Ironwood Pharmaceuticals Inc Q3 FY2021 Earnings Call

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ironwood Pharmaceuticals Third Quarter 2021 Investor Update Call. All lines have been placed on mute to prevent any background noise. After the speaker’s presentation, there will be a question-and-answer session. Thank you. Matt Roache, Director of Investor Relations, you may begin your conference.

Good morning, and thanks for joining us for our third 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 June 30, 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 will 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 an update on progress towards our strategic priorities and commercial performance of LINZESS. Mike Shetzline, our Chief Medical Officer, will provide an update on our pipeline, including the option agreement with COUR Pharmaceuticals that we announced this morning; and Jason Rickard, our Chief Operating Officer, will wrap up with a review of our financial results and guidance. 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 turn the call over to Tom.

Thanks, Matt. Good morning, everyone, and thanks for joining us today. We closed another strong quarter in 2021, driven once again by double-digit LINZESS prescription demand growth year-over-year. This morning, we announced that we have expanded our pipeline by entering into an option agreement with COUR Pharmaceuticals, which we'll review in more detail in a few minutes. We're coming out of a terrific American College of Gastroenterology meeting, where we presented new findings from a survey on the impact of abdominal symptoms in adult patients with irritable bowel syndrome with constipation. In addition, we gave an oral presentation and presented four other posters, one of which received ACG's Presidential Poster Award. I couldn't be more proud of the team's execution and the work we're doing to advance treatment in GI diseases and redefine standard of care for GI patients. Let's start with an overview of our strategic imperatives as well as our strategic priorities. Our strategy starts with maximizing LINZESS. Since launch in 2012, LINZESS continues to experience accelerated demand and widespread acceptance among healthcare practitioners as a leading prescription treatment for adults with IBS-C and chronic constipation. In the third quarter, LINZESS total prescription demand grew 12% versus the prior year quarter, and new-to-brand prescription growth continued to outpace the market. Next, we are looking to build an innovative portfolio both through the development of internal assets and through bringing external therapies that target serious organic GI diseases. Mike will be providing an update on our pipeline. Finally, we're committed to delivering sustainable profits and cash flow. We had another impressive quarter on the bottom line and ended the third quarter with $574 million in cash and cash equivalents on the balance sheet. We're taking a thoughtful and disciplined approach to capital allocation in an effort to maximize return to our shareholders as we continue to explore growth opportunities with the same high bar we've always had. Now I will turn it over to Mike to discuss our pipeline.

Thanks, Tom, and good morning, everyone. We're advancing our pipeline through the development of IW-3300, our wholly owned asset for the potential treatment of visceral pain conditions, such as interstitial cystitis, pain syndrome, and endometriosis. We're on track with the IND application to the FDA this year and the start of the clinical program in the first quarter of 2022. In addition to IW-3300, we're excited to announce that we entered into an option agreement with COUR to acquire an exclusive license to develop and commercialize in the U.S. CNP-104, which we believe, if successful, may transform the treatment of primary biliary cholangitis, otherwise known as PBC, a rare autoimmune disease targeting the liver that affects an estimated 133,000 people in the U.S. COUR's novel approach uses a biodegradable nanoparticle encapsulating PDC-E2, which is the autoantigen believed to be responsible for the autoimmune pathology of primary biliary cholangitis. COUR's proprietary platform combines PDC-E2 with state-of-the-art pharmaceutical nanoparticles to tolerize the immune system and potentially eliminate the immune cell bile duct destruction present in PBC. COUR's platform has shown proof of technology in clinical and preclinical settings, further demonstrating the opportunity for the platform to treat PBC. Currently, there is no therapy that addresses the root cause of the autoimmune destruction of the bile ducts in PBC, which can result in profound fatigue and pruritus as well as other symptoms and, not uncommonly, can lead to irreversible damage and scarring of the liver, ultimately requiring liver transplant. We believe CNP-104 has the potential to shift the treatment paradigm in PBC with the opportunity to be the first disease-modifying therapy for PBC. Collaborating with COUR allows us to move our strategy forward through an expansion of our pipeline, leveraging our deep relationship with gastroenterologists and advancing innovation via differentiated opportunities like CNP-104. We believe COUR's expertise in immune reprogramming and Ironwood's development and commercial strength as well as our reach in the GI disease area presents an opportunity to help introduce a potentially new game-changing therapy to patients in significant need of new treatment options. We're thrilled to be collaborating with COUR, which expects to begin a clinical trial for CNP-104 this year. Jason will provide more detail on the agreement later on the call. Going forward, we'll continue to share new updates as our pipeline development progresses. Now back to Tom to discuss the commercial performance of LINZESS.

