Ironwood Pharmaceuticals, Inc. (IRWD) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ironwood Pharmaceuticals Fourth Quarter 2015 Investor Update Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Ms. Meredith Kaya. Ma'am, please go ahead.

Good afternoon, and thanks for joining us for our fourth quarter 2015 investor update. Our press release crossed the wire earlier this afternoon and can be found on our website, www.ironwoodpharma.com. Today's call and accompanying slides includes forward-looking statements. Such statements involve risks and uncertainties that may cause actual results to differ materially. A discussion of these statements and risk factors is available on the current Safe Harbor statement filed as well as under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended September 30, 2015, and in our future SEC filings. All forward-looking statements speak as of the date of this presentation, and we undertake no obligation to update such statements. Joining me for today's call are Peter Hecht, Chief Executive Officer, who will provide introductory remarks; and Tom Graney, Chief Financial Officer, who will discuss our financial performance guidance; Tom McCourt, Chief Commercial Officer; and Mark Currie, Chief Scientific Officer will also be available during the question-and-answer portion of the call. Our speakers will be referring to slides available via the webcast. For those of you dialing in, please go to the Events section of our webcast to access the webcast live. I'd now like to turn the call over to Peter.

Thanks, Meredith, and good afternoon, everyone. At the H&Q conference last month, I detailed our strategy to build a top performing commercial biotech. I'll recast and highlight in this discussion to provide context for our 2015 and 2016 priorities, which I would like to focus on with you today. But I encourage you to listen to the full webcast, which can be found on the Investor section of our website. Ironwood is grounded in a platform of great scientific innovation that is generating multiple blockbuster opportunities. With the priority focused in three areas, IBS-C and CIC, vascular and fibrotic diseases and refractory heartburn. Starting with IBS-C and CIC, we're very pleased with the performance of our first product LINZESS, which is well on its way to becoming our first blockbuster. LINZESS ended 2015 with U.S. net sales of $455 million, up 53% from 2014. Commercial margin for the brand expanded from 10% in 2014 to 46% in 2015. And we expect LINZESS's top line and operating leverage to continue to grow strongly in 2016 and beyond. The growing revenues and profits from LINZESS and $439 million of cash in the hands of a very experienced and committed team provide us with the strength to execute on our strategy and build a sustainable growth company without the need to raise additional capital. 2015 proved to be an important year for us, as we made critical advances across the business. A very important milestone was achieved just last month as over 1 million patients have now been treated with LINZESS, an incredible accomplishment that we are all very proud of. During the year we reported positive Phase III data for linaclotide 72-microgram and CIC initiated the Phase IIb colonic release trial reported positive IW-3718 Phase IIa proof of concept data in refractory GERD and reported positive Phase Ia data with our sGC stimulator IW-1973. And just today we had more exciting clinical data in our vascular and fibrotic program with positive Phase Ia data from our second sGC stimulator, IW-1701. Each of these readouts provides clinical insights into our development and commercial strategies and we look forward to multiple key readouts across our R&D portfolio this year. Turning to 2016, let me briefly highlight a few of these opportunities for you. Within IBS-C and CIC, as we continue to grow LINZESS, we see an important opportunity to innovate and help even more patients in this category. To that end, we're developing linaclotide colonic release, a second-generation product for this market, which has the potential to provide both greater and faster abdominal pain release for adult patients. We expect data from our Phase IIb trial in the second half of 2016 and we're actively preparing to advance in the Phase III in 2017. LINZESS is the branded prescription market leader in this category after just three years in the market. With continued strong LINZESS growth expected into 2031 and patent protection for colonic release expected into the mid-2030s, if approved, we believe our first two IBS-C and CIC products can generate peak U.S. franchise sales of greater than $2 billion with additional ex-U.S. revenues beyond that. Within our vascular fibrotic platform, we're leveraging our expertise in guanylate cyclases to develop multiple sGC stimulators. We believe there are multiple several blockbuster opportunities in high unmet need areas such as congestive heart failure and diabetic nephropathy, as well as certain orphan diseases such as pulmonary arterial hypertension, duchenne muscular dystrophy, and achalasia among others. Our two lead molecules are currently in Phase I study, and we expect to initiate multiple Phase II proof-of-concept studies later in 2016. And lastly, with respect to refractory GERD, there are on the order of 7 million to 10 million Americans who are suffering from GERD, and continue to experience heartburn symptoms, despite receiving treatment with the proton pump inhibitor. There are no approved therapies in this indication. We reported very encouraging proof-of-concept data in 2015 from a Phase IIa study with IW-3718, and we finalized our commercial formulation. We expect to initiate a Phase IIb dose ranging study shortly with data expected in 2017. Our cash used for operations has declined substantially over the past few years. In 2015, we used a $107 million cash for operations, down from a $156 million in 2014. And we expect our cash used for operations to decline in 2016 to less than $60 million. Looking beyond 2016, we expect continued strong top line growth and margin expansion for LINZESS and financial discipline to enable us to become cash flow positive in 2017 to 2018 timeframe. Even as we invest in late-stage development for at least three of our blockbuster opportunities and launch at least two important linaclotide opportunities with our partners to get in with the 72-microgram launch early next year. Looking out to 2020, we expect rapidly growing cash flows greater than $1 billion in LINZESS U.S. net sales, at least two product launches from internally developed products and at least five other internally developed product candidates from our pipeline to be in later-stage development. And we expect additional upside to this already strong profile from value-creating acquisitions or product in-licensing. We're really excited about where Ironwood is today and we look forward to reporting on our progress throughout the year, as we continue to focus on innovation and relentless execution. Before I turn it over to Tom, I want to say thank you to our physicians and patients and to the Ironwood team, which includes all of our fellow employees, partners and investors who are committed to building this organization and generating meaningful shareholder value for many years to come. With that, I'll hand it over to Tom.

