Ironwood Pharmaceuticals Inc Q2 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Ironwood Pharmaceuticals 2Q 2021 Investor Update Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Roache, Director of Investor Relations. Please go ahead.

Thank you, Wendy. Good morning, and thanks for joining us for our second quarter 2021 investor update. Our press release crossed the wire this morning and can be found on our website. 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 quarterly report on Form 10-Q for the quarter ended March 31, 2021, 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, Tom McCourt, our CEO, will provide a brief overview and review our strategic priorities and commercial performance of LINZESS. Jason Rickard, our Chief Operating Officer, will then review our second quarter financial results and provide updated guidance for the year. Mike Shetzline, our Chief Medical Officer, will also be available for 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 slides. With that, I will now turn the call over to Tom.

Thanks, Matt. Good morning, everyone, and thanks for joining us today. We had a very impressive second quarter driven by double-digit LINZESS prescription demand growth. As a result of the company's strong commercial performance, we are raising our financial guidance for fiscal year 2021, which Jason will cover in more detail later on the call. Working alongside the highly talented Ironwood team, we continue to execute against our strategy of maximizing LINZESS, building our innovative GI Pipeline, and delivering sustained profits and generating positive cash flows. I'm very proud of everyone's work thus far in 2021 as we continue to strive to redefine standard-of-care for patients and drive value to our shareholders. Now let me share a brief overview of our strategic priorities. First, we are proud that in the second quarter LINZESS delivered 14% prescription demand growth year-over-year and US net sales of $259 million, reinforcing its position as the number one prescribed brand in the US for the treatment of adults with IBS-C and chronic constipation. We are also pleased to report that LINZESS brand prescription growth increased 26% versus the second quarter last year, a record high demonstrating that a growing number of health care practitioners are choosing LINZESS for their patients. Second, we continue to advance our efforts on building our GI portfolio. We are maintaining a disciplined approach to exploring LINZESS innovative GI assets by applying a focused set of predefined criteria and setting the bar high for any potential deals that we may consider. We believe this approach will drive our success further, faster and provide great benefit to patients we can serve. On IW-3300, our wholly-owned asset for the potential treatment of visceral pain conditions, we remain on track to submit an IND by the end of this year and expect to begin a clinical program in early 2022. And third, we delivered significant growth on the bottom line and had another quarter of strong cash flow generation. We ended the second quarter with $493 million in cash and cash equivalents on the balance sheet, providing us with the financial flexibility to execute on our strategic priorities for the remainder of the year and beyond. We continue to take a thoughtful and disciplined approach to capital allocation in an effort to maximize return to our shareholders as we aim to bring innovative therapies to GI patients. Turning to a few corporate updates, I was honored to be appointed Chief Executive Officer by the Board of Directors this quarter. Since joining the company in 2009, I've been consistently impressed by the organization's talent and focus on our strategic priorities and our mission to redefine standard of care for the GI community we faithfully serve. I look forward to building on our successes as we move forward. I also want to mention that Jason Rickard, our Senior Vice President, and Chief Operating Officer was designated Principal Financial Officer, which was previously held by Gina Consylman, our former CFO. We're appreciative of Jason taking on this additional role in the interim while we conduct a comprehensive search process to identify our next CFO. In addition, Ron Silver, our Corporate Controller, was designated Principal Accounting Officer; and John Minardo, who recently joined Ironwood as Chief Legal Officer. We're thrilled to have John join the team and have Ron take on his new role. Now let's move our focus to the commercial performance of LINZESS. LINZESS performed exceptionally well in the second quarter. As I mentioned a few moments ago, prescription demand growth grew 14% year-over-year. LINZESS continues to be the market leader within this category with 42% total market share, which is an all-time high for the brand. LINZESS brand prescription growth increased 26% from the second quarter of 2020, which is also an all-time high. In addition, we saw a 13% increase in new prescribers in the first half of the year versus the same period a year ago. We believe our second quarter performance is driven by a few key factors. First, the growth we are experiencing in the US continues to be the result of strong execution of our commercial strategy and the positive experience that patients and physicians have had with LINZESS. We also benefited from broad payer access and reimbursement. Second, we believe we benefited significantly from our sales and marketing efforts including our refreshed consumer campaign, which incorporates the IBS-C overall abdominal symptom data, as well as our in-person sales calls to health care practitioners throughout the quarter returning and nearing pre-COVID levels. Third, we continue to see year-over-year increases in online searches and clicks for constipation-related terms. We are also seeing higher traffic to the LINZESS website, suggesting more patients are seeking treatment options for their IBS-C and chronic constipation. Finally, we continue to see encouraging signs of market growth, which may be attributed in part to an increase in adult IBS-C disease prevalence. Data from the National GI Survey II, showing increased IBS prevalence, were presented at the DDW meeting in May. Looking ahead, we're on track to exceed $1 billion in US net sales in the near term. Our strong performance in the quarter, coupled with additional life-cycle management opportunities, reinforces the long-term growth potential for the brand. In the second quarter, the American Journal of Gastroenterology published full results from our Phase IIIb clinical trial evaluating LINZESS 290 mcg on multiple abdominal symptoms in adult patients with IBS-C. The results demonstrated that linaclotide 290 mcg administered orally once daily to adult IBS-C patients was associated with a statistically significant and clinically meaningful improvement in overall change in abdominal score, which comprises the symptoms of bloating, pain, and discomfort compared to placebo. We reported top-line results for this trial in June 2019, and following the US FDA approval of a supplemental NDA based on the data from this trial, the LINZESS US prescribing information was updated in September to reflect the clinical impact of LINZESS on overall abdominal symptoms in adult IBS-C patients. Research has shown approximately 95% of surveyed adults with IBS-C report experiencing bowel-related abdominal bloating, pain, and/or discomfort, with the majority reporting they experience these symptoms once a week or more. Our data suggests that LINZESS may provide meaningful improvement of overall abdominal symptoms associated with IBS-C, a condition that impacts an estimated 11.5 million adults in the US. Moving on to an update on our intellectual property, Ironwood, along with AbbVie, entered into a settlement agreement with Teva Pharmaceuticals, granting a license to Teva for its generic version of the 72 mcg LINZESS in the US beginning March 31, 2029, subject to FDA approval and certain other limited customary exceptions. With this settlement agreement, we have settled with the filers of all known ANDAs to-date seeking approval to market generic versions of LINZESS and preserve the majority of LINZESS patent coverage for all three dose strengths. As we look ahead, we understand that GI diseases affect one in five Americans and remain a large unmet need with a highly symptomatic patient population. These diseases can be severe and debilitating and often have limited or no treatment options, creating urgency around the need for new and innovative treatments. Our experienced and specialized team continues to focus on pursuing innovative assets in GI diseases with significant unmet needs and strong scientific rationale. We're committed to generating more value-creating opportunities to leverage our strong GI capability and experience now and in the future. I would like to thank all of our employees, patients, caregivers, and advocates in the GI community for their shared dedication in this underserved market. I'll now turn the call over to Jason to review our financial performance.