Thanks, Mike. LINZESS continues to deliver a remarkably strong performance in the third quarter, powered by both new patients and refill volume, further reinforcing its position as the #1 prescribed medicine in the U.S. for the treatment of adults with IBS-C and chronic constipation. As I mentioned earlier, LINZESS prescription demand grew 12% year-over-year, resulting in U.S. net sales of $253 million. This strong performance reaffirms our confidence that LINZESS has the potential to exceed $1 billion in U.S. net sales in the near future. We believe that the impressive demand growth we're seeing with LINZESS continues to be the result of strong execution of our commercial strategy and fueled by a few sustainable drivers. First, our clinical focus on constipation plus overall abdominal symptoms is a key differentiator for LINZESS relative to the needs of adult IBS-C patients, who often are burdened by bloating, pain, and discomfort. Second, we believe our consumer promotional efforts are encouraging more potential patients to seek information, as evidenced by the increased visits to linzess.com and the growing new patient starts. Telemedicine also continues to help make physician care easily accessible for IBS-C and chronic constipation patients. Third, our professional promotion efforts focused on gastroenterologists and high-prescribing primary care physicians are nearing pre-COVID levels and are having a positive impact on our overall selling effort. Finally, our class-leading payer access continues to be paramount to the success of the brand. LINZESS recently became a preferred brand across all commercial formularies for yet another major payer in the U.S. And we expect LINZESS will continue to maintain class-leading unrestricted access in 2022. We continue to advance a number of life cycle management opportunities with the goal of increasing the clinical utility of LINZESS. As we mentioned in August, I am very pleased that the FDA approved our proposed modification to the LINZESS label based on clinical data generated in pediatric studies. The updated label modifies the box warning for the risk of serious dehydration and contraindication against the use of children in those less than two years of age. The box warning and contraindication previously applied to all children less than 18 years of age and less than six years of age, respectively. As a reminder, LINZESS is not currently approved for use in patients under 18 years of age. The warning on the LINZESS label at launch was primarily applied due to preclinical findings. And there was an absence of any clinical data in the pediatric population at that time. Since that time, we've been generating clinical data in pediatrics to better characterize the potential benefit-risk profile of linaclotide in this population. This important label update reflects the clinical and safety data that have been generated to date in children 2 to 18 years of age. As soon as all the ongoing planned pediatric studies with linaclotide are completed, we plan to engage the FDA on potential additional label updates to reflect all the pediatric clinical and safety data that will be generated. Looking ahead, we're focused on delivering value to our patients and shareholders. We're confident in the strategy and the opportunities that we see ahead to improve the lives of millions of patients suffering from GI diseases. We believe the growth investments we're making position our company for long-term success. GI symptom and CI disorders can be severe and debilitating, often ranked near the top of the list for reasons why patients seek medical care. In most cases, these disorders have limited or no treatment options, creating urgency around the need for new and innovative treatment options. To address this problem, we have built a strong experienced team that is focused on pursuing innovative assets in GI with significant medical need and strong scientific rationale. This drives us every day at Ironwood. And I would like to thank all the employees, patients, caregivers, and advocates in the GI community for their shared dedication to supporting our efforts in this underserved market. I'll now turn the call over to Jason to review our financial performance.