Thank you, Peter, and thanks to everyone for joining us this afternoon. I will now cover some of the key financial and performance highlights from the fourth quarter and full year of 2015 and provide 2016 financial guidance. Please refer to our press release for the detailed financial statements. Beginning with LINZESS, demand in the fourth quarter resulted in $130 million in net sales, an increase of 38% compared to the fourth quarter of 2014 and $455 million in net sales for the full year, an increase of 53% compared to 2014. We are continuing to see strong margin expansion. Commercial margin for LINZESS was 65% and 46% for the fourth quarter and full year 2015 respectively, compared to 36% and 10% in the fourth quarter and full year 2014 respectively. While our commercial margin will fluctuate from quarter-to-quarter, we expected to continue to expand over time as the brand continues to grow. The LINZESS brand collaboration in U.S. recorded $67 million and $132 million in total net profit for the fourth quarter and full year 2015 respectively, compared to a profit of $18 million in the fourth quarter of 2014, and a loss of $20 million for the full year 2014. Off-note brand net sales increased by $158 million year-over-year while brand net profit increased by $152 million. Turning to Ironwood's financial highlights for the quarter. Revenue for the fourth quarter was $53 million, an increase of approximately 40% compared to the fourth quarter of 2014. On a full year basis, revenue increased over 95% to $150 million. Ironwood's revenue consists of revenue from our collaboration with Allergan, our co-promotion agreement with that scientist as well as additional collaboration, royalty and amortization revenue from our global partnerships. As a reminder, we will be recording on our P&L, the non-cash unrealized gain or loss on derivatives each quarter, as a result of the $336 million convertible debt financing completed last June. This is related to the change in fair value as we mark-to-market the convertible notes, hedges, and warrants that comprised the cost spread overlay. In the fourth quarter of 2015, this was a non-cash gain of $1.6 million. Our non-cash measures are calculated by excluding the impact of the non-cash mark-to-market adjustment on the derivatives related to the convertible notes. As it is not related to the operational performance of the company. GAAP net loss for the fourth quarter and full year was $14 million and $142.7 million respectively. And non-GAAP net loss for the fourth quarter and full year was $15.7 million and $132.7 million respectively. GAAP net loss per share for the fourth quarter and full year was $0.09 and $1 respectively, and non-GAAP net loss per share for the fourth quarter and full year was $0.10 and $0.93 respectively. We ended 2015 with $439 million in both cash and investment. Using $19 million of cash for operations during the fourth quarter and $107 million during the full year. This is down from $23 million during the fourth quarter of 2014, which included a $15 million milestone payment from Astellas, and $156 million for the full year of 2014. As Peter detailed earlier, we made tremendous progress in 2015 across all aspects of our business. We began the year focused on maximizing LINZESS with our partner Allergan, and advancing our multiple product candidates until late stage of clinical development. We executed on both fronts with LINZESS sales growing 53% year-over-year and reporting sixth positive top-line data readout from our development program. All of this was done with a short focus on financial discipline, enabling us to end the year within original guided expense ranges, which consisted of both R&D and SG&A expenses for Ironwood as well as the combined marketing and sales expenses for LINZESS. This progress supports further investment in 2016. As such, our 2016 financial guidance is as follows. Cash used for operations to be less than $60 million. Total operating expenses to be in the range of $255 million to $285 million. This consists of $130 million to $145 million in R&D expenses and $125 million to $140 million in SG&A expenses. And combined Ironwood and Allergan marketing and sales expense for LINZESS to be in the range of $230 million to $260 million, which is the same range we provided for 2015. As we've said in the past, we are always exploring ways to optimize our capital structure, which may include utilizing the capital market to pay down or restructure our debt. With that said we feel great about our financial position and believe the growing LINZESS revenues and profits and our strong balance sheet to enable us to fully fund our current business going forward without the need to access the markets for additional capital. In summary, we're pleased with the progress we're making as we execute on our strategy and look forward to sharing the results for multiple key readouts across the portfolio throughout 2016. With that, I'll hand it back to Michelle to begin the Q&A portion of our call.

