Ironwood Pharmaceuticals, Inc. (IRWD) Q1 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Ironwood Pharmaceuticals Q1 2017 Investor Update 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 call will be recorded. I would now like to introduce your host for today’s conference, Ms. Meredith Kaya. You may begin.

Good afternoon, and thanks for joining us for our first quarter 2017 investor update. Our press release across the wire earlier this morning, and can be found on our website, www.ironwoodpharma.com. Today’s call and accompanying slides include 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 slide, as well as under the heading Risk Factors in our annual report on Form 10-K for the year ended December 31, 2016, 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, Tom McCourt, Chief Commercial Officer, Mark Currie, Chief Scientific Officer and Tom Graney, Chief Financial Officer. Our speakers will be referring to slides available via the webcast. For those of you dialling in, please go to the Events section of our website to access the webcast slides. I would now like to turn the call over to Peter.

Thanks, Meredith. Good afternoon, everyone. It was great seeing so many of you at our R&D day at our offices in March, where we provided an extensive review of our business and select value creating opportunities. If you weren’t able to attend or join the webcast, I highly encourage you to listen to the replay, which is still available on our website. We’re speaking with you today form DDW in Chicago. We’re making many data presentations and our team is having terrific conversations with leading gastroenterologists about linaclotide, visceral pain, and crosstalk of then [ph] organs and uncontrolled GERD and achalasia. We’re also hosting an Investor reception tonight, featuring three leading medical experts. I hope to connect with many of you while you are here. Please reach out to Meredith for details if you’d like attend the reception. As emphasized at R&D day, Ironwood has very strong momentum with two exciting commercial products and one of the most innovative mid to late stage pipelines in biotech. We continued to make progress in the first quarter with strong execution across all facets of our business. We gauge LINZESS performance by growth and prescription demand, patient access, and net price. The brand is performing well on all of these measures, including more than 20% volume growth this past quarter compared to Q1 of 2016. With that said, I know the LINZESS sales number for the first quarter was a bit surprising and I'd like to quickly comment on that. LINZESS net sales for the quarter were up about 8% year-over-year. The variation between volume growth and net sales growth during that period is primarily due to differences in trade buying patterns year over year, that resulted in a drawdown in channel inventory, which Tom Graney will speak with - speak to shortly. This is consistent with what's been seen across the industry this quarter, especially for primary care brands. LINZESS remains on track to exceed $1 billion by 2020 and we expect Ironwood revenues to generate greater than 25% CAGR growth between 2016 and 2020. This in turn is expected to fuel continued investments in innovation and drive high margin growth for many years to come. With that, I'd now like to turn the call over to Tom McCourt.