Thanks, Tom, and good morning, everyone. I have a few updates to provide today. First, I'll walk through our Q3 financial performance, then touch on our capital allocation strategy and provide more specifics on our agreement with COUR. And finally, I'll review our 2021 guidance. Please refer to our press release for our detailed financial information. Moving to LINZESS. U.S. net trade sales grew 5% compared to the third quarter of 2020 driven by robust prescription demand growth, partially offset by net price and inventory channel fluctuations. For the balance of 2021, we expect that the impressive LINZESS prescription demand growth sustainability will continue, and we'll still expect mid-single-digit price erosion. Regarding the channel, using fewer inventory channel fluctuations to date in 2021 has resulted in favorable net sales growth in the first half of the year and is causing a dampening of net sales growth in the second half of the year, as was seen in the third quarter, and is expected to continue through the fourth quarter. Through the third quarter, net sales growth is up 11% year-to-date, and we continue to expect to meet our net sales growth guidance of between 6% and 8% for the full year. Turning to LINZESS brand profitability. Commercial margin in the third quarter was 74% versus 78% in the third quarter of 2020. I'd like to point out that the lower commercial margin compared to the same period last year was primarily the result of an increase in mix selling expense in the third quarter of 2021 versus the third quarter of 2020, when we did not execute as many in-person details due to COVID-19 restrictions. As you may recall, our selling expenses related to virtual call details and overhead during the first three quarters of 2020 were adjusted in the fourth quarter of last year. We continue to seek to expand margins over time through growing LINZESS net sales and disciplined investment behind the brand. In the third quarter of 2021, Ironwood revenues were $104 million driven by $100 million in the LINZESS U.S. collaboration revenues, which were flat year-over-year due to net sales growth being offset by higher selling expense compared to last year, as I just mentioned. Now to Ironwood's profitability. We delivered GAAP net income of $56 million in the third quarter of 2021, and adjusted EBITDA was $65 million. Moving to cash and capital allocation priorities. In the third quarter, we generated $75 million in cash flow from operations and ended the quarter with $574 million in cash and cash equivalents, up from $363 million at the end of 2020. As a growth company, we're focused on identifying and investing in opportunities that create the most value for our patients and shareholders over the long term. We're positioning our company for future success, which includes continued investment pipeline tests and expanding our innovative pipeline of assets, such as the agreement announced this morning with COUR. As previously disclosed in the second quarter of 2021, we have received authorization from our Board to buy back up to $150 million of our outstanding shares of common stock through December 2022. We are fortunate to have a strong balance sheet, which we believe positions us well for continued growth. Before moving to our financial guidance, I'd like to provide more detail on the option agreement with COUR. Under the terms of the agreement, we will make an upfront, nonrefundable payment of $6 million to COUR and additional payments of $4 million upon the commencement of COUR's clinical study for CNP-104, $2 million upon receipt of FDA Fast Track designation for CNP-104, and approximately $7.5 million to perform the study. We expect approximately $10 million of such near-term payments to hit the P&L in the fourth quarter of 2021, with the remaining payments to be incurred between 2022 and 2023. After we review the data from COUR's study, if we exercise the option, we will pay COUR $35 million in exchange for an exclusive license to develop and commercialize CNP-104 in the U.S. for the treatment of PBC. Additionally, we will pay royalties to COUR in the high single digits to low double-digit percentage of the aggregated annual net sales in the U.S. for products containing CNP-104. COUR will be eligible to receive commercial milestone payments of up to $440 million over the term of the agreement. We're excited to be collaborating with COUR to potentially help transform the treatment of PBC. CNP-104 fits squarely within the framework and guiding principles of our business development strategy. Going forward, we're looking at bringing assets similar to CNP-104 that are highly differentiated, target clear unmet medical needs, and have clear decision points. We continue to see these types of opportunities in the market. Turning to our 2021 financial guidance. In addition to invest U.S. net sales growth between 6% to 8%, we continue to expect total Ironwood revenue of $390 million to $410 million and adjusted EBITDA of greater than $210 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 for closing remarks before Q&A.

