Ironwood Pharmaceuticals, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited financial statements. Amounts below are in millions of dollars unless noted.
Business context
Ironwood is a commercial-stage biopharmaceutical company focused on linaclotide. LINZESS is marketed in the U.S. with Forest for adults with IBS-C or chronic idiopathic constipation; CONSTELLA is marketed in certain European countries by Almirall for IBS-C. Partners are advancing linaclotide in Japan and China. Ironwood also funds early-stage research and development.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Collaborative arrangements revenue | $4.9 | $96.4 | $17.9 | $123.3 |
| Cost of revenue | $2.0 | — | $6.7 | — |
| Research and development | $23.0 | $23.5 | $79.9 | $85.2 |
| Selling, general and administrative | $30.3 | $22.8 | $94.5 | $59.3 |
| Collaboration expense | $6.2 | $2.5 | $42.1 | $7.7 |
| Operating income (loss) | $(56.6) | $47.6 | $(205.3) | $(28.9) |
| Interest expense | $(5.3) | $(0.0) | $(15.7) | $(0.0) |
| Net income (loss) | $(61.8) | $47.6 | $(220.8) | $(28.8) |
| Basic and diluted earnings (loss) per share | $(0.51) | $0.44 basic; $0.42 diluted | $(1.93) | $(0.27) |
- Cash flow: Nine-month operating cash use was $231.3, versus $47.2 in 2012. Investing cash use was $73.4, principally reflecting net purchases of marketable securities; financing provided $312.4. Cash and cash equivalents ended at $144.5, up from $136.7 at year-end 2012.
- Liquidity: Cash, cash equivalents and available-for-sale securities totaled $242.4 of unrestricted liquidity at September 30. Current assets were $275.8 and current liabilities $39.7.
- Debt: Notes payable had a carrying value of $174.7; $175.0 principal was issued in January 2013 at 11% annual interest, with legal maturity on or before June 15, 2024. Payments from March 2014 are based on the greater of 7.5% of prior-quarter U.S. LINZESS net sales or accrued interest. Forest payments are expected to support required payments, but Ironwood must cover any shortfall from general funds.
- Balance sheet: Total assets were $325.8, stockholders’ equity $84.2, and accumulated deficit $725.8 at September 30. Inventory was $20.6, compared with $6.7 at December 31, 2012.
- Margins: The filing does not provide a meaningful product-level margin or clear U.S. LINZESS sales figure. Reported operating results are affected by collaboration accounting, cost sharing, and milestone timing.
Changes versus prior period
- Revenue fell 95% year over year in Q3 and 86% for the first nine months. The main drivers were $85.0 of Forest FDA-approval milestone revenue in 2012 and the ending in 2012 of development-period amortization for Forest and Almirall upfront fees.
- Those prior-period items contributed to Q3 2012 operating income and net income; Q3 2013 instead recorded a $61.8 net loss. The nine-month net loss widened from $28.8 to $220.8.
- Nine-month SG&A rose $35.2, primarily reflecting increased commercial staffing, sales and marketing, and infrastructure for the U.S. launch. Collaboration expense rose $34.4, mainly because of higher commercial spending and cost of goods, partly offset by higher LINZESS sales.
- Ironwood completed a $175.0 debt placement in January and a public offering that generated $137.8 net proceeds in Q2. The company also reported a $7.8 increase in cash and cash equivalents, while combined cash and marketable securities increased about $74.2 during the nine months.
Outlook, commentary and risks
- Management expected substantial operating expenses and losses for the foreseeable future and said cash on hand at September 30 was expected to fund projected operating needs for at least the next 12 months. Profitability and positive operating cash flow timing could not be predicted.
- Management expected continued investment in LINZESS commercialization, supply, additional indications and patient populations, and the broader pipeline. The company completed a Phase IIIb CIC study in September 2013; AstraZeneca and Ironwood initiated a Phase III IBS-C study in China during Q3; Astellas completed enrollment in a Japanese Phase II IBS-C trial.
- Key risks include dependence on LINZESS commercial adoption and reimbursement, variable collaboration profits and expenses, partner performance, contract manufacturing and supply capacity, drug safety and post-marketing obligations, competition, regulatory outcomes, and the ability to fund ongoing losses and service 11% debt.
- Other notable risks include uncertainty around European pricing and reimbursement, pending patent challenges, and possible shortfalls in Forest collaboration payments supporting debt service. Ironwood reported no material change in previously disclosed contractual obligations apart from the notes and capital leases.
- Almirall’s June 2013 agreement amendment reduced launch milestones and added sales-based milestones while changing royalty terms. Q3 CONSTELLA royalties were recorded one quarter in arrears.
- The company stated disclosure controls were effective and there were no material changes to internal control over financial reporting during the period.
Important facts for investors to verify
- U.S. LINZESS prescription growth, net sales, and the resulting Forest profit-sharing payments; the filing does not provide a clear U.S. sales value.
- Whether European pricing and reimbursement support CONSTELLA launches and royalty growth, and the effect of the amended Almirall terms.
- Cash burn and liquidity runway against management’s at-least-12-month estimate, including future R&D and launch spending.
- Debt-service capacity as payments tied to LINZESS sales begin in March 2014, and the potential for Ironwood to fund payment shortfalls.
- Manufacturing capacity, product safety and pediatric post-marketing work, and progress and outcomes of partner-led clinical programs.
- A clerical error in an October 22, 2013 press release misstated cumulative LINZESS prescriptions; the company corrected the figure to more than 386,000 prescriptions since launch, according to IMS Health.