Thank you. [Operator Instructions] Our first question comes from the line of Catherine Hu with Bank of America Merrill Lynch. Your line is open. Please go ahead.

Hey, guys. Thanks for taking my question. Just a couple of quick ones. Now that you have Phase Ia data from for both IW-1701 and IW-1973, can you just talk about the main differences you see between the two, and how would these guide you on and which indications to pursue for each? And then, have you seen any early benefit from the removal of amitiza from the CMS – CVS formulary. Thanks.

Mark, can you take the first question?

Yeah. Thanks for the question, Catherine. Yeah. So we're very excited obviously, as we progress both molecule for soluble guanylate cyclase stimulator program. The very large and number of opportunities is I think where -- so I think we are in a great position to be able to potentially advance these two molecules forward, and obviously, we think forward even further out, additional one that we continue to move the platform forward. We think there are a number of blockbuster potential opportunities obviously, and this – they range from ones at a very large market and cardiovascular oriented. And so that's certainly kind of influences what we are thinking about relative to the molecules and one that also are more of orphan disease type therapeutic areas. So when we look at the two molecules and we really kind of what the differentiation we're seeing, whether they both have very desirable property we think, we see with IW-1973 as we indicated before, it has property for once-a-day therapy. We see the same with IW-1701. We see slight differences in their distribution. We think IW-1973 is – has a much broader volume distribution and in animal models, we see that reflected as getting higher levels in specific tissue. With IW-1701 a little more restricted and again, we think because of those, IW-1701 maybe the better molecule for cardiovascular potential opportunity and then IW-1973 maybe one where you might want to have it out into the tissue where fibrosis is just really going on and tissue inflammation in addition to the cardiovascular activity. So that's kind of how we think of it, but we think both of them now have demonstrated really exciting profile and we're anxiously ready to get moving on the next step for these particular molecules.

Tom, do you want take the CVS question?

Sure, Peter. First of all, thanks for the question. And concerning the CVS question to your point, as of January 1, LINZESS was positioned in a preferred status with the CVS/caremark plan. It's early but we've already seen some fairly rapid increases in market share, which looks quite encouraging and I think this is further broadened our already very strong access across all the plans. We're now over 80% unrestricted access in both Med D as well as the commercial plans. And I think we're set up for a very strong 2016. Looking at the prescriber base which is now over 170,000, and how responsive and how solid the performance the DCC campaign is, which we will be refreshing and actually releasing a brand new campaign March 1st. So I think as far as brand growth and access, I think we're going to be in a very strong position.

Great. Thanks guys.

Thank you.

Thank you. And our next question comes from the line of Tim Chang with ETIG. Your line is open. Please go ahead.

Hi, thanks. Could you comment on how the launch of VIBERZI is helping you with, with the marketing of LINZESS? And I have a follow up on the sGC inhibitor later?