Thanks, Jason, and thanks, everyone, for joining our call this morning. I'm extremely proud of our financial performance this quarter and of our team's continued dedication to our vision of becoming the country's leading GI healthcare company. We look forward to updating you on our progress and on our 2022 outlook at the upcoming JPMorgan Healthcare Conference in early January. Operator, you may now open up the lines for questions.

Your first question comes from the line of Eric Joseph from JPMorgan.

This is Hannah on for Eric. So just first with regard to the COUR deal. Just wondering how the mechanism and clinical potential of CNP-104 contrasts with the other assets being developed for PBC. And can you speak to some of the properties of the candidate with respect to administration and dosing?

Sure. I'll have Mike Shetzline, our Head of Medical, take that question.

Yes. Thanks for the question. So as you're probably aware, current therapies directed at PBC are primarily derivatives of bile acids, things like URSO and things like Ocaliva. So what we're trying to achieve with the COUR asset is actually very much a disease-modifying effect because the platform is directed towards tolerizing the immune system. So what PBC is, it's an autoimmune disease and the antigen responsible for the pathology of the disease that we believe today is the PDC-E2 antigen. What the COUR asset does is it takes that antigen, encapsulates it in nanoparticles. Those nanoparticles get directed primarily to the liver and spleen. In those organs, the immune system, when they see the antigen, the PDC-E2, they recognize it and tolerize to it. So they become anergic or less responsive or sometimes not responsive and would not then continue the autoimmune destruction of the bile duct cells. That's the pathology of PBC. So in principle, the COUR asset targets the root cause of PBC, the autoimmune destruction of the bile duct cells. Current therapies try to manage the disease by mimicking the bile acids. Does that answer your question?

Yes. And can you speak a little bit just to the properties of the molecule, how it's administered and how you guys are currently dosing?

Yes, certainly. Yes. So currently, the dosing for the first-in-human study will be IV dosing, given two doses, one week apart. The evidence so far to date in clinical and preclinical models suggest that this could be sufficient to adequately tolerize patients to the PDC-E2 antigen.

So I mean from a commercial opportunity, as we look at this, obviously, this is a highly symptomatic disease. It's quite serious. It could be quite debilitating in the long term. And to have a drug like this that could be a disease-modifying agent, obviously, it could be a huge breakthrough. And you can imagine the value that could be created for patients. So I think the way we structured the deal and certainly the clinical development pathway really gives us a clear line of sight to a decision point, whether we move on or not. But we're very excited about the opportunity. We're very excited about the science. And I think we're looking forward to working with COUR in moving this asset forward.

Great. And just looking on CT.gov, it looks like the primary study has a 120-day primary study period before the follow-up period. Just wondering when you expect to see data and how that data on hand and how soon after receiving that data, you have to make the option decision.

Yes, that's a good question. As you know, this is a first-in-human study, and we are proposing a 120-day study. Our strategy with COUR involves understanding gastrointestinal diseases and disorders, where we have a strong grasp of the mechanism of action, the pathology, and the ability to analyze data for clinical value. This approach in PBC encapsulates all of that, which is why we are very excited about the opportunity. We are currently collaborating with COUR, and we will have chances to monitor study progress and examine some of the objective endpoints, such as the liver pathology biochemistries, including alkaline phosphatase, a recognized marker for disease progression and improvement in PBC. We will also look at the immune-modifying effects of the COUR asset, particularly the response of T cells in PBC patients to the PDC-E2 antigen, which we hope will improve during treatment. We'll need to gather that data throughout the study, and we expect to draw significant results. We are optimistic that integrating this clinical data will enable us to make a clear decision regarding the exercise of the option.

Your next question comes from the line of David Lebowitz from Morgan Stanley.

When you look at the asset CNP-104, I guess could you tell us a little bit more about the indication? How is it currently managed? How impactful it is on these individuals' day-to-day lives?

Mike, do you want to take that?

