss was approximately 51.9% of revenue; net loss was approximately 62.4% of revenue.
- Costs: Total costs and expenses increased 14% to $105.0 million. R&D was $36.5 million, up 8%; SG&A was $61.9 million, up 11%. Intangible amortization rose to $3.5 million, mainly following DUZALLO’s 2017 approval.
- Cash flow: Operating activities used $30.9 million, compared with $27.8 million used in Q1 2017. Investing activities provided $44.7 million, primarily reflecting sales and maturities of securities; financing activities provided $5.3 million. Cash, cash equivalents and restricted cash ended at $151.8 million.
- Liquidity: Unrestricted cash, cash equivalents and available-for-sale securities totaled approximately $194.4 million at March 31, down about $27.0 million from year-end. Current assets were $275.7 million and current liabilities $62.3 million.
- Debt: Total indebtedness was approximately $485.7 million in principal: $335.7 million of 2.25% convertible notes due 2022 and $150.0 million of 8.375% notes due 2026. The 2026 Notes begin scheduled principal payments in March 2019, tied to U.S. LINZESS sales; the company expected about $12.0 million of principal to be current within 12 months.
Material changes versus Q1 2017
- Collaborative arrangements revenue increased $11.2 million, primarily from an approximately $11.7 million increase in Ironwood’s share of U.S. LINZESS net profits, attributed mainly to higher prescription demand.
- API revenue increased $5.4 million, mainly because of greater linaclotide API shipments to Astellas. Product revenue rose $0.3 million.
- R&D expense increased $2.8 million, including higher early-pipeline investment, partly offset by lower lesinurad development expense. SG&A rose $6.3 million, including increased selling and marketing costs and workforce-reduction charges.
- Net loss improved by $9.4 million. Lower contingent-consideration expense, a derivative gain rather than a loss, and no repeat of the prior-year debt-extinguishment loss contributed to the improvement.
- Operating cash use increased by $3.0 million.
Outlook, risks and notable items
- Management stated that available cash was expected to fund projected operating needs for at least 12 months from issuance of the financial statements. The company had not achieved positive operating cash flow and did not provide quantitative revenue or earnings guidance; it could not guarantee when, or if, it would become profitable or cash-flow positive.
- Ironwood began testing a revised lesinurad marketing mix in selected markets and reduced its field-based workforce by about 60 employees. Q1 included approximately $2.4 million of related severance and benefits costs. Test-market results were expected to inform future investment in the franchise.
- In May 2018, after the quarter, Ironwood announced its intent to separate its sGC business into a new publicly traded company, with completion expected in the first half of 2019 and anticipated to be tax-free. Completion, timing, costs, benefits and tax treatment remain uncertain.
- In January 2018, Ironwood and Allergan settled with Sun, granting a generic LINZESS license effective February 1, 2031, subject to FDA approval and specified conditions. An April 2018 settlement with Aurobindo provides for a license effective August 5, 2030, also subject to conditions. Litigation with other generic manufacturers remained pending, with trial scheduled for June 2019.
- Key risks include dependence on U.S. LINZESS and Allergan’s reporting and commercial execution; uncertain adoption and sales of ZURAMPIC and DUZALLO; generic competition and patent outcomes; product safety and required post-marketing studies; reliance on third-party manufacturing and distribution; and debt-service obligations.
- Ironwood adopted ASC 606 on January 1, 2018 using the modified retrospective method; it reported no cumulative adjustment and no material impact on financial position, results or cash flows.
Important facts for investors to verify
- LINZESS U.S. prescription demand, Allergan’s reported sales and costs, and Ironwood’s resulting 50% profit share.
- Lesinurad sales, reimbursement and inventory trends, plus the outcomes of the selected-market marketing tests and any resulting impairment risk for related intangible assets.
- Cash burn, liquidity runway and the timing and amount of 2026 Notes principal payments as LINZESS sales evolve.
- Progress, costs, tax treatment and final terms of the proposed sGC separation.
- Developments in LINZESS generic litigation, settlement terms, patent coverage and potential entry dates.
- Required lesinurad renal and cardiovascular safety study and linaclotide pediatric and other post-marketing commitments.