Okay. Tom, work it in.

Sure, we're very excited about being part of the VIBERZI launch. As we saw from day one, these two products fit together absolutely synergistically. There is the same target and to be able to provide broader offering to this sizable of suffering patient population across all forms of IBS with two innovative products there was a tremendous opportunity. So I think it does really three things. First of all it amplifies the message – the core message around the unmet medical need in IBS. I think it also underscores the underlying pathology of visceral hypersensitivity and mortality. And I think it also is an opportunity for us to create either more selling opportunities both within primary care and GI, which obviously LINZESS is going to be benefiting from. So the execution is going quite well, early signals we could. There is a lot of work to do, but I think we're in a very, very strong position and we are delighted to be part this strong effort.

Any other follow-up question.

Yeah. I guess with the stimulators – I mean, I guess, there is one approved product out there. I think it's still by buyer, I mean, what's – I mean what do you think you can sort of achieve with your compounds in terms of differentiation. Do you think there will be fewer side effects or more attractive dosing profile?

Yeah. Again, thanks for the question. With the soluble guanylate cyclase stimulators, first off the opportunities are so rich and diverse this particular molecular target is expressed throughout the body and plays a critical role in a number of basic disease processes, vascular dysfunction and fibrosis tissue inflammation, so we certainly think there is lots of opportunity. As we look at the current approved products, the bare molecule, it's a three times a day administered drug, it's doing very well in PAH and it's the first entry. We think – certainly think bringing forward once a day therapies can offer a potentially exciting advantage. And over time also having molecules that have different tissue distribution depending on the specific diseases maybe very important in offer differentiation relative to increasing efficacy for those specific diseases where you have one particular tissue involved, such as liver fibrosis or renal fibrosis or pulmonary fibrosis, so we think again the opportunity is so large just because of the number of diseases and how fundamental this process is.

Okay. Great. Thanks.

Thank you. And our next question comes from the line of Geoff Meacham with Barclays. Your line is open. Please go ahead.

Hi, guys. This is Carter Gould on for Geoff. Thanks for taking our questions, and also thank you for all the color on the market opportunities. I guess first question, on the longer range linaclotide P cells opportunity provided, do you have differential expectations for the duration of therapy for the chronic release, relative to what you've seen with LINZESS? And secondly, given the range of potential development scenarios for the sGC stimulators and the size of the potential indications. At this point, have you internally made a decision to rule out potentially partnering either of those agents? Thank you.

Tom, can you take the question about P cells, and the duration of therapy?

Sure. As far as – I just want to make sure I get the question, right. So, in terms of our – the chronic release how – yeah – how will that grow the business. And I think – I think this is really about focusing on new sources of business and how we expand the overall utility. I think what we expect to see with colonic release based on everything we've seen in [indiscernible] model, we think we can provide a much greater pain relief faster, which is probably the biggest single driver of patient adherence. So, I think the sources of business will come from three places. One, I think it's going to be a much stronger value proposition in a more compelling clinical profile to more broadly use to product. I think second – I think you – we're going to see dramatic increases at adherence, because we know pain relief will drive adherence stronger than anything else. And I think the third piece is pulling back patients who have maybe previously not gotten the satisfaction that they had hoped to get with the immediate release. So, I mean these are three very sizeable populations that we think we can grow the utilization of the drug, and not to mention the extension in the patent life which obviously brings incremental value and over time it's our intention to move many of these patients that are – were previously on LINZESS for the colonic release. So we really like the commercial opportunity and it looks very exciting for us.

Mark, can you take question about sGC partner?

Yeah. So, when you think about the soluble guanylate cyclase stimulators in the platform opportunity, I think you are right in that. We certainly consider potential partnerships and in that number, the specific diseases that we're looking at are diseases that again capability than rest of the world market would be very useful for us. We obviously are very focused on the U.S. market from building commercial opportunity And from there, I think you – we would also be looking at for some of these specific diseases, specific expertise, their areas such as in congestive heart failure that might be very useful to have specific expertise and experience with a partner and also being able to do very large registration that is in a fully rest-of-the-world type program. From there I think we also then look at the opportunity that we think very strongly Ironwood would be driving but – and we would be focused on driving those in the U.S. and then having the partner expand those into the rest of the world's market.