Sure. So PBC is a very chronic and debilitating disease. It not uncommonly progresses to a degree of liver function, liver dysfunction, and bile duct destruction that can ultimately lead to a need for liver transplant. So it's a very serious medical condition. On the way to that, patients suffer clinically detrimental fatigue and pruritus. The itching can be quite debilitating. The current therapies are ursodeoxycholic acid or URSO. And then for URSO failures, for people intolerant, they can take Ocaliva. So those current therapies are bile acid derivatives. They help increase liver bile flow. When we talk about what's happening in the liver to patients with PBC, they get bile duct destruction, and they get fibrosis. That impedes the flow of liver through the bile ducts and out into the digestive system. This impedance to the bile flow is one of the things that drive some of the symptoms. But we're managing that through bile flow. Those therapies do not treat the underlying cause of the disease, which is that immune destruction of the bile duct cells. And that's what CNP-104 is targeted to do. By taking the PDC-E2 antigen, its goal is to reeducate the immune system or how the body responds to that antigen, whereas in the PBC patient, that would destroy the bile ducts. By reeducating the T cells, the therapy has the potential to eliminate that destruction or reverse that destruction and provide a better immune profile, meaning that bile duct destruction could potentially cease, and patients should have a very clear disease-modifying and much better course and may even obviate the disease course if it were to completely reprogram the T cells.

If you look at the landscape right now and other drugs in development for PBC, how do you see this therapy as compared to them in terms of the promise?

Yes. So along the same lines, many of the therapies that are even being considered like those managing symptoms still focus on that bile acid mechanism or the bile acid mimics. They still try to approach the PBC patient from just enhancing bile flow to the liver. So really, that competitive landscape is consumed by these assets that improve liver flow but don't treat the underlying mechanism of the T cell destruction.

Yes. I think as we've talked to a number of the hepatology experts, this identification of the antigen and the specificity of the target are very exciting. This could be the first disease-modifying agent that we've been able to develop and could be a real breakthrough for patient treatment. So I think, David, we're very excited about the opportunity for this to be a game changer and really position it alone in this space.

What should we anticipate regarding the steps to market, particularly concerning the necessary trials and their timelines?

Mike, as far as the trials to get approved?

Yes, this is the initial study as proposed. We really need to see that data set to understand the benefit-risk; the current clinical data has shown that the platform is safe and well tolerated. This involves a new patient population in PBC patients. We will need to analyze the data from this initial study to inform how the subsequent studies will be designed and to ensure engagement with the agency. This is an orphan and rare disease, which usually provides options that could expedite our path to market. However, it is too early to get into specifics without any patient data.

Yes. I think, David, that's one of the things that are also attractive to us is the potential designation by the FDA for accelerated review as a priority. The time to market could be attractive depending on the clinical outcome of this study. Part of the reason why we see a significant value here as we move forward.

Your next question comes from Tim Chiang from Northland Capital.

I'm just looking at the COUR website. And I guess their target for data would be the first quarter of 2023. And I just wanted to sort of go back. Is there orphan drug status already with this CNP-104?

Mike?

Yes. I think COUR can exactly confirm that, but I think that's the case.

I was looking at the ClinicalTrials.gov website, and it appears that the inclusion criteria for this Phase IIa study involves patients who have experienced treatment failure with standard care, is that correct?

Yes. It's in patients who have failed either URSO, who are intolerant to URSO and/or Ocaliva. These are the bile acid derivatives that I mentioned earlier.

What is the failure rate with current meds? Is it pretty high?

Yes, it's a range, potentially up to 40%. It's important to understand that even with patients on URSO or Ocaliva, this mechanism is very synergistic. If this first asset proves successful and we are able to tolerize the immune system, that benefit will also apply to individuals on URSO or Ocaliva. We will begin studies to demonstrate that, but I want to emphasize that this immune-modifying profile is distinct and unique from current therapies.

I think, Tim, the other piece of this is this could be a disease-modifying agent that initially will probably be looked at in those failures. When you think about how debilitating and problematic PBC is, there's certainly an opportunity for these two treatments, as Mike mentioned, to work together. And over time, it would probably be pulled up into earlier therapy. So it can indeed be a disease-modifying agent. Yes, it is. We've talked about celiac disease, which is an area of interest. There's a lot of activity in this space that look attractive in addition to this opportunity in PBC.

And there are no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect.