Ironwood Pharmaceuticals, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2018; comparisons are with the same 2017 periods. Ironwood is a commercial biotechnology company whose principal revenue source is its U.S. LINZESS collaboration with Allergan, alongside linaclotide API sales and a smaller U.S. lesinurad business. Amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $65.7 | $86.8 | $215.9 | $204.1 |
| Operating loss | $(169.1) | $(19.4) | $(244.9) | $(100.2) |
| Net loss | $(174.4) | $(32.3) | $(266.9) | $(129.0) |
| Net loss per share, basic and diluted | $(1.14) | $(0.22) | $(1.75) | $(0.87) |
| Operating cash used | Not stated for quarter | Not stated for quarter | $(80.2) | $(91.5) |
Q3 revenue comprised $54.2 million of collaborative arrangements, $1.2 million of net product revenue and $10.3 million of API sales. Nine-month amounts were $188.5 million, $3.0 million and $24.5 million, respectively. The filing does not provide a directly comparable consolidated gross-margin measure; the reported operating loss includes significant impairment and restructuring charges.
- Liquidity: At September 30, unrestricted cash, cash equivalents and available-for-sale securities totaled approximately $161.4 million; restricted cash was $7.7 million. Current assets were $248.5 million and current liabilities $112.6 million.
- Cash flows: For the first nine months, operating activities used $80.2 million; investing activities provided $71.4 million, primarily reflecting securities sales and maturities; financing activities provided $25.2 million. Cash, cash equivalents and restricted cash increased $16.4 million to $149.2 million.
- Debt: The company reported total indebtedness of approximately $485.7 million. The 2022 convertible notes had $335.7 million principal outstanding and $261.4 million net carrying value. The 2026 notes bear 8.375% interest; $39.2 million was classified as current, and scheduled principal payments begin in March 2019. The 2022 notes bear 2.25% cash interest and mature in 2022.
- Balance sheet: Total assets were $416.7 million, down from $605.7 million at December 31, 2017. Stockholders’ equity was a deficit of $197.3 million, versus positive equity of $9.8 million at year-end 2017.
Material changes versus the prior comparable periods
- Q3 revenue fell 24% year over year, while nine-month revenue increased 6%. Q3 collaborative revenue declined $22.5 million, largely due to a $29.7 million reduction in Ironwood’s LINZESS collaboration revenue following an Allergan gross-to-net rebate and allowance adjustment. The adjustment reflected cumulative differences between earlier estimates and subsequent payments.
- Nine-month API revenue increased $9.0 million, primarily on higher linaclotide shipments to Astellas in Japan. Net product revenue increased $1.5 million for the nine-month period, mainly reflecting DUZALLO sales.
- R&D expense rose 13% to $122.2 million for nine months, primarily from increased early-stage pipeline investment. SG&A rose 5% to $183.1 million, including higher separation-related legal and consulting costs.
- Net loss increased substantially: nine-month loss was $266.9 million versus $129.0 million in 2017. The main unusual charge was a $151.8 million impairment that fully wrote off the ZURAMPIC and DUZALLO intangible assets. The company also recorded $15.1 million of nine-month restructuring expense and a $31.0 million gain from remeasuring lesinurad contingent consideration.
Outlook, management commentary, risks and unusual items
- After lesinurad test-market results fell short of expectations, the board decided to terminate the AstraZeneca lesinurad license. Ironwood gave notice in August 2018; termination was expected to take effect no later than 180 days after notice. Transition costs and arrangements with AstraZeneca remained under discussion.
- The company planned 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, tax treatment and expected benefits are uncertain.
- Pipeline priorities included two Phase III trials of IW-3718 for persistent GERD; Phase II praliciguat trials for diabetic nephropathy and HFpEF; and a Phase II olinciguat trial for sickle cell disease. The filing gives no specific financial guidance for future revenue, earnings or cash flow.
- Management stated that cash on hand at September 30, 2018 was expected to fund projected operating needs for at least the next 12 months. The company had not achieved positive operating cash flow and cautioned that it might use capital sooner than anticipated or require additional funding.
- Ironwood depends substantially on LINZESS collaboration revenue and on Allergan’s timely, accurate sales and cost information. Other key risks include product demand and reimbursement, manufacturing and partner execution, clinical and regulatory outcomes, and ongoing costs and tax risks associated with the proposed separation.
- Ironwood and Allergan were litigating patent challenges by generic applicants to LINZESS; trial was scheduled for June 2019. The company reported that its disclosure controls and procedures were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the Allergan $59.3 million LINZESS sales adjustment, including Ironwood’s $29.7 million share, affects subsequent collaboration revenue and whether further gross-to-net adjustments arise.
- The effective termination date, transition obligations, remaining costs and any disputes with AstraZeneca concerning the lesinurad license.
- Cash use, available liquidity and debt-service capacity, particularly as principal payments on the 2026 notes begin in March 2019.
- The separation’s final structure, timing, total costs, tax opinion and impact on each company’s assets, liabilities and operating expenses.
- Progress and results from the Phase III GERD trials, Phase II sGC programs, LINZESS development programs and LINZESS generic patent litigation.