Thanks, Peter and good morning, everyone. As Peter said, LINZESS demonstrated continued strong demand growth year-over-year. Total LINZESS volume growth included a greater than 20% increase in capsules and a 17% increase in total prescriptions year-on-year. The difference between the two is accounted for by the increased size of the prescription. Similar to what we've seen with LINZESS in previous first quarters and with many other branded primary care drugs, prescription growth was a bit lighter in the first quarter due to seasonality in the market which is caused by patients changing their health plans at the beginning of the year and patients working through annual deductibles. You can see this more clearly through the LINZESS rejection and refusal data. As expected in January, there is typically a sharp increase in rejections and refusals, which returns to normal level over the first quarter. This pattern is consistent with every first quarter since launching LINZESS, except 2016 due to a couple of big managed care wins with CVS in the United Healthcare that began January 1, 2016, and offset this normal seasonality. Importantly, the most recent weekly prescribing data showed the largest week-on-week prescription growth since the beginning of the year, and this acceleration has continued through the early part of the second quarter. We believe LINZESS is just scratching the surface of its potential. In over four years on the market, LINZESS been prescribed by nearly 180,000 physicians to nearly 1.5 million patients with over 40 million adults in the US estimated to suffer from IBS-D the and chronic constipation and the majority of whom are in OTC treatments and dissatisfied, the opportunity to drive further growth is significant. As a branded prescription market leader, we are investing into the brand and building a franchise that we believe will exceed $2 billion in peak annual US sales. We expect to do this by continuing to grow the overall market as well as increase market share, ensure broad peer access and expanding the clinical utility. For example, we recently introduced a third LINZESS dose, the 72 microgram dose for adults with chronic constipation. We are very encouraged by the early uptake in the market and the fact that more than 70% of patients treated with the 72 microgram dose are new LINZESS patients previously taking OTCs. The strong performance validates what we heard from physicians, which is that dosing flexibility is important to help treat this large and heterogeneous chronic constipation population. Turning to our gout franchise. We continue to make progress in developing the market with our first lesinurad product ZURAMPIC. We expect net sales to be nominal in 2017 as we focus on market development, including educating physicians or recognize uncontrolled gout and introducing the efficacy and safety of lesinurad plus allopurinol for appropriate patients, while we secure payer access. We are monitoring certain metrics to assess our progress across all these areas and plan to update you moving forward. Specifically regarding physicians, our focus is on the breadth of the ZURAMPIC prescriber base and the responsiveness to brand promotion. Our sales team is currently calling on roughly 30,000 high prescribing physicians, most of whom are primary care physicians who we believe will be the primary growth driver for years to come. Regarding payers, we are working to secure peer access and reimbursement, so the estimated 2 million uncontrolled gout patients can get ZURAMPIC at a reasonable co-pay. We've had some early wins and our parent team will continue to work on this throughout the remainder of 2017 and into 2018. We believe DUZALLO, the fixed-dose combination of lesinurad and allopurinol will be the critical growth driver behind the lesinurad franchise, helping it to grow to over 300 million in US sales. DUZALLO provides the potential for just one pill once a day, which is one co-pay to enable nearly twice as many uncontrolled gout patients reach goal compared to allopurinol alone. We expect DUZALLO to be approved this fall with the launch soon after approval. Before I close, I just want to comment that we've had a very productive Digestive Disease Week. As the branded prescription market leader, LINZESS has had a big presence and we're having some great conversations with gastroenterologists about the management of IBS-D, chronic constipation, and visceral pain associated with the number of GI disorders. Equally as exciting are the advancements in science that our teams are bringing to the GI community, including Linaclotide DR1 and DR2. IW-3718 for uncontrolled GERD and IW-1701 for achalasia, all of which reinforce our commitment to innovation and fit well into our commercial model. With that, I'll now turn the call over to Mark Currie.

Thanks, Tom. And good morning, everyone. As Tom said, it's been a great couple of days at DDW. We are making exciting progress across our R&D effort and it's been fun to share some of these advancement with our peers in the GI community. We're looking forward to continued progress throughout the remainder of 2017 with a number of important advancements expected from our pipeline. Beginning with IW-3718 for uncontrolled GERD, we expect data from a Phase IIb dose-ranging clinical trial mid-year. As a reminder, IW-3718 is a wholly owned gastric-retentive formulation of a bile acid sequestrant, designed to work in combination with a PPI to reduce the effects of bile on the esophagus. The Phase IIb trial is set up to detect a 15% or greater difference for heartburn severity between IW-3718, plus PPI versus PPI alone. The trial also includes a patient reported outcome measures designed to help define for the first time ever clinical meaningfulness for the uncontrolled GERD patient. We believe the data from this study they are positive will reduce a significant program risk for this greater than $2 billion US annual peak sales opportunity. In addition to the IW-3718 data, a digital catalyst expected later this year, include the DUZALLO approval and launch that Tom just mentioned, the Phase III initiation of linaclotide DR1and IBS-C, Phase IIa result for IW-1973 in diabetic with hypertension and for IW-1701 in achalasia and three Phase II initiation for IW-1973 in resistant hypertension, heart failure, preserved ejection fraction and diabetic neuropathy. It’s going to be an active year and one that it set us up for continued momentum in 2018 and beyond. With that, I am going to turn the call over to Tom Graney.

