Ironwood Pharmaceuticals, Inc. (IRWD) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Ironwood Pharmaceuticals Second Quarter 2020 Investor Update Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Meredith Kaya. Thank you. Please go ahead.

Good morning, and thanks for joining us for our Second Quarter 2020 Investor Update. Our press release crossed the wire 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-Q for the quarter ended March 31, 2020 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. Also included are non-GAAP financial measures, which should be considered only as a supplement to and not a substitute for or superior to GAAP measures. To the extent applicable, please refer to the tables at the end of our press release for reconciliations of these measures to the most directly comparable GAAP measures. During today's call, Mark Mallon will begin with an overview of the quarter; Tom McCourt will review our commercial and pipeline performance and Gina Consylman will review our financial results and guidance. Mike Shetzline, our Chief Medical Officer and Mark Plinio, our Chief Commercial Officer, will also be available during the Q&A portion of the call. We will be referring to slides via the webcast. For those of you dialing in, please go to the Events section of our website to access the webcast slides. With that, I'll turn the call over to Mark.

Thanks, Meredith. Good morning, everyone and thanks for joining us today. The last few months have been an important period for Ironwood, marked by continued execution across each of our strategic priorities. We demonstrated solid LINZESS demand growth, made important updates designed to strengthen our 3718 Phase III program for refractory GERD, made the tough but data driven decision to discontinue 7246 development following the Phase II results and delivered our fifth consecutive profitable quarter since separation. All of this was despite challenges resulting from the ongoing COVID-19 pandemic. I'll spend a few moments on each of these and then turn it over to the team for more details. LINZESS prescription demand grew 9% year-over-year in the second quarter, an impressive number for a brand that is already the market leader within its category and when considering the challenges that the healthcare sector has faced due to the pandemic. On 3718, we recently gained alignment with the FDA on important program updates that are designed to strengthen our pivotal Phase III trials. We believe these updates represent a clear advancement for the two 3718 trials, providing us with an opportunity to obtain an early indication of the efficacy of 3718 in the refractory GERD population. Now at the time of the announcement of these changes or upgrades for 3718, one of the updates we shared was that we were in discussions with the agency regarding its request for additional long-term safety data as part of an NDA submission. We are pleased to share today that the agency has since indicated to Ironwood that we will not be required to conduct a long-term safety study in connection with a potential NDA submission. Turning to 7246. We and our partner, AbbVie decided to discontinue 7246 following the top line results from our Phase II trial. We are in the process of analyzing the full data set to better understand the disparity between these results and our previous positive Phase IIb findings in IBS-C. Finally, our focus on generating profits continued in the second quarter with the delivery of both GAAP and non-GAAP profitability. Given the strong results in the first half of 2020 and our confidence in our continued performance in the second half, we are reinstating our previously withdrawn 2020 full year LINZESS net sales, total Ironwood revenue guidance and reiterating our adjusted EBITDA guidance. Our vision of becoming the leading GI-focused company is grounded on our ability to advance new GI treatments and our goal of redefining the standard of care for millions of patients. We strive to bring multiple innovative medicines to market over time, both organically and inorganically. Our bar for accessing inorganic opportunities remains high, but we will not hesitate to act on an asset that we believe will generate long-term value and make a difference for patients. With that, I'll turn it over to Tom to discuss our commercial and development progress in more detail.

