Earnings Call Transcript - IRWD Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Ironwood Pharmaceuticals Fourth Quarter and Full Year 2020 Investor Update Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Meredith Kaya. Thank you, please go ahead.

Meredith Kaya, Speaker

Good morning and thanks for joining us for our fourth quarter and full year 2020 investor update. Our press release crossed the wire this afternoon 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 September 30, 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.

Mark Mallon, CEO

Thanks Meredith. Good morning everyone and thanks for joining us today. Let me begin by saying how proud I am of the entire Ironwood team who truly show their passion and commitment throughout 2020 to advance treatments for GI diseases and redefine the standard of care for GI patients. Their passion and mission-driven approach is one of the things that has most inspired me during my time with Ironwood. As I shared last week, deciding to leave Ironwood wasn’t easy, but the chance to pursue certain passions of mine is really the right decision for me personally and for my family. I am confident Ironwood will be in great hands with Tom as Interim CEO while the Board conducts its search. Tom has been an incredible colleague of mine for many years and a key member of the leadership team since joining Ironwood in 2009. In addition to his many accomplishments over the years, he led the successful launch and commercialization of LINZESS. Despite the challenges of the COVID-19 pandemic over the last year, Ironwood’s business fundamentals and financials were strong. We believe the resilience and strength of LINZESS combined with the continued profit and cash generation of 2020 provides a solid foundation for the future. I'm confident Ironwood is well-positioned to deliver value for patients and shareholders. Turning to our 2020 performance, we began 2020 focused on our three core priorities to drive LINZESS growth, advance our GI portfolio, and deliver sustainable profits. LINZESS continues to be the prescription market leader within its category, demonstrating exceptional growth in the brand's eighth year since launch. Additionally, Ironwood has now delivered its second consecutive year of profits and ended 2020 with over $360 million in cash, more than doubling our cash position from the end of 2019. Turning to our pipeline, the results from the 3718 and 7246 clinical programs were disappointing. These are two distinct programs that were being developed to treat high unmet medical needs and represented an opportunity to potentially have millions of patients. While these types of outcomes are not uncommon in drug development, they are certainly never easy, especially when they affect our own teammates, as these did with the recent workforce reduction. We're pleased to receive the approval of linclotide sNDA for overall abdominal symptoms data in adults with IBS-C, as well as the progress of our ongoing pediatric studies. With several GI diseases in desperate need of new therapies, continued scientific progress within this category and our unique expertise and capabilities, the team is focused on finding and advancing innovative treatments for GI diseases. I'm proud of the strong foundation we've built together. All of you in Ironwood are true champions in the GI community and I'm privileged to have worked alongside you. I look forward to calling Ironwood as it seeks to drive continued success. With that, I'll turn it over to Tom.

Thomas McCourt, Interim CEO

Thanks, Mark and good morning everyone. I look forward to serving as the Interim CEO following Mark's transition as we build on the strong foundation we have in place. Our path forward strategy begins with maximizing LINZESS. We believe there's substantial opportunity for continued growth and are working closely with our partners to deploy innovative commercial strategies and enhancing the clinical profile through lifecycle management. Second, we're focused on building an innovative GI development portfolio by pursuing assets that target serious organic GI diseases. We maintain a disciplined approach to exploring and assessing potential new assets, including applying a focused set of criteria and a high bar for any potential deal that we may consider. We believe our new refreshed approach has the potential to drive our business further and faster and with the potential for providing great benefit to patients we can serve. And third, we seek to continue to take a thoughtful and disciplined approach to capital allocation in an effort to continue generating sustainable profits and cash flow. We're steadfast in our mission and importantly remain focused on our goals of driving value to shareholders by bringing important medicines to patients and building a growing and successful business. Now, let me turn to the commercial performance. In 2020 LINZESS showed incredible strength and resilience in the face of the pandemic, further strengthening its position as the number one prescribed medicine in the U.S. for the treatment of adults with IBS-C and chronic constipation. LINZESS prescription demand grew 8% in the fourth quarter and 9% for the full year 2020 year-over-year. This strong performance translated into full year U.S. net sales of $931 million, a remarkable achievement and we are seeing strong LINZESS demand growth continuing into the first quarter and while it's still early, we're very encouraged by the performance thus far. We believe LINZESS remains on track to exceed $1 billion in U.S. net sales with several additional opportunities to drive further growth. The brand hit all-time highs in New-to-Brand prescriptions in the second half of 2020, reinforcing that patients and healthcare practitioners continue choosing LINZESS for appropriate patients despite the pandemic-related limitations. We also saw an increase in 90-Day prescriptions as a percent of our total business. In the fourth quarter, 90-Day prescription demand was 20% of our business versus 17% during the same time in 2019, meaning on average more total pills per prescription. The brand's success to date in the U.S. has come through consistent and strong execution of the commercial strategy that's grounded in three core fundamentals: increasing awareness of LINZESS among physicians, motivating appropriate patients to seek care and request LINZESS, and securing broad peer access. Moving forward, we intend to continue to focus on these core fundamentals, but to execute in new ways.