Thanks, Tom. It's a pleasure to be on the call this morning to discuss our strong second quarter results. I have three main updates to provide. First, I'll walk through our second quarter financial performance. Then, I'll discuss our capital allocation strategy. And finally, I'll review our updated financial guidance for the year. Please refer to our press release for our detailed financial information. In the second quarter of 2021, Ironwood revenues were $104 million, which were up 16% year-over-year driven primarily by LINZESS US collaboration revenues of $100 million, also up 16% versus the second quarter of 2020. Let's move on. US net sales grew 18% compared to the second quarter of 2020, driven by robust prescription demand growth and favorable inventory channel fluctuations, partially offset by net price erosion. For the balance of the year, we anticipate healthy prescription demand and we continue to expect mid-single-digit net price erosion. We also expect fewer channel fluctuations versus the prior year resulting in a dampening of net sales growth for the second half of 2021, when compared to the first half of the year. Turning to LINZESS brand profitability, commercial margins in the second quarter were 72% versus 75% in the second quarter of 2020. I'd like to point out that the lower commercial margin versus last year was primarily a result of an increase in selling expenses in the second quarter of 2021 compared to the second quarter of 2020, but we did not execute as many in-person details due to the COVID-19 restrictions. As you may recall, our selling expenses related to virtual call details and overhead during the first two quarters of 2020 were adjusted in the fourth quarter of last year. Before moving on, I'd like to provide an update on an accounting item reflected in the second quarter's results. The release of our valuation allowance against the majority of our deferred tax assets, including the net operating loss carryforwards from losses incurred by our business through 2019, resulted in a one-time recognition of an income tax benefit of $338 million in Q2, and a $338 million non-current deferred tax asset that is expected to be used to offset future cash taxes. It's important to note that this valuation allowance release is a non-cash, non-recurring event and as such is reflected in an adjustment to our non-GAAP net income. Please refer to our quarterly filing for more information about the valuation allowance release. Now to Ironwood's profitability; we delivered GAAP net income of $391 million, which includes the $338 million non-recurring income tax benefit associated with the release of the valuation allowance that I just mentioned. Adjusted EBITDA was $65 million, up $32 million versus the prior-year quarter. Moving to cash and capital allocation priorities, in the second quarter, we generated $49 million in cash flow from operations and ended the quarter with $493 million in cash and cash equivalents, up from $363 million at the end of 2020. We maintain a disciplined and thoughtful approach to capital allocation. As you know, in the second quarter, our Board authorized a share repurchase program under which the company may repurchase up to $150 million of its outstanding shares of common stock through December 2022. Although we did not repurchase any shares in the second quarter, we continue to remain committed to deploying capital in support of our strategic priorities where we believe we can drive the greatest value for our shareholders. Now, let's review our updated 2021 guidance. As Tom highlighted earlier, as a result of the strong growth of US LINZESS prescription demand, we are raising our 2021 financial guidance. We now expect US LINZESS net sales growth of 6% to 8%, which is up from our previous guidance range of 3% to 5%. Total Ironwood revenue is projected at $390 million to $410 million, which is up from $370 million to $385 million, and adjusted EBITDA of greater than $210 million, which is up from greater than $190 million. We believe our continued financial performance, strong balance sheet, and disciplined approach to capital allocation position us well to continue to invest in our business and pursue additional opportunities in the GI space. I'll now turn the call back over to Tom.

