Ironwood Pharmaceuticals Inc Q2 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by. My name is Sharell and I will be your conference operator today. At this time, I would like to welcome everyone to the Ironwood Pharmaceuticals Q2 2023 Investor Update Conference Call. I would now like to turn the call over to Matt Roache, Director of Investor Relations. Your line is now open.

Thank you, Sharell. Good morning, and thanks for joining us for our second quarter 2023 investor update. Our press release issued this morning 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 annual report on Form 10-K for the year ended December 31, 2022, and in our subsequent 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 a reconciliation of these measures to the most directly comparable GAAP measures. During today's call, Tom McCourt, our Chief Executive Officer, will review our strategic priorities and our pipeline; and Sravan Emany, our Chief Financial Officer, will provide an update on the commercial performance of LINZESS, discuss the recent addition of apraglutide to our portfolio through our acquisition of VectivBio, and review our financial results and updated guidance. Andrew Davis, our Chief Business Officer, is available for the question-and-answer session following our prepared remarks. Mike Shetzline, our Chief Medical Officer, is unable to attend today's call as he's out for personal reasons unrelated to Ironwood's business. While we do not know how long Mike may be out, we will provide updates as appropriate. Today's webcast includes slides. So, for those of you dialing in, please go to the Events section of our website to access the accompanying slides separately. With that, I'll turn the call over to Tom.

