Ironwood Pharmaceuticals, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Comparisons are with Q1 2016 unless otherwise noted. Amounts are in U.S. dollars.
Business context
Ironwood is a commercial biotechnology company focused on gastrointestinal, gout, vascular and fibrotic diseases. LINZESS is commercialized in the U.S. with Allergan, with U.S. net profits or losses shared equally before contractual adjustments. Ironwood began U.S. sales of ZURAMPIC in October 2016 and is developing DUZALLO; the FDA accepted DUZALLO’s application for review in January 2017. Astellas began marketing LINZESS in Japan in March 2017.
Key financial results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $52.2 million | $66.0 million; down 21% |
| Collaborative arrangements revenue | $51.9 million | $66.0 million; down $14.2 million |
| Product revenue | $0.3 million | None reported |
| Research and development expense | $33.7 million | $31.8 million; up 6% |
| Selling, general and administrative expense | $55.6 million | $36.2 million; up 54% |
| Operating loss | $39.7 million | $2.0 million |
| Net loss | $52.5 million | $13.3 million |
| Net loss per share, basic and diluted | $0.36 | $0.09 |
| Cash used in operating activities | $27.8 million | $0.2 million provided |
The revenue decline primarily reflected a $13.4 million Astellas development milestone recognized in Q1 2016, lower API and drug-product shipments, and lower prior-period Astellas license revenue. These were partly offset by a $2.8 million increase in Ironwood’s share of U.S. LINZESS net profits. That share was $38.3 million in Q1 2017, compared with $37.5 million in Q1 2016.
SG&A rose mainly with ZURAMPIC launch staffing, selling and marketing costs, and transition services. R&D increased modestly, including lesinurad development and support costs. Q1 2017 also included a $1.3 million write-down of excess ZURAMPIC sample commitments, a $1.6 million contingent-consideration remeasurement loss, and a $2.0 million debt-extinguishment loss.
Financial position, debt and liquidity
- At March 31, 2017, unrestricted cash, cash equivalents and available-for-sale securities totaled $295.3 million, versus $305.2 million at December 31, 2016. Cash and cash equivalents alone were $133.3 million; available-for-sale securities were $162.0 million.
- Current assets were $357.9 million and current liabilities $78.9 million. Total assets were $701.3 million; stockholders’ equity was $29.6 million, down from $66.7 million at year-end.
- Operating cash use was $27.8 million. Investing activities provided $88.1 million, primarily reflecting net security maturities and sales; financing activities provided $19.1 million. Cash increased $79.3 million, while cash plus available-for-sale securities decreased as securities were converted to cash and debt was refinanced.
- Reported 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 funded redemption of the 11% PhaRMA Notes in January 2017. Their quarterly payments are linked to U.S. LINZESS sales beginning in 2019; the company must cover any payment shortfall from general funds. The 2022 Notes are senior unsecured and convertible, subject to their indenture terms.
- Management stated that available cash was expected to fund projected operating needs for at least the next 12 months, while cautioning that actual cash use could exceed estimates. The company had incurred operating losses since inception and had an accumulated deficit of approximately $1.2 billion.
Outlook, risks and notable items
- No specific revenue, earnings or cash-flow guidance was provided. Management expects substantial R&D and SG&A expenses for the foreseeable future and aims to become cash-flow positive, but said timing and achievement are uncertain.
- LINZESS remains the principal revenue source. Commercial results depend on demand, reimbursement and pricing, partner execution, competition, and supply availability. ZURAMPIC’s launch and commercial uptake are additional uncertainties.
- ZURAMPIC carries an FDA boxed warning concerning acute renal failure, particularly if used without an XOI. The FDA-required post-marketing renal and cardiovascular safety study is being conducted by AstraZeneca; Ironwood may reimburse up to $100 million over as many as ten years for required activities.
- Ironwood relies on third parties, including AstraZeneca for ZURAMPIC supply and transition support. The filing identifies manufacturing, regulatory, clinical-development, reimbursement, safety and partner-performance risks.
- Ironwood and Allergan sued four generic manufacturers over LINZESS patents. The lawsuits triggered an FDA approval stay for the challenged ANDAs through February 29, 2020, absent an earlier adverse court decision. Patent validity and infringement remain contested.
- A March 2017 lease amendment extended the headquarters lease through January 2025 and ended Ironwood’s obligations for previously subleased space; the company recorded a $1.6 million gain from release of related sublease liabilities.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track U.S. LINZESS net sales, Ironwood’s profit share and related commercial costs, as well as the impact of the revised Allergan arrangements.
- Assess ZURAMPIC sales-through and demand, channel inventory, sample commitments, reimbursement, and the cost and execution of commercialization.
- Monitor DUZALLO’s FDA review and development costs, and progress and funding obligations for the ZURAMPIC post-marketing study.
- Review cash burn and liquidity against management’s at-least-12-month runway statement, including debt-service obligations and the sales-linked 2026 Notes terms.
- Follow the LINZESS generic patent litigation and any changes to the expected approval stay or patent protection.