Thanks, Jason. I'm extremely proud of our performance this quarter and the team's continued dedication to our vision of becoming a leading GI healthcare company. We're looking forward to continuing our momentum in the upcoming months with the neurogastroenterology meeting later this month. The Ironwood team will also be attending the Wells Fargo Healthcare Conference and the Morgan Stanley Global Healthcare Conference in September, as well as the American College of Gastroenterology meeting in October. We look forward to speaking to all of you then. Operator, you may now open up the line for questions.

Your first question is from Eric Joseph with JPMorgan.

Good morning. This is Hannah on for Eric. Thanks for taking the question. Just a couple from us. So with LINZESS now on pace to reach over $1 billion in revenue in 2021, just thinking about what you now see as the peak sales potential of the product and how much headroom do you currently see with respect to market share growth?

Yes, thank you. We're quite impressed with the accelerating growth. There has been a noticeable inflection point for the brand, and the outlook is very promising. There are still 30 million patients experiencing issues, and we have treated less than 10% of them, indicating significant room for growth. Additionally, we are seeing a remarkable surge in patients seeking assistance and utilizing the internet and telemedicine for care, which is enhancing our market presence. We are very optimistic about our current position and future trajectory. We anticipate the brand growing significantly beyond $1 billion in sales. The next steps involve continuing to invest in the brand to sustain that growth and advancing major life cycle management initiatives, such as the pediatric program, which serves a large underserved community with no approved treatments available. While we haven't released long-term numbers yet, we feel much more optimistic now compared to a year ago.

Great. Thinking about business development timelines, last quarter you announced the $150 million share buyback for 2022. Should we expect this to be the main focus for excess cash during this period? What timeline are you considering for possibly identifying new pipeline candidates? Looking a few years ahead, how do you envision the pipeline?

Great. Thanks, Hannah for the question. I mentioned it in the script a bit. I'll reference our capital allocation strategy. We believe we're in a fortunate position to be able to invest behind building and testing our brand to continue the growth that Tom outlined. As you know, we have a desire to continue to grow the GI portfolio with innovative assets for organic GI diseases and to generate cash while sustaining profitability. We will continue to assess those opportunities and make judgments about how to allocate capital over that period. We don't see the announcement of the share buyback program as contrary to any of those priorities, and we believe we can execute against each of them in a way that creates value for shareholders. When it comes to product development, we maintain a high bar but also see a lot of opportunity in the GI space and believe we've got the right team to assess those assets and attract them. If we find something attractive, I can't speculate on the timing of that, as you know deals take their own course. So, we'll provide updates as we go on the corporate development front.

Great. That’s helpful. Thanks for taking the questions.

Maybe next question?

I am sorry. I was on mute. Your next question is from the line of Tim Chiang.

Hi, Tom.

Hi, Tim.

Good quarter by the way. I jumped on late so I apologize if this question's already been asked. But I sort of look at your updated guidance, with US investment sales growth around 6% to 8% for this year, and that's still materially lower than what AbbVie has been reporting in terms of sales growth. Could you just sort of talk about that a little bit? And I apologize if you've already explained that.