Great. Thank you.

Thank you. And our next question comes from the line of Boris Peaker with Cowen. Your line is open. Please go ahead.

Great. Thanks for taking my question. So I just want to focus a little on the 72-micrograms. I guess, one is, when are we going to see the diarrhea data, but also importantly in terms of the discussions with the FDA, what are you specifically looking for in the label and how would you position an intensive marketing?

Sure. This is Tom. I'll take it. It is the 72-microgram, and as we've said before, this is part of the lifecycle strategy for the brand. Our objective for the 72-microgram was to broaden the range of option that physicians could utilize various pills to tailor the dose for the needs of the patients. So as we move forward, we'll certainly have indications and idea, as well as chronic constipation we will have three doses on the market to tailor the dose. As far as the overall diarrhea rates, we are not going to reveal those until we have final labeling. What we expect to see as a label will be active and active negotiation with FDA. What we do say, we can say about the data compared to side-by-side comparison in the trial with 145 microgram, is that we did see a lower rate of diarrhea. The diarrhea that was observed tended to be more mild. And we had significant reduction in discontinuation right now. Keep in mind the discontinuation rate with both 290 microgram and 145 microgram was well, was less than 5%. So we're talking about a very, very small group of people who do not tolerate the drug, and overall what we know from all the market research that we've conducted is both physicians and patients are very satisfied with the current offering that we have in the marketplace.

Do you have a sense of what the actual discontinuation rate is in the marketplace versus the clinical study?

Yeah, we do. And what we're seeing based on your number of market research studies is that, the brand seems to be performing very similar to what we saw in the clinical trials with regard to the reported diarrhea rate that we certainly extrapolate out of the market research as well as the discontinuation rate which continues to get be lower and lower, to be quite honest as physicians have got more experience with the drug and are actually setting expectations for the patient and directing the patient to stop taking their laxatives, take it every day, and what we're seeing is the noise around what was already and fairly low diarrhea rate it's quite a down, quite a bit.

Great. And my last question, in terms of your long-term LINZESS sales projections, what market share are you assuming for Synergy's plecanatide?

Well, I mean it's – it's -- I can't speak for what the emerging competition will look like it. What I can tell you about where we think we are in our position in the marketplace, and we've really established a very strong position across those all fronts in the marketplace. I think we've set a very, very high bar for anybody to come in and compete with us with the broad prescriber base, the level of satisfaction that we're seeing from patients, hearing patients as well as physicians. But although he success we've had from the payer, and there's something that I think we're particularly proud of to have 80% unrestricted access most of which are plans that have agreed to put us in a preferred position, one-on-one position, and we're going to continue to raise the bar with regard to who our competition is and the competition for us is still OTCs. And as a market leader, our job is to continue to grow the market and capture the market. I mean plecanatide will have a place, and they will get some business, but we also feel that the extra share of voice in the marketplace is only going to amplify the message, and it's the market leader. You're going to get a disproportionate share of the business. So, we're looking forward, we're preparing, and certainly we're going to continue to raise the bar and shape the market.

Great. Well, thank you very much for taking my questions.

Thank you. And our next question comes from the line of Irena Koffler with Mizuho. Your line is open. Please go ahead.

Hi. Thanks for taking the questions. I have two. So, you mentioned a $2 billion target to go in that franchise and I was wondering if you can expand on that a little bit in terms of what will come from the current formulation and what we will come from potentially the colonic release to the label extensions and it is – or is it just mostly a factor of being out in the market versus it's a long-time just fragile the price increases? So that's the first question. And then the second question is, you mentioned that you might have two new products internally developed once launched in 2020. What are those ones that you are thinking those will be and what is your low hanging fruit in your pipeline? Thanks.

Irena, this is Tom. So, I'll take the first question with regard to our estimation of the $2 billion, the peak sales of $2 billion for the franchise. Certainly, we see the immediate release to current formulation driving a big chunk of that growth. We see that north of $2 billion by 2020. And as we bring in the colonic release both the better ideas, chronic constipation drug as well as a possible drug for other forms of chronic intestinal pain, we see that expanding the market significantly. In addition to that, we see a sizable opportunity with a pediatric population. We are moving forward with that program as well. And of course, price will always be a consideration. So, I think, you've got your finger on the three big drivers of growth, how that breaks up. I think it's largely kind of depend on how big the immediate release grows over the next three years to five years.