Thanks, Mark. I will spend the last few minutes providing some additional color on LINZESS performance, as well as recapping our financial results and guidance. You can find the detailed financial statements in our press release. As Peter and Tom mentioned, LINZESS demonstrated strong demand in the first quarter with more than 20% increase in volume year-over-year. Total LINZESS net sales for the first quarter were up 8% year-over-year to $147.6 million. The higher growth in volume compared to net sales was due primarily to differences in trade buying patterns year-over-year resulting in a nearly $20 million impact. We have always focused on growth in demand, measured by volume gains, patient access and net price as our key metrics and they have encouraged investors to do the same. We believe the brand is demonstrating strong performance against these measures and we now are again invested strongly behind the brand in the first quarter of 2017 as we continue to build the franchise. Commercial costs and expenses were $70.9 million, which included $3.7 million in cost of goods sold and $62.2 million of LINZESS sales and marketing expenses. LINZESS brand collaboration in US generated $76.7 million in total net profit and a 52% commercial margin for the first quarter. As you've seen over the past few years, commercial margins fluctuate quarterly. We expect them to expand over time and to exceed 70% by 2020. Turning to Ironwood financials. We ended the first quarter of 2017 with approximately $295 million of cash, cash equivalents and available for sale securities. Cash used in operations was $27.8 million compared to 200,000 of cash generated in operations in the first quarter of 2016. The increase in cash use year-over-year, primarily reflects $15 million cash milestone we achieved from Astellas in the first quarter of 2016 and cost associated with the launch and commercialization of ZURAMPIC in the first quarter of 2017. We recorded $52.2 million in Ironwood total revenue on our P&L for the first quarter of 2017 compared to $66 million in the first quarter of 2016. Again, revenue in the first quarter of 2016 benefited from the $15 million dollar milestone from Astellas. Total operating expenses were $91.8 million for the first quarter of 2017, including $55.6 million in SG&A expenses and $33.7 million in R&D expenses. Our investment in the first quarter reflect the launch and commercialization of ZURAMPIC, as well as the advancement of our pipeline program. Turning to our non-GAAP disclosures. We exclude three non-cash adjustments to arrive at our non-GAAP measures, the mark-to-market adjustment related to the convertible note hedges and warrants, the amortization of acquired intangible assets and the change in fair value of contingent consideration associated with our licensing agreement with AstraZeneca for lesinurad. These three adjustments resulted in a charge of $4.2 million or $0.03 per share in the quarter. GAAP net loss for the quarter was $52.5 million or $0.0 36 per share and non-GAAP net loss was $48.3 million or $0 33 per share. In the first quarter of 2016, the GAAP net loss was $13.3 million or $0.09 per share and non-GAAP net loss was $11.7 million or $0.08 per share. Moving to our 2017 financial guidance. We continue to expect R&D expenses of $145 million to $160 million and SGA expenses of $235 million to $250 million. Total LINZESS marketing and sales expenses of $250 million to $280 million. Net interest expense of approximately $40 million and cash used from operations to be less than $100 million. In closing, we're making important progress as we work to become a top performing commercial biotech company. We expected to deliver a rapid top-line growth over the next several years, while advancing an innovative pipeline. Commercially, we continue to build our branded prescription market leading position with LINZESS and IBS-C and chronic constipation. We look forward to launching DUZALLO into the uncontrolled gout market expected in the second half of 2017. We are also excited about our opportunity to deliver additional innovative medicines to patient. As Peter mentioned, we're hosting the investor reception this evening at DDW and hope to see many of you there. With that, I'll turn it over to Catherine to begin the Q&A a portion of the call.

Thank you. [Operator Instructions] And our first question comes from Ying Huang with Bank of America Merrill Lynch. Your line is open.

Hi, good morning. Thanks for taking my question. I have a question first on LINZESS sales. So even if you add back the $20 million inventory destocking you get to roughly 23% growth from 1Q, but then you also see that the 20% increase in capsules distributed. Just wondering can you comment on the net pricing trend, because I do notice that from 1Q ‘15 you saw a 15% increase in WAC. And then related to that, are you seeing any impact at all from the synergy launch in the marketplace. And then a quick question on the R&D side. Can you comment exactly which biomarkers data would we expect from IW-1973 in the second half? Thank you.

We'll go to Tom Graney, Tom McCourt, Mark Currie for their answers.

Yin, yes. Thank you for your question. As we saw in the first quarter we did have 20% increase year-over-year in volume and as I think you heard from Tom McCourt's comments that was in a difficult comparison to last year's first quarter as a result of some really important managed care wins we had to start 2016. So we did have that strong growth, and when you adjust for the stocking of inventory as you did in your math, you achieve even better growth as you mentioned. When it comes to price, we did see in the first quarter minimal price, net price increase year-over-year, as we continue to invest behind making sure that we've got the best branded market access in this category. We do enjoy terrific managed care access with 90% coverage in Med-D and about 70% of patients with commercial plans get access to LINZESS for about a dollar a day. So we feel great about the position we've been in on the payer front, which as you know since launch has been an important part of our strategy to grow the category.