Thanks Mark. I'll begin by reviewing our LINZESS performance. LINZESS has been a resilient and growing brand in the face of COVID-19. As evidenced, by the strong patient demand during the quarter. Volume increased 9% year-over-year. And importantly, we have seen strong new-to-brand prescription growth, a key metric that predicts future growth and a good indicator for the overall health of the brand. Beginning in late March, at the beginning of the pandemic in the US, we saw a negative impact in new-to-brand prescription demand. Not surprisingly, fewer patients were going into their offices to see their physicians, coupled with our decision to pause in-person promotion, which resulted in fewer new patients receiving LINZESS. However, new-to-brand prescription demand began to rebound in late April and continued to strengthen throughout the remainder of the quarter. By June, average weekly new-to-brand volume had increased more than 15% compared to what we were seeing in early March. We believe this renewed demand in both total prescriptions and new-to-brand prescription can be attributed to a few key features. First, our sales force began gradually returning to physicians' offices and conducting in office and in-person details in certain territories for a portion of the quarter. We are pleased with the growth that we are seeing in areas of which the field has returned. Second, our latest DTC campaign Get Real was launched in early April. This campaign includes a strong call to action the patients suffering from IBS-C. It is our goal to help educate patients that they may be suffering for more than just occasional constipation, helping them to describe both the chronic abdominal and constipation symptoms, which we believe will encourage more patients to seek care and request LINZESS. The IBS-C category continues to experience remarkably stable growth in line with what we have seen in recent years, with nearly 40% market share as of the end of June, LINZESS remains the prescription market leader in the category. This strong position reinforces our confidence in our ability to drive growth now and over the next several years. Turning to 3,718, our gastric retentive bile acid sequestrant with the potential treatment of refractory GERD. As Mark highlighted earlier, we recently made key updates to our ongoing Phase III program that we believe reflect an important advancement for the two, 3718 trials. These updates are summarized on this slide. The first update was to change the primary endpoint to a continuous endpoint from a previous responder endpoint. We recognize that changing to primary endpoint in the middle of Phase III program was unusual. To be clear, our decision to do this was primarily due to the recent FDA guidance indicating a preference for a continuous endpoint over a responder endpoint in assessing clinical outcome. It was not because we had concerns over the original design of the trial. As we evaluated our 3718 program and in discussions with the agency. We designed these changes to maintain the scientific integrity of the trials without adding any additional risk to the program. The data from our Phase IIb trial supports this decision. The new primary endpoint is very similar to one of the previous key secondary endpoint and to the primary endpoint in our Phase IIb trial. With the change to the primary endpoint, we restructured the hierarchy of the key secondary endpoints, elevating the statistical prominence of regurgitation, one of the most bothersome symptoms in refractory GERD. The ability to treat regurgitation is a key benefit, we believe, will clearly differentiate 3718 as there are no current treatments available for regurgitation associated with refractory GERD. The second update, with our decision to stop enrollment of study subjects in the study 302 and conducted early efficacy assessment of the data. As a reminder, the Phase III program is comprised of two identical studies: study 301 and study 302. Study 302 is currently well powered and with the guidance from the agency for trials impacted by COVID-19, we have the opportunity to update an early indication on efficacy in this trial. We believe the decision to stop enrollment and conduct this assessment gives us the opportunity to make earlier and more informed decisions while not compromising the scientific integrity of the trial. An Independent Data Monitoring Committee or an IDMC is planned to assess the data from the trial using pre-specified criteria that are consistent with certain of the new primary and secondary endpoints. We, Ironwood, will remain blinded. The IDMC will make a non-binding recommendation to Ironwood based on the results that could have the following possible outcome. If the IDMC determines that the data met all pre-specified criteria, we plan to continue enrolling in study 301 and target reporting top line results from both trials in the first half of 2021. This outcome would increase our confidence that 3718 will successfully treat this population. Alternatively, if the IDMC determines that the data does not meet all pre-specified criteria, we would plan to unblind and analyze the data to determine whether there is a rationale to continue to advance 3718 or if we should stop the Phase III program altogether. We expect the outcome of this assessment to be reported in the fourth quarter. Lastly and as Mark already highlighted, we were pleased with the feedback from the agency indicating that we will not be required to conduct an additional long-term safety study in connection with the potential NDA submission. We view all of these updates as positive for our 3718 program. We are confident in the design of the new endpoints and we look forward to gaining an early indication of efficacy, all of which provides us with the opportunity for more informed and quicker decision making on the program overall. 3718 is a critical driver for our business. We believe, if approved, 3718 offers great potential for patients and for Ironwood. The highly symptomatic nature of refractory GERD and the ability of patients to self-identify, gives us confidence that 3718 may be an important treatment option for millions of adults in the US suffering from this highly bothersome disorder. In summary, we believe our GI portfolio remains in a strong position heading into the second half of the year. The strength of LINZESS, coupled with the advancement of 3718, an equally sized opportunity as LINZESS, we remain excited about our long-term growth potential and are confident in our ability to deliver outstanding value to patients and shareholders. With that, I'll turn it over to Gina to discuss the financial results of the quarter.

Thanks, Tom. Over the next few minutes, I will provide some additional color on the highlights of our financial performance and our expectations for the rest of the year. Please refer to our press release for more detailed financial information. In the second quarter of 2020, Ironwood revenues were $89 million, driven by strong US LINZESS collaboration revenues of $87 million. Our core business, our US LINZESS, collaboration revenues increased 15% compared to the second quarter of 2019. The decrease in total revenues year-over-year is primarily due to $25 million in API sales recorded in the same period in 2019. LINZESS net sales were $219 million during the quarter, as reported by AbbVie, a 5% increase compared to the second quarter of 2019. Increases in demand and net price were partially offset by lower inventory levels. As we highlighted in our press release, in connection with the closing of the AbbVie Allergan deal, AbbVie recast historical net sales for Allergan products, including LINZESS, to conform with AbbVie's revenue recognition, accounting policies and reporting conventions. While the change from Allergan to AbbVie's accounting policies does impact the LINZESS net sales amount reported by AbbVie. It does not result in any change to our historically reported collaborative arrangements revenue or how we recognize collaborative arrangements revenue. We will continue to record our revenue based on the settlement payments received from AbbVie. The change in AbbVie's policies for certain rebates and discounts has two primary impacts to the LINZESS collaboration P&L. The first impact is related to the timing of LINZESS net sales. Conformance with AbbVie's policies affects the timing of recognition of certain rebates and discounts within LINZESS US net sales on a quarterly basis. However, these quarterly differences are expected to net out for the full year. The second impact is related to classification within the LINZESS brand P&L. Certain rebates and discounts that previously reduced LINZESS US net sales are now included as part of LINZESS US commercial costs, expenses and other discounts. Turning to LINZESS. Commercial margin was 75% during the quarter. The increase in commercial margin in the second quarter of 2020 is primarily due to higher patient demand and lower collaboration related selling expenses associated with the salesforce being remote for a portion of the quarter. As a reminder, remote selling activities conducted by Ironwood and AbbVie are now counted as an expense in the US LINZESS commercial collaboration. Turning now to Ironwood's profitability and cash. We delivered our fifth consecutive quarter of profitability in the second quarter. GAAP net income was $25 million and non-GAAP net income was $26 million. Adjusted EBITDA was $33 million and cash flows from operations was $20 million. We ended the second quarter with $253 million in cash, which we believe positions us well to be able to invest into our core business and service our existing debt obligations as well as pursue the inorganic opportunities that Mark mentioned earlier. Our cash generation in the second quarter can be attributed to strong LINZESS performance and disciplined capital allocation. We continue to expect modestly higher R&D expenses in the first half of 2021 compared to 2020, primarily driven by additional costs associated with 3718 and partially offset by the savings associated with the 7246 discontinuation. Now turning to 2020 financial guidance. LINZESS performance remains strong and we continue to invest thoughtfully into our business, especially during this difficult time. After further analysis of the potential impact of COVID-19 in our business, we are reiterating the original guidance we provided in February related to both LINZESS net sales growth and total Ironwood revenue. Specifically, we expect LINZESS net sales to grow in the mid-single-digit percent range, driven by strong demand growth and expected stable net price for the year. LINZESS performance contributes greatly to Ironwood's revenue generation, and therefore, we are also reiterating our expectation to generate $360 million to $380 million in total Ironwood revenue for the year. Lastly, we are maintaining our guidance of expected adjusted EBITDA of greater than $105 million. With that, I'll turn it over to Mark for some closing comments before Q&A.

Thanks, Gina. In summary, we entered the second half of 2020 in a position of strength with what we believe are sound business fundamentals, a focused strategy and a resilient business. I would be remiss, if I did not take a moment to again commend the hard work that all of my colleagues at Ironwood have put in during the difficult first half of the year. In light of the ongoing pandemic, our colleagues continued commitment to and passion for our mission has reinforced, but a remarkably agile culture and community we built at Ironwood. We believe that Ironwood is well equipped to successfully navigate the challenges healthcare industry will continue to experience and are excited about the opportunities that we have ahead of us to improve the lives of millions of patients suffering from GI diseases, while delivering robust shareholder value. Thanks again for joining us this morning. Operator, if we may, we can open the line for Q&A?

[Operator Instructions] And I'm not showing any questions that are coming into the queue at this time. I will turn the call back over to Mark Mallon for any closing comments.

Okay. Well, thanks to all of you again for joining. Really excited about the quarter results, of course. And we're positive, as I said, looking forward to the second half of the year. And of course, we remain available to answer any questions directly. Please reach out to Meredith and we'll be happy to set up some time. Thanks, everyone. Stay safe.

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.