Mark, can you take the second one.

Yeah. So I think as we look at it, we have a number of different short run goal. The – we certainly believe colonic release offers us the opportunity to, you just mentioned that to bring forward a product that – for the IBS-C and CIC patients. And then, in that whole program, we've indicated we have a second formulation that we think is one that could be very exciting for treating IBS-M or potentially lower GI pain. And that said, we then go from other one that we are continuing the best of timeline but are moving along pretty quickly, as we indicated 3718 in the rest of the program that we have in the STT particular area there. So, we think the number one short run goal and where we are in this program, some being in pretty late stage now going into 2b studies, multiple ones essentially in 2b studies right now with the colonic release in 3718 that we've indicated looked out in the first part of this year.

Thank you.

Thank you. And our next question comes from the line of David Nierengarten with Wedbush Securities. Your line is open, please go ahead.

Hey. Thanks for taking the question. So you guys had a nice improvement this quarter in operating margin and I was just wondering, what led to that improvement, was it generally just the lower sales and marketing expense and if that is the case, if that's going to that level of marketing and promotion would be carry forward likely in the 2016? Thanks.

Yeah. This is Tom. I'll take the question. Yeah. I think there is two components to that obviously. One is demand, and demand looks – look good in the fourth quarter. We think the demand will look particularly promising as we launch our new DTC campaign. As far as the borderline number, as you know the quarter-to-quarter rates of investment will fluctuate based on when we invest heavily in DTC, when we pullback DTC when the market softens. So a lot of it will cycle through the year, based on our investment strategy and the overall marketing mix. So it may fluctuate from time to time. But I think as Tom mentioned earlier, I think we see these margins continue to get stronger and stronger, and that everything looks solid because obviously the demand continues to grow. We see the marketing mix staying roughly the same. So the guidance that Tom gave earlier of up $230 million to $260 million, we think we will probably stay within that those guard rails unless we see something particularly attractive with regard to what we've learned as we've launched our new DTC campaign.

Got it. Thanks.

Thank you. And our next question comes from the line of Anupam Rama with JPMorgan. Your line is open. Please go ahead.

Hi, guys. This is Eric in for Anupam, this evening. Thanks for taking the question. Just the – I know you guys don't specifically comment on gross to net, but if I try to back into it for the quarter, it seems like it might have been a little bit higher [indiscernible] fourth quarter versus third quarter, I'm just wondering – I'm thinking about that correctly, and maybe how should we'll be thinking about that – about this changing in first quarter of 2016? And looking sort of longer term, maybe you can comment on any shift in growth in the – as part of your 2020 $1 billion guidance? Thanks.

Sure. This is Tom Graney, I'll take that one and thanks for the question. As we've said and as Tom has commented on access has always been core to our strategy and ensuring that patients who needed to get on LINZESS and could benefit from it had access to it at a price that would enable them to build their script and then rebuild as the scripts keep getting written. So, we're really pleased with the position we have commercially.

As Tom highlighted earlier, with respect to sequential growth quarter-over-quarter, we did have 10% growth sequentially and a good chunk of that actually was from net price, so we continue to focus on net price over time. We won't comment on where we see it going relative to the 2020 number, but we want to make sure that our innovation that we brought to the market continues to get rewarded. We're seeing good reaction from payers as we continue to drive demand and patients continue to go to the physicians and ask for LINZESS. So I think it's the quality of the product and what experience physicians and patients are having with it that is just reinforcing the value of proposition of LINZESS IR. And then, certainly as we look ahead to the colonic release version, that gives us another opportunity to kind of reset that value proposition.

Great. Thanks.

Thank you.

Thank you. [Operator Instructions] I'm showing no further questions at this time. And I would like to turn the conference back over to Peter Hecht for any closing remarks.

Thank you very much, Michelle. We appreciate your -- taking the time to facilitate our call this afternoon. We'll be here this evening. If you have any follow-up questions, please be in touch with Meredith and we'll be happy to take your questions. Thanks for your time and as always we appreciate your time and attention. Have a good evening.