Gina Consylman, CFO

Thanks, Tom and good morning everyone. I am pleased to be able to highlight our strong financial performance for 2020 and provide our 2021 financial guidance. Please refer to our press release for our detailed financial information. First, touching on our 2020 financial performance, Ironwood total revenues in the fourth quarter of 2020 were $117 million driven primarily by a 9% increase in U.S. collaboration revenue from LINZESS year-over-year and $390 million for the full year exceeding our 2020 revenue guidance. A reminder that 2019 revenues included $42 million in license and milestone payments and $49 million in sales of linaclotide API recorded in 2019. Beginning in 2020, we are no longer responsible for the supply of linaclotide API to our ex-U.S. partners. AbbVie sales during this past year reflected the remaining API shipments to Astellas and AstraZeneca for our amended agreements. Regarding LINZESS, U.S. net sales were up 16% in the fourth quarter and 10% for the full year 2020 year-over-year. I'd like to briefly comment on commercial margin in the fourth quarter as it was lower than we have seen in previous quarters. This decrease is due primarily to an adjustment to selling expenses recorded during the period. During the first three quarters of 2020, only costs associated with in-person details were included as part of the LINZESS U.S. brand collaboration. Since we weren't able to execute as many in-person details due to COVID-19 restrictions, we saw a significant improvement in commercial contribution during those periods. Further, we and AbbVie determined to adjust the selling expenses due to the COVID-19 pandemic. As such, full year 2020 expenses are similar to our investments in 2019 and the adjustment simply reflects timing across the quarters. Looking ahead to 2021 we expect the commercial investment behind LINZESS to be in line with our investment in 2020, and we continue to seek to expand margins through growing LINZESS net sales and disciplined investment behind the brand.

Michael Shetzline, Speaker

Thanks Gina. I will spend the last few minutes touching on the opportunities within the GI space and our own Ironwood 3300 program. We've been steadfast in our efforts to advance treatments for GI diseases and over the past two years, the learnings we gained give us confidence in our fresh strategy to also explore earlier stage development opportunities in serious organic diseases. Through our recent assessment of the GI landscape, we identified over 100 GI assets across more than 25 disease areas to fit our new focus strategy. Through these efforts, we prioritized eight disease areas with high unmet need and where we believe we can have the most impact. These areas are seeing a lot of progress in the understanding of the disease, the pathophysiology, and the potential targets. For example, two of the disease areas we're looking at are pancreatitis and celiac disease. Pancreatitis is a significant medical need since unfortunately today patients are still treated with IV fluids and pain management with no approved therapies targeting the underlying pathology of their disease. Celiac disease, where the pathophysiology is very well defined and the mechanism is well understood and there are lots of opportunities to target new medications for patients suffering from this disease still has no medical therapies. While these are just two examples, clearly, there remains tremendous unmet need within GI. In conjunction with this strategy, we're also advancing 3300, a GC-C Agonist being developed for the potential treatment of visceral pain conditions such as bladder pain syndrome and endometriosis. 3300 is a stable and potent GC-C Agonist that provides a true opportunity to test the cross-talk hypothesis in humans. Cross-talk is a well-known biological phenomenon where sensations or injury originating in one organ can cause altered sensation in a nearby organ because of overlapping nerve pathways. We believe this can result in enhanced pain perception affecting the bladder and reproductive organs in the pelvic area. We have strong preclinical data in a number of visceral pain models, including vaginal and bladder pain that suggests the potential for GC-C stimulation with 3300 to alleviate visceral pain. We expect a similar IND application with the SFDA in the second half of 2021, putting us on track, if approved, to initiate a Phase 1 clinical trial with 3300 in early 2022. We expect this trial will help us determine the asset’s potential for further clinical development. I will now turn it over to Mark for some closing comments before Q&A.

