Ironwood Pharmaceuticals, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Ironwood is a commercial biotechnology company whose revenue is primarily linked to LINZESS, commercialized in the U.S. with Allergan, alongside API sales to partners and U.S. sales of ZURAMPIC and DUZALLO. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $81.1 million | $65.1 million | $150.3 million | $117.2 million |
| Operating loss | $39.9 million | $41.0 million | $75.8 million | $80.7 million |
| Net loss | $49.4 million | $44.2 million | $92.5 million | $96.7 million |
| Net loss per share, basic and diluted | $0.32 | $0.30 | $0.61 | $0.65 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(53.6) million | $(60.3) million |
- Q2 revenue increased 25%; six-month revenue increased 28%. Collaborative arrangements contributed $71.2 million in Q2 and $134.3 million year to date, mainly Ironwood’s share of U.S. LINZESS net profits. API sales to Astellas were $8.8 million and $14.2 million, respectively.
- Q2 net loss widened year over year despite improved operating loss, reflecting principally a less favorable derivative result. Six-month net loss narrowed year over year.
- Six-month research and development expense was $75.4 million, up 6%; selling, general and administrative expense was $127.9 million, up 13%. The latter included increased separation-related legal and consulting expenses.
- At June 30, cash and cash equivalents were $145.4 million and available-for-sale securities were $35.8 million, or $181.2 million combined unrestricted liquidity. Cash, cash equivalents and restricted cash totaled $153.7 million.
- Total debt principal was approximately $485.7 million, as stated by the company. The 2022 convertible notes have $335.7 million principal; the 2026 notes have $150.0 million principal and carry an 8.375% coupon. The company expected approximately $24.9 million of 2026 Notes principal to be payable within the following 12 months.
- Current assets were $279.5 million and current liabilities $95.0 million. Stockholders’ deficit was $44.0 million, compared with equity of $9.8 million at December 31, 2017.
Material changes and unusual items
- U.S. LINZESS collaboration revenue increased 21% in Q2 and 23% for the first six months, principally due to higher prescription demand. Ironwood’s share of U.S. LINZESS net profit was $57.6 million in Q2 and $107.8 million year to date.
- API revenue rose substantially year over year, driven by increased linaclotide API shipments to Astellas for Japan. Net product revenue remained small at $1.1 million in Q2 and $1.7 million year to date.
- Ironwood recorded $1.8 million of lesinurad supply and inventory write-downs and purchase-commitment losses in Q2. It also recorded $4.8 million of restructuring expenses for the first six months, associated with workforce reductions.
- Changes in fair value of the 2022 note hedges and warrants affected reported results: Q2 included a $0.8 million derivative loss, while the six-month period included a $0.5 million derivative gain. These are non-cash fair-value movements.
- Cash and cash equivalents plus available-for-sale securities declined approximately $40.2 million during the first six months. Operating cash use was partly offset by proceeds from securities sales and maturities and employee stock option exercises.
- Ironwood adopted ASC 606 revenue guidance effective January 1, 2018; management reported no material impact on financial position, operations, or cash flows.
Outlook, management commentary, and risks
- Management said available cash at June 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 could not guarantee when, or whether, it would become cash-flow positive or profitable.
- In May 2018, Ironwood announced a proposed separation of its sGC business into a separate public company, targeted for completion in the first half of 2019 and expected to be tax-free. Completion, timing, costs, tax treatment, and anticipated benefits remain uncertain.
- After lesinurad test-market results did not meet expectations, the board decided July 31 to terminate the lesinurad license; notice was sent to AstraZeneca August 2, with termination expected 180 days later. Ironwood expected a full impairment of approximately $150 million for ZURAMPIC and DUZALLO intangible assets and an approximately $30 million gain from remeasuring contingent consideration in Q3 2018. These were expectations, not amounts recorded in this quarter.
- Following the termination decision, the company expected to reduce its workforce by approximately 125 employees and incur $9–$11 million of severance and benefit costs plus $1–$2 million of termination and other contract-related costs, mostly in 2018. It also expected costs associated with lesinurad until the license termination takes effect.
- Key risks include dependence on U.S. LINZESS collaboration revenue and Allergan’s reporting and commercialization; competition and reimbursement/pricing pressure; clinical, regulatory, safety, and manufacturing risks; and significant losses, cash burn, debt service, and reliance on future LINZESS cash flows. LINZESS generic patent litigation remained active; trial involving Teva, Sandoz, and Mylan was scheduled for June 2019. Aurobindo settled, with a generic license date of August 5, 2030, subject to FDA approval and specified conditions.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level and no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- LINZESS prescription demand, Allergan-reported sales and expenses, and resulting collaboration profit share.
- Liquidity runway, operating cash burn, and ability to meet interest and principal obligations, particularly as 2026 Notes principal payments begin in March 2019.
- Actual timing, charges, cash costs, and transition arrangements for lesinurad termination, including the projected intangible impairment and contingent-consideration gain.
- Separation progress, total costs, tax-free qualification, and whether the expected first-half 2019 timetable remains achievable.
- LINZESS generic litigation outcomes, patent protection, and potential effects on future revenue and cash flows.