Yes. And as far as the progress synergy is made, I just want to start off by saying you know, we are the market leader in a very large and growing market, and there's room for multiple players here. And you know, generally what we see in markets like this when you have additional entrants to the market the market growth and of course the market leader will benefit largely the most from that effort. Where we need to be focused on right now is really continuing to behave like a market leader. We're going to continue to grow the market. We're going to continue to invest in DTC to continue to grow that market. We're going to capture the market you know, which has been largely driven by just the high level of satisfaction that the physicians are feeling about the drug, and certainly how patients are experiencing the benefit of the drug. And as Tom mentioned, you know, the payer access here is really, really key. It is the number one reason, the number one obstacle for choosing any brand in this category and of course our active physician promotion. So you know, when we look where we are, where we want to go, now it's all about raising the bar, it's 72 microgram you know, was a big step forward, we're seeing very encouraging growth out of the gate. These appear to be new patients coming right from OTC, so we see this expanding the market and I think all the lead indicators look very strong.

With respect to what we expect to see on the biomarkers side for IW-1973 in diabetic hypertension study. First, we're very focused on the pharmacodynamic activity in the cardiovascular effects, particularly blood pressure. The patients do have hypertension, so we're looking to see the effect on lowering blood pressure in the population, obviously also tolerability. And then with respect to specific biomarkers, we are focusing on a number of different metabolic biomarkers because of their effect we've seen in animal models with 1973 on both glucose and lipid lowering and also inflammatory markers looking as we've seen some of the effects relative to lowering some of the inflammatory cytokines that we've seen in a number of different models.

Great. Thank you very much.

Thank you. And our next question comes from Tim Chiang with BTIG. Your line is open.

Hi, thanks. You know I think, I'm here over at the DDW conference as well with you guys, and you know, certainly a lot of buzz about new treatments actually in the GERD space and you know, Mark could you talk a little bit about assuming your Phase IIb trial is successful, how quickly could you actually start a Phase III trial in with your bile acid sequestrant?

Yes. We haven't given any guidance yet Tim on when we – how quickly we would expect. Obviously, there are a number of things; once we have that data - we will want to focus on then having discussions with the FDA and then continuing to get ready for a preparation. We would expect to be in 2018, I think that what we've indicated, but specifically how fast we would then get that study started we haven't given it, it would be in 2018.

And Mark, can we just...

Tim, just a comment. I really agree with the enthusiasm we're seeing in the GI community, in a space in GERD where there really hasn't been any innovation for a long, long time. And the conversations that we're having with these esophageal experts and the interest in the role of bile acid in addition to acid control is really encouraging. So you know we're looking forward to seeing the data, but we're getting a lot of interest and a lot of questions here at DDW around uncontrolled GERD.

Yes. I think that you know certainly if you guys can show successful results, you'll have a market for this product. But you know I also wanted to highlight or question on the DR1 formulation, when do you guys expect to meet with the FDA, is still sometime later this summer to discuss how the Phase III trial will be designed?

Yeah, obviously once we had our Phase IIb data and we put it, packaged it together. So we've had dialogue and communication with the FDA since data and they will continue through the summer.

We continue to expect to start that study in the second half too.

Okay. I’ll see you guys later tonight at the reception,

Great. Looking forward to it.

Yeah.

Thank you. And our next question comes from David Maris with Wells Fargo. Your line is open.

Hi. Good morning. This is actually Patrick Trucchio on for David Maris. I have two questions. The first one on LINZESS inventory as a trade, have inventories normalized the trade following destock in Q1 or should we anticipate some additional destock in Q2? And then secondly, can you talk about the GERD data in terms of the timing and can you remind us what the specific endpoints are and what would constitute a definitive move into Phase III?

Hey, Patrick. It's Tom Graney. I'll take your first question. As we've seen since launch and you see this frequently with primary care brands there is often pretty sizable fluctuations in both wholesaler and retailer inventory levels during the course of the year based on the buying patterns of our customers. We see the current service level still being maintained with the current inventory levels. So we don't really speculate on what we think our customers are going to do going forward. Right now we're just making sure that we're focused on driving demand and ensuring that the supply chain has a robust level of inventory to make sure they're able to maintain service levels for our end user patient customers.

Mark, can you take the second question.

Yeah. So the key endpoint focus around the heartburn and severity scale and we still expect data in the mid this year. One of the things that as you indicated what would be a clear go no go, we powered this specific study for 15% improvements on heartburn severity over placebo, but there's a component here that's also critical, which is determining clinical meaningfulness. And as you know we've been pioneers in the patient-reported outcome work with what we did in the IBS-C field. And now we're taking that same type of expertise and bringing it to these patients. And so one - what we're doing is bringing both efficacy data that we will see and PRO data determining what is clinically meaningful change for these E patients, that will then define the go no go.

Great. Thank you.

Thank you. [Operator Instructions] And our next question comes from David Lebowitz with Morgan Stanley. Your line is open.