Thanks, Matt. Good morning, everyone, and thanks for joining us today. I'm excited to provide an update on our progress on what has been a transformative quarter at Ironwood. First, I'm pleased to announce that we are increasing our full year LINZESS U.S. net sales and Ironwood revenue guidance based on the strong performance of LINZESS. Second, LINZESS received FDA approval to treat pediatric patients aged six years to 17 years for functional constipation, further expanding the clinical utility of the brand and its growth potential. Finally, we're excited to have completed the tender offer to acquire VectivBio, including their key GLP-2 asset apraglutide. If successful and approved, we believe apraglutide has the potential to become the new standard of care for patients suffering from short bowel syndrome with intestinal failure and achieve $1 billion in peak net sales. We believe the continued success of LINZESS combined with our expanding pipeline is well positioned to realize our vision of becoming the leading GI health care company. Let's turn to Slide 6 for a brief overview of our strategic priorities. First, maximize LINZESS. LINZESS continues to see robust prescription demand growth, profitability, and widespread acceptance among health care practitioners as a leading branded prescription treatment for adults with IBS-C and chronic idiopathic constipation. In the second quarter, U.S. net sales and prescription demand both increased 9% year-over-year, demonstrating that the momentum of the brand remains strong. In June, LINZESS received FDA approval for pediatric patients aged six years to 17 years for functional constipation, making LINZESS the first and only prescription therapy indicated for this population, which has a high unmet medical need and limited treatment options. We're extremely proud of this achievement for Ironwood, but more importantly, for patients. Moving on to our second strategic priority, strengthen and progress our innovative GI portfolio. In addition to the impressive LINZESS performance in the second quarter, we also significantly enhanced our GI portfolio with the acquisition of VectivBio. This acquisition fits squarely within our strategic framework, and we believe it represents a critical step for Ironwood to achieve our vision and deliver value to patients and shareholders. Our third strategic priority is to deliver sustained profits and generate cash flow. We expect the cash flow from LINZESS will support a rapid deleveraging to below two times total net debt to EBITDA, ahead of the potential apraglutide commercial launch in 2025. As a GI-focused biopharma with strong cash flow generation, we believe we are well positioned to maximize LINZESS growth and continue to advance our pipeline programs to create the next growth horizon for the company. Next, I'll review our pipeline programs, which you can see on Slide 7. I'll start with an update on the timing of the top line data for the STARS Phase III clinical program of apraglutide in short bowel syndrome with intestinal failure, which continues to be our primary focus in the VectivBio pipeline and the expected value driver from the acquisition. We recently completed enrollment of the STARS Phase III trial with 164 patients suffering from short bowel syndrome with intestinal failure. It is the largest GLP-2 study ever conducted in short bowel syndrome with intestinal failure. A big congratulations to the entire STARS clinical team and the entire organization for this tremendous accomplishment. Given the medical need and the interest of patients, we elected to enroll all screened patients that made it successfully through the STAR study screening process and honor their commitment to participate in the clinical trial, allowing for more global diversity, which we believe is beneficial to both patients and the global development program. We expect the addition of these patients will now result in a top line readout for the STARS Phase III in March 2024. In addition, apraglutide for short bowel syndrome with intestinal failure received Fast Track designation, which is designed to expedite development of treatments for patients with limited treatment options and can lead to earlier drug approval and faster access. Apraglutide's Fast Track designation further reinforces our conviction in the clinical development program based on the unmet medical need and the potential benefit for patients suffering from short bowel syndrome with intestinal failure, which remains on track for a potential launch in 2025. We look forward to providing additional updates as the study continues to advance. In addition to evaluating apraglutide for short bowel syndrome with intestinal failure, we are also evaluating the asset as a potential treatment for patients with Graft-Versus-Host disease, or GvHD. Graft-Versus-Host disease is immunologically mediated and occurs in individuals with allogeneic hematopoietic stem cell transplantation, where donor immune cells react against the host recipient. The gastrointestinal tract is among the most common sites affected by GvHD and severe manifestations of GvHD in the gut portend poor prognosis in patients after stem cell transplant. We are currently executing a proof-of-concept Phase II study, which is going well and recently completed a preplanned interim analysis. The interim analysis supported continuing the study without any changes. Given the recent acceleration in recruitment of the study, we expect to complete recruitment in the near term, and we expect data on the complete study in the first quarter of 2024. Now the CNP-104 for the potential treatment of Primary Biliary Cholangitis. The proof-of-concept study is ongoing, and given the strong science underlying this therapy, we plan to assess T-cell response in patients dosed with CNP-104 in the second half of 2023. This will inform the timing of the top line data and potential option exercise. We expect to provide an update on the program at that time. We're excited about CNP-104 because it is truly precision medicine, and it introduces a potentially new game-changing asset for PBC patients as there are no therapies on the market today that address the root cause of the autoimmune destruction of bile ducts in PBC. Moving to IW-3300, a wholly owned Ironwood asset for the potential treatment of interstitial cystitis and bladder pain syndrome. There is a significant unmet need in this area as this chronic condition affects millions in America, yet there are very few treatment options currently in the market or in development. We are currently executing a proof-of-concept Phase II study, which is progressing as planned. We're excited about this program as it is the first time the crosstalk hypothesis will be tested in humans, but we are proud to be at the forefront of clinical development in this area. Before I turn the call over to Sravan, I want to acknowledge all the Ironwood employees, including our newest colleagues who have joined us through VectivBio, who have continued the momentum and strong execution against our strategic priorities as we pursue our mission to help make a remarkable impact in patients' lives. Sravan, over to you.