Mark Mallon, CEO

Sorry, I was on mute, apologies everyone. So thanks, Mike for catching that and thanks for the update on 3300. It's certainly an exciting opportunity for Ironwood. As you've heard from the team this morning, Ironwood has significant opportunity ahead to advance our vision of becoming the leading GI-focused healthcare company in the U.S. and I want to thank the entire Ironwood team for a tremendous effort in putting patients at the forefront of everything we do. Thanks again for joining us this morning. Operator, Megan, we can now open the line for Q&A.

Operator, Operator

Our first question is from Martin Auster with Credit Suisse. Your line is open.

Mark Mallon, CEO

Hi Martin.

Unidentified Analyst, Analyst

Hi everyone, this is Mark on for Martin. But thanks for taking my question. I guess two for me, I was wondering if you might be able to provide a little more clarity on your 2021 guidance and it looks like revenue guidance was roughly flat year-over-year, while you expect LINZESS net sales to grow 3% to 5%. Is that discrepancy due to higher Ironwood commercial cost or is there something else we need to consider and I guess are there any additional details you can provide on how we should think about these costs moving forward? And then the second question I have relates to, I believe generic Amitiza entered the market the other month. I'm just curious if you could kind of speak to what impact you have seen since it entered the market and has it resulted in any pressure on LINZESS pricing and if so, how does that impact on pricing compared to your expectations coming into the year?

Mark Mallon, CEO

So thanks for the questions, Mark. Gina, can you take the first one and Tom maybe you can pick up the question on Amitiza.

Thomas McCourt, Interim CEO

Sure.

Gina Consylman, CFO

I appreciate your question, Mark. Let me clarify the situation regarding the decline in Ironwood revenue even though we are projecting an increase in LINZESS revenues. It's important to remember that Ironwood revenue comes from more than just the collaboration with AbbVie on LINZESS. For example, in 2020, there was a minor contribution from API sales, which included some completed transactions with Astellas and AstraZeneca stemming from agreements restructured in 2019. We generated significant revenue from those deals in 2019 but only a small amount in 2020, and that's now all concluded. We don't expect any further revenue from this in 2020. Additionally, regarding the $10 million I mentioned in the guidance, this amount is part of total Ironwood revenue and is actually projected to decrease year-over-year, or for 2021 compared to 2020. In 2020, we had received fixed payments alongside royalties, but starting in 2021, we anticipate only receiving royalties.

Unidentified Analyst, Analyst

Got it.

Mark Mallon, CEO

Tom, go ahead.

Thomas McCourt, Interim CEO

You are correct that a generic version of Amitiza is now available. Its market share has been declining over time. It was the leader when we entered the market, but within the first 18 months, we managed to catch up and even surpass it in market share. It's important to note that these are distinct molecules, and their efficacy and tolerability differ significantly. The growth of LINZESS has been primarily driven by high treatment satisfaction among both physicians and patients. Regarding pricing pressure, we've been operating in a generic market since our launch, with generic options available to patients. It's also worth noting that most patients are still using over-the-counter options, despite their dissatisfaction. This is where we find our business opportunities. We expect further pricing pressures from various sources, including the government. However, we have guided towards stable pricing this year, which we believe will carry into next year. We have secured a few contracts, leading to some price erosion as mentioned by Gina. The key takeaway is the overall health of the brand. Looking at the demand growth and what we've experienced as we concluded last year and moved into this year, we remain confident about the brand's ongoing viability in the market.

Unidentified Analyst, Analyst

Great, thanks for taking my question.

Operator, Operator

Your next question is from Eric Joseph with J.P. Morgan. Your line is open.

Mark Mallon, CEO

Hi, Eric.

Eric Joseph, Analyst

Hi, good morning, thanks for taking the questions. I’m thinking about potential transactions.

Mark Mallon, CEO

Eric, could you repeat that question? I don't know about the others, but it broke up a little bit and it was hard to hear.

Eric Joseph, Analyst

Stuart, can you hear me now? Sorry about that.

Mark Mallon, CEO

That's better, yeah, that's better.

Eric Joseph, Analyst

Okay, yeah, just wondering if there's any further color on potential transactions that you're thinking about in the organic GI space, particularly around size of the deal and speed of development in a target asset, and whether the change in leadership will have any impact on timing? Thanks.

Mark Mallon, CEO

So, Tom why don't you take sort of how you're seeing sort of organic opportunities in GI and Gina certainly jump in with any thoughts you have as well? And Tom I think there is a question about the strategic direction at the end. Sorry Tom.

Thomas McCourt, Interim CEO

Sure. As Mark, as both Mark and Gina mentioned, we're really focusing on these serious organic diseases. We've identified a number of assets, as Mike mentioned, and most of these are held by fairly small companies with limited development expertise and essentially no commercial expertise. So obviously, we're really focusing on particularly assets that we can leverage our internal expertise to accelerate time to market. So we're really looking for an asset where there's clear incremental value to be created. So, we have a very high bar, we've looked at a number of assets to date but we will continue to strive to make sure that it is the right next move for us as far as where we're going. I mean, obviously, it is built and is very complementary to LINZESS with regard to the commercial model. But obviously, Mike and his team bring very deep scientific and medical expertise to make a good choice. And then obviously working with Gina’s corporate development team to make sure we get the right deal done.

Gina Consylman, CFO

Sure, thanks Tom. I might just add that I don't expect the leadership change to affect our ability to continue executing our transactions this year. I have a lot of confidence in Tom, especially from working with him over the past seven years, and Julie stepping up as Executive Chair is a great advantage. I believe this combination places us in excellent hands. I would also like to remind you that we discussed a bit about the minor revenue fluctuations relating to API and royalties as well as our milestone payment. However, our core business remains strong, with collaboration revenue from LINZESS growing year-over-year. This fundamental strength positions us well financially, allowing us not only to cover the upfront costs associated with our development stage asset but also to support its ongoing development, while maintaining profitability in the process.

Mark Mallon, CEO

I want to emphasize how prepared the team is to continue performing at a high level. In my experience, I've never seen a team more capable of driving LINZESS growth. We have an outstanding commercial team that Tom has assembled, and they have executed extremely well over the past year. They are full of new ideas and collaborate effectively, which is essential to our success. From a business development perspective, we have a fully aligned Board and management team. The strengths within the team are clear, and Mike and Tom have outlined specific targets for us. We have the resources and the alignment to act quickly on these objectives. Additionally, we demonstrated our ability to generate profit and cash in 2020, and our focus on execution and delivery is stronger than ever. I'm confident that the team will maintain its momentum and may even enhance their performance.

Eric Joseph, Analyst

Okay, thanks for all the color there, appreciate that. Appreciate you taking the questions, I will move back to the line.

Operator, Operator

Our final question is from Boris Peaker with Cowen. Your line is open.

Boris Peaker, Analyst

Good morning.

Mark Mallon, CEO

Hi Boris, how are you?

Boris Peaker, Analyst

Can you talk about the trend in gross to net discounting and the outlook for that over the next several years?

Mark Mallon, CEO

Sure, I will ask Gina to share her thoughts on that, and I'm sure Tom may want to add some additional insight. Sorry, Gina.

Gina Consylman, CFO

Yes, I'm happy to discuss this, especially since 2020 was a fantastic year that we were quite pleased with. Tom mentioned our original price guidance for the year, which we achieved. The year-over-year growth in net sales was not only due to strong demand but also price appreciation. This price appreciation resulted from thoughtful changes we made to our plan designs at the start of 2020. For example, we stopped being exclusive to certain plans, but fortunately, we did not experience a drop in demand because of these changes. That was the primary factor, along with some minor unfavorable adjustments from 2019 related to gross to net, which are typical from time to time. Since those adjustments were not repeated in 2020, they contributed to our price appreciation for the year. Looking ahead to 2021, we have guided for mid-single-digit price erosion, which is also linked to contract changes we are aware of. We are experiencing continued pricing pressure mainly due to competitive factors and the upcoming generic version of Amitiza. However, our strategy for demand growth remains unchanged. We are fully investing behind our brands and believe that the demand will continue for many years. Additionally, we aim to ensure broad payer access with an affordable copay, which is $30 or less for most of our patients. To maintain this broad access, we may need to make adjustments year-over-year to ensure that our patients can still afford their medications. I have previously mentioned that I do not expect price appreciation to be the norm. While I am pleased with 2020, I do not anticipate it will continue going forward. I expect ongoing pressure throughout 2021. We've guided to mid-single-digit price erosion, but payers often do not wait for contracts to expire to renegotiate. They are actively monitoring the situation and we are continuing our focus on demand growth and broad payer access simultaneously.