Thank you very much for taking my question. I was curious has there been any feedback from the sales force regarding new competitive products. Has there been substantial outreach that they're already detecting on with respect to your competitors or is it still relatively quiet as far as the bulk of the physician base?

Yes. This is Tom. I'll take the call. We haven't heard a whole lot. I mean, obviously there's - they're out there. They're calling out physicians, they're are introducing the product, but it hasn't been you know disruptive in any way shape or form with regard to our ability to deliver the message and to drive demand. As you know the level of satisfaction with LINZESS is very high. And you know our challenge with any emerging competitor is to keep the sales force focused on an arcade [ph] game as the market leader and that is certainly driving demand and capturing market share. But you know so far it's early, but you know we're not hearing a whole lot.

And quickly jumping over to the 72 microgram dose, what types of patients are these, the profile, the typical patients that that dose is being selected by and I guess previously what about the - why don’t these patients jump over earlier when it was higher doses, had they experimented with prescription therapies or was there an alternate reason why they held back?

It's a great question. You know, what we've heard - what we've consistently heard from physicians in the past that you know, that they tend to hold both 290 and 145 for people that have fairly severe symptoms and they were asking for a lower dose for patients that maybe have more mild symptoms or more may be more sensitive to the drug. But you know, what we're seeing and it's early, so still have some work to do, is it appears that the majority of these patients are indeed these patients that tend to be a bit more mild and are coming right off OTCs into the market. So this clearly looks like it's expanding the market as opposed to cannibalizing the 145 dose.

That's great. Thanks for taking the questions.

Thank you. And our next question comes from Anupam Rama with JPMorgan. Your line is now open.

Hey, guys. It's Eric in for Anupam this morning. Thanks for taking the questions. Just a couple on 3718 in refractory GERD. It's obviously still pretty early stage here into development, but in thinking about the market opportunity and the type of feedback, the market feedback that you're getting, I'm just maybe wondering maybe how you guys are thinking about potential pricing? Any indication maybe relative to historical PPIs, given that this is intended as an adjunct therapy? And secondly, what are you guys monitoring in terms of the competitive landscape for refractory GERD? Thanks.

Yes. First, as I mentioned earlier you know this is a whole new area and you know, this is as you know it's a huge market. We're talking PPI’S were $12 billion dollar market. And there really hasn't been much innovation in this space and there really isn't as we look at other competitors in the entering the market there really isn't much as far as both treatments or technologies you know to treat these patients. So you know, we see this as a tremendous opportunity for us. As far as pricing, obviously that's work that we have to do and it's going to be really dependent on the value proposition which is going to be driven on how strong is the clinical profile, how broad do we think the patent should we believe, the penetration could be and you know our number one objective here is to secure broad payer access. This is a - you know we're talking millions of millions of patients and we don’t want the payer to be a barrier. So we want to be very thoughtful about the value proposition and the value that we can bring to the payer, as well as the health care community. But everything is very exciting, like I said it's been very encouraging to see the level of enthusiasm that we're seeing that at DDW from the gastroenterology community.

Got it. Thanks for taking the questions.

Thank you. And our next question comes from Boris Peaker with Cowen and Company. Your line is open.

Good morning. This is Justin on for Boris. Thanks for taking our questions. So more on 3018 for GERD. I just wanted to get an idea made this year from the top-line data and like the spectrum of detail of approval which is the P values that are hit or not or you think there will be actual numbers in there. How are you sure to preserve the data for publication or conference? And then at that same time that you put out this first press release, where you actually say if you're going to go ahead or make a go or no go decision or is there going to be a waiting period after that? Thank you.

I think I got that Justin. This is Mark. So I think historically we will give top level - top line data in our press release and that will give an indication if we intend to go forward. Obviously going forward is always contingent on FDA meeting, when we're going forward they have the Phase III. But so we would expect again to be giving a very clear go no go as far as both the efficacy data and clinical meaningfulness and the profile we feel that the commercial team is seeking to be able to market. I think I got – does that addressed your questions?

Yes. It looks like well to see actual numbers and you don't need to preserve anything on publications...

Yes, top line number and then we'll put out a publication f or sure to follow on...

Okay. All right, great. Thank you.

Thank you.

Thank you. And I'm showing no further questions at this time. I'd like -+ I would now like to turn the call back to Peter Hecht for any closing remarks. Peter Hecht Thank you, Catherine and thanks to everyone for joining us today. We're available throughout the day, so reach out to Meredith if you'd like to follow up after the call with any questions and if you're here in Chicago we hope to see you this evening at our reception. Thanks again. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a great day.