Thanks, Tom, and good morning, everyone. I'm happy to provide additional details on what was a very exciting and transformative quarter for Ironwood. Starting on Slide 9. As Tom mentioned a few moments ago, both LINZESS U.S. net sales and prescription demand grew 9% year-over-year. This strong growth was driven in part by a 15% increase in new-to-brand prescriptions year-over-year, reinforcing that patients and health care professionals continue to choose LINZESS in a growing market. We believe the strong demand momentum for LINZESS is a result of high treatment satisfaction from both patients and health care professionals, combined with the support of class-leading formulary access, guideline recommendations, and focused commercial execution. In addition, as previously mentioned, LINZESS was granted a new indication in June for the treatment of functional constipation, which affects roughly 6 million patients aged six years to 17 years old in the United States. Since the FDA approval, our talented sales team has been in the field educating customers. Thus far, feedback has been very positive, and health care professionals are excited by the ability to prescribe LINZESS to help this new patient population. In early July, we also began promoting LINZESS to pediatric gastroenterologists in specific geographies and will assess future promotional expansion based on market response from these efforts. We look forward to providing updates later in the year as we gain more insights into this opportunity, which will help inform optimal investment and the net sales potential in 2024. Moving on to our acquisition of VectivBio on Slide 10. We are thrilled to have apraglutide as part of our GI portfolio for the following reasons: we have high conviction in apraglutide's clinical program in the short bowel syndrome with intestinal failure based on its mechanism of action, designed for enhanced potency, extended half-life, and unique convenience of weekly dosing as well as compelling data to date. In addition, the novel design of the ongoing Phase III study is set up to evaluate efficacy in both short bowel syndrome with intestinal failure patient populations, which are stoma and colon in continuity. As a company with a strong network in the GI community, we believe Ironwood is best positioned to maximize the potential value of apraglutide for patients and shareholders by leveraging our existing expertise in clinical development, regulatory, medical affairs, and commercial execution, as evidenced by the blockbuster success of LINZESS. We believe we will drive significant operating leverage through Ironwood's existing commercial capabilities to support a potential commercial launch in 2025, if approved. As I mentioned earlier, we believe apraglutide has the potential to achieve $1 billion in peak net sales and significantly expand the treated patient population in short bowel syndrome with intestinal failure based on the asset’s unique properties. This acquisition has the potential to create an attractive financial profile for Ironwood over the long term, with apraglutide providing a significant catalyst to extend Ironwood's growth horizon through the 2030s. Additionally, I'd like to provide a brief update on where we are with the VectivBio transaction closing and the integration. As we previously announced at the end of June, we successfully completed the tender offer to purchase the outstanding ordinary shares of VectivBio for $17 per share in cash, with 98% of the shares being tendered. Following the completion of the tender offer, we began collaborating with our new colleagues and integrating Ironwood and VectivBio business operations, which is progressing well. We are taking the necessary steps to affect a squeeze-out merger under Swiss law to acquire the remaining 2% of VectivBio shares. We expect this process to be completed during the second half of 2023. We will provide additional updates and subsequent filings as steps in this process are completed. Next, I'll provide additional details on our financial performance for the quarter. As shown on Slide 11, U.S. net sales were $270 million in the second quarter of 2023, an increase of 9% year-over-year. Net sales growth was driven by LINZESS prescription demand growth of 9%. Second quarter net price was favorable compared to our previously communicated full year mid-single-digit net price erosion guidance due to favorable channel mix. Turning to LINZESS brand profitability: commercial margins in the second quarter of 2023 were 71% compared to 69% in the second quarter of 2022. Moving to Ironwood revenues. In the second quarter of 2023, Ironwood revenues were $107 million, driven primarily by U.S. LINZESS collaboration revenues of $105 million. Ironwood recorded $13 million of income tax expense in the second quarter, the majority of which was non-cash. We completed two restructurings in the second quarter of 2023. In April, as previously disclosed, we reduced our workforce by approximately 10% of our headquarters-based personnel. And in June, Ironwood commenced the elimination of certain positions related to the VectivBio acquisition. Ironwood recorded $13 million of restructuring expenses and adjustments, primarily comprised of employee severance, benefits, and related costs in the second quarter. In the second quarter, Ironwood recorded $1.8 million in interest expense and other financing costs and generated $8.8 million in interest and investment income. GAAP net loss was $1.1 billion, and adjusted EBITDA was a loss of $1 billion in the second quarter, driven by a one-time charge of approximately $1.1 billion related to the acquired in-process research and development from the VectivBio acquisition. In the second quarter, we generated approximately $35 million in cash flow from operations and ended the quarter with $175 million in cash and cash equivalents. The acquisition of VectivBio was funded through proceeds from our revolving credit facility, cash on hand, and cash of VectivBio. Moving forward, we continue to maintain our focus on generating sustained profits and meaningful cash flows, while now having the potential to extend our growth horizon through the 2030s. We expect to generate greater than $175 million of operating cash flows each year ahead of a potential apraglutide commercial launch, if successful and approved in 2025. Additionally, the acquisition of VectivBio is expected to be accretive to earnings per share beginning in 2026. And assuming no additional business development activities, we expect adjusted EBITDA to return to greater than $250 million by the end of 2025. We anticipate total net debt to EBITDA for our revolving credit agreement of approximately three times by the end of 2023. And we expect cash flows for LINZESS will support a rapid deleveraging to below two times total net debt to EBITDA ahead of a potential apraglutide commercial launch in 2025. Moving forward, we'll continue to prioritize investments to maximize the value of LINZESS, progress our development portfolio, and manage our capital structure through debt paydown. We will maintain the flexibility to evaluate additional opportunities for capital development. Next, I'll review our updated 2023 guidance on Slide 13. As a result of continued strong performance of LINZESS through the first half of the year, we are increasing our full year U.S. LINZESS net sales and Ironwood revenue guidance. We now expect LINZESS U.S. net sales growth of between 6% and 8%, driven by continued strong prescription demand growth and an improved pricing outlook for the remainder of the year. Accordingly, we now expect Ironwood revenue between $435 million to $450 million. We are also revising our adjusted EBITDA guidance to reflect the acquisition of VectivBio. We now expect a loss of approximately $900 million, which includes a one-time charge of approximately $1.1 billion from the acquisition. Excluding the impact of the one-time charge, adjusted EBITDA is an approximate representation of our operating cash flows. To wrap up, we had a strong second quarter and first half of the year. We believe we have strengthened our position to become the leading GI health care company. We are well positioned for continued growth, and we remain focused on maximizing LINZESS, strengthening and progressing our innovative GI portfolio, and delivering sustained profits and generating cash flow. We're excited about several key development milestones ahead of us, and we'll continue to keep you updated on our progress in the second half of the year. I want to close by thanking all of our employees, patients, caregivers, and advocates for their shared dedication to advancing and supporting therapies for GI disorders. Operator, you may now open up the line for questions.

Your first question comes from the line of Tim Chiang with Capital One. Your line is now open.

Hi, thanks. I've just got a few questions. I think maybe the first question is on the improved pricing for LINZESS. Could you just sort of comment on what the dynamics are for LINZESS in the second half of the year? How things have changed a little bit from the first half of the year for LINZESS?

Yes. So, thanks, Tim. Good to hear from you. So, I think from a pricing perspective, for the first few quarters, we experienced favorable pricing relative to our initial guidance and expectations. And I think as we disclosed, that's due to favorable channel mix. First half pricing trends have improved our outlook for the full year. And as you can imagine, when you have the volume of LINZESS, a slight shift in the mix is going to have a meaningful change. And so, I think that's essentially where we're at.

Got it. And then maybe just a follow-up on apraglutide. I mean obviously, you've adjusted the timeline for the top line readout. Is there any change? Is it really just screening related? Is that the reason for the push out on the release of the data?

Yes. I think the important point here is that we chose to enroll all patients who successfully completed the STARS study and the screening process. As Tom noted, we are committed to these patients and the sites involved. To preserve global diversity in the trial, we believe this approach benefits both the patients and our overall global development efforts. We are pleased to share that trial enrollment is complete with 164 patients, and we expect to have updates in the first quarter of next year.

Tim, this is Tom. I think this is a discussion that we had, obviously, with the Vectiv team. And the process of screening these patients is pretty robust and challenging. And we're asking patients to go through an awful lot during the screening process. So, we felt obligated to really include them into the trial. We felt it was absolutely the right thing to do. We had good alignment with VectivBio on that. Plus, it certainly strengthens the overall diversity of the study as we think about a global program as we think about the future filings of the product. So, we are absolutely delighted with where the program is at. Certainly, everything looks right where it needs to be. And I think we have great conviction and confidence in the clinical development program at this point.

And two final points on top of that, which is one that it's an extra 20 patients in the trial in the study. And then two, notwithstanding the extra 20 patients, we still expect to have a 2025 launch, and there's no impact from our perspective on the timing of our commercial launch.

Your next question comes from the line of Boris Peaker with TD Cowen. Your line is now open.

Good morning, and congratulations on the strong results for LINZESS. I have two questions, one about LINZESS and the other about GLP-2. Regarding LINZESS, can you share where the sales growth is originating from? Are there specific demographics experiencing increased uptake, or particular types of physicians, such as general practitioners versus gastroenterologists? Is the growth happening across the board? For the GLP-2 side, I would like to know your thoughts on the absence of a generic Gattex. Why haven't we seen one yet, and when might we expect to see it?

Yes. So, on that first question on LINZESS, it's really across the board that we're seeing growth. And so, we're excited by that. And as we said in the prepared remarks, we're seeing continued growth in the market, and we're continuing to see physicians choose LINZESS when those patients present.

I think part of that is that the pediatric indication strongly supports the overall profile of the drug, which I believe creates a significant positive effect. We'll gain a clearer understanding of the potential upside for pediatrics, although it is still early. Andrew and the team are thoroughly assessing how responsive the promotional efforts are to determine the level of investment we should make. This drug continues to show remarkable linear growth and even acceleration, especially with the new brands showing a 15% increase at this stage, which is quite impressive.

Yes. And so, we're just seeing these new patients continue to compare. And then I think the other piece is a strong profile remains the same, right, clinically, huge patient satisfaction. I think the things that have made LINZESS success over the last 11 years for us, I think these have continued here. And then, Andrew, do you want to take a crack at the Gattex question as well?

Yes. So, on generic Gattex, I mean, tough to say what's going through another pharmaceutical manufacturer's mind on what they're doing strategy-wise. But at the end of the day, peptides are not always easy drugs to make an easy drug to bring to market. I think there's a number of market dynamics for a generic to make it challenging. So, we haven't seen it yet. I think maybe not the most unexpected outcome for us at this point.

Boris, I mean as far as we're concerned, that's nothing but good news. When you look at kind of where Gattex in and when you look at the profile, of apraglutide with regard to its potency and its half-life, I mean this really could be a significant advancement in care for patients.

Your final question comes from the line of David Amsellem from Piper Sandler. Your line is now open.

Thanks. So, on the Gattex generic question, I know it's hard to make. It's a peptide and all that. But I guess my question here is, to the extent that Gattex does lose exclusivity, how are you thinking about payer dynamics for apraglutide? How are you thinking about pricing for apraglutide? So just help us understand the commercial implications of a loss of exclusivity for Gattex. And then secondly, for the STARGAZE study in acute graft versus host, to the extent that you do have a proof of concept, is that something you intend to take forward? Or is that something you'd look to partner at given that it's outside the GI realm? How are you thinking about that? Thank you.

Yes, Andrew, why don't you start with the first one?

Regarding the generic version of Gattex, I believe it might be a bit premature for us to provide specific price guidance at this stage. However, I can assure you that we have thoroughly considered and modeled this scenario during the transaction. Whether or not a generic Gattex becomes available, we are confident in our investment and the significant opportunities that lie ahead. As for the STARGAZE trial, we recently completed a planned interim analysis, which indicated that we can continue the study as it is. Based on our current status with the study and recruitment, we expect to have updates to share in the first quarter. At that time, depending on the trial's progress and the data outcomes, we will assess our options.

Yes. I believe the main focus here is identifying the greatest opportunity for value creation, which we will carefully evaluate. We're not committed to any specific outcome at this stage. Much of it depends on the profile and how proactive we decide to be in this area. We are driven by data and evidence, which will guide our choices. It's important to remember that there is a significant unmet medical need, particularly related to gastrointestinal issues. When these arise, the GI community gets involved and consulted, even though they don't usually provide direct care for these patients.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.