Well, Tim, I think we're very much aligned with AbbVie. We work side by side, setting the targets on a quarterly basis and updating the year-end and long-range plan quarterly. So we should probably check what they put out. When it comes to our guidance, we had previously provided the 3% to 5% net sales growth and as Jason mentioned, we raised it up to 6% to 8%, which is a pretty healthy increase. So we're certainly all pleased with the growth we're seeing, but we should be consistent. So, Phase II heads up, we'll reach out to AbbVie to make sure we're communicating the same.

Well, Tom, I'm just referring to the fact that I think AbbVie reported what, 18% year-over-year US net sales growth in the second quarter, is that right?

That's true. Go ahead.

Just to clarify, it's 15% year-to-date versus we're guiding to 6% to 8% year-over-year. Reference my comments in the script related to lower inventory in the second half of the year dampening the net price growth over that period.

So basically, we think we saw a boost this quarter due to how the inventory is being managed. In the past, we saw a burn in the first half of the year and then they would accelerate the inventory in the back end of the year. Now they've been keeping more predictable inventory levels, which makes it easier to predict where net sales will land. But you're absolutely right, for the quarter it was 18%, but that was a combination of the 14% demand growth as Jason mentioned, along with the boost in the inventory, which was partially offset by net price erosion in the mid-single digits.

And how do you see the demand growth? I mean, do you see this sustainable at around 14%?

Yeah. I mean, I think this brand continues to surprise us as far as its growth. I mean, as you know, you do not see many brands like this in categories where we see linear growth that we have been seeing. And you think about it, we were looking at 10% to 11% growth a couple of years ago. But really for the last four years in a row, we've seen north of 12% demand growth and this year is likely to be more than that, we believe. So, the brand has continued to perform. When I look at the tens of millions of patients that are still suffering and we've only treated 10% of the patient population, I don't see a real competitor emerging in the future. It's believable that we'll continue to see this kind of growth going forward.

Okay. Good. Good place to be.

Yeah. We're providing.

So thanks for the comment, Tom.

Thanks, Tim.

Your next question is from the line of David Lebowitz.

Hi. This is Avatar Jones on for David. My question is in regards to the volumes. And I apologize if I missed, but where are those coming from? Is that impacted by the Phase 3 publication? Is this just something more organic? Is it 90-day scripts? Can you sort of provide some color on that? Thank you.

I would say it's probably all of the above. I do think we're seeing a higher level of activity by patients. When we talk about activity, the online searches have increased significantly. We're seeing 400,000 to 500,000 unique visitors a month to our website, which is excellent and indicates ongoing growth. So I think part of it is an overall awareness of the disease; our ability for patients to raise their hands; and, yes, the 90-day scripts improve adherence to therapy because patients realize the full benefit of the drug. We are also seeing a broader community now raise their hands for help. So I think it's probably a combination of all those factors growing nicely, including awareness. But we still have work to do here; unearthed awareness is still around 10% to 12%. So there's plenty of opportunities to educate patients about the better treatment options that exist.

Understood. Thank you. And I had a follow-up question. I know there's been a question asked on business development. But just are there any specific therapeutic areas of interest? And can you sort of provide us guidance as to what intrigues you?

Maybe I know Mike Shetzline is online here, and he's leading the charge in reviewing the GI landscape. We've seen a lot of opportunities. We are focusing right now on molecules we are currently evaluating. Mike, would you comment on that?

Sure. Thanks, Tom. We're obviously addressing the medical needs of patients suffering from GI diseases and disorders. We're prioritizing those that are managed by gastroenterologists, focusing on organic diseases where we understand the mechanisms and can conduct clear and decisive proof-of-concept studies. We want to target innovation and strive to be first-in-class or best-in-class with differentiated opportunities. We believe we have a great opportunity list given the medical need. We're looking at various disease areas, but we are particularly interested in liver injury or liver failure, which has a huge medical need in hepatology. Celiac disease is another underserved population where patients still experience morbidity despite the availability of gluten-free diets. Additionally, there are opportunities in managing pruritus and pancreatitis, which often lacks medical therapies. We have a broad landscape and many opportunities, but we maintain a high bar to make sure we make the right choice at the right time.

Thank you. Much appreciated.

Thanks, Mike.

And at this time, there are no further questions. I would like to thank everyone for joining today's call. You may now disconnect.