Boris Peaker, Analyst

Great. Go ahead.

Thomas McCourt, Interim CEO

Boris, I just wanted to share one last thought. This year has really been an eye-opener for us. As you know, most of our major plans have been preferred and restricted, meaning we are the only option available. Last year, we made a few decisions to give up that exclusivity and move to one or two positions, or even a non-preferred position. Despite that, we are still driving growth, specifically double-digit growth in those plans. I think this gives us some flexibility considering our situation with these plans and the other options they might not have ordinarily had. It also highlights the strength of our brand in terms of how it is perceived by payers. However, I completely agree with Gina that as we look ahead, we should expect some price erosion year-over-year, which is why it is essential to continue driving demand.

Boris Peaker, Analyst

Thank you, that's very helpful. My second question is about the prescription option that recently became available over the counter and its impact on your price growth. Is that still in play and contributing to prescription growth? Could you provide any updates on that?

Thomas McCourt, Interim CEO

Sure. I believe you're specifically referring to the removal of the generic peg from the prescription market, correct?

Boris Peaker, Analyst

Yeah.

Thomas McCourt, Interim CEO

At the end of 2019, we experienced a notable shift in the market after the removal of the market leader, which led to a surge in prescriptions. The significant change was the elimination of a key choice in prescription drugs. This created a situation where, when patients are dissatisfied with over-the-counter options, they are less likely to want another non-prescription alternative. LINZESS not only offers excellent clinical results and high patient satisfaction, but it also became one of the fewer options available, aside from some recent entrants that have not been able to effectively differentiate themselves. We have observed that LINZESS has continued to perform well, with the vast majority of our business coming directly from the over-the-counter market, which is crucial for us. We are also seeing an increase in our overall market share, driven by this change in available choices, which has helped boost LINZESS's growth.

Boris Peaker, Analyst

Got you. Okay, great, thanks for the detailed answers to my questions.

Operator, Operator

Our final question is from Jacob Hughes with Wells Fargo Securities. Your line is open.

Jacob Hughes, Analyst

Hey guys, good morning.

Gina Consylman, CFO

Good morning.

Jacob Hughes, Analyst

Just a follow-up question on your guidance. If I just find your revenue guidance, I just take kind of the midpoint of your revenue guidance and take out the $10 million that you mentioned for other, it kind of implies collaboration revenues are up modestly year-over-year. And I was just wondering, is that going to kind of a reduction on the commercial margin or higher investment or what was the explanation there? Thanks.

Mark Mallon, CEO

Gina, you want to take that.

Gina Consylman, CFO

Sure, we do expect LINZESS revenues to keep growing. Over time, we also anticipate that margins will continue to improve as revenues increase and we make thoughtful investments. We have been fully supporting the brands. Looking at this year’s numbers, I believe they are around $10 million higher than last year. We can continue to invest in the brand and make more strategic investments that offer higher returns. We are guiding for LINZESS sales growth of 3% to 5% for the year, with a similar level of investment. Additionally, just a reminder that we retain 50% of that increase.

Jacob Hughes, Analyst

Okay. Thank you.

Gina Consylman, CFO

Hopefully that's helpful.

Operator, Operator

We have no further questions at this time. I turn the call back to presenters for closing remarks.

Mark Mallon, CEO

Well, Tom, I want to take a moment to thank you and the entire team for your great work in 2020. I wish you the best of luck as you step into the Interim CEO role, and I encourage the whole team to continue their excellent efforts and successes. As I mentioned earlier, I am confident about our future progress. Tom, I'll give you the opportunity to share any final thoughts as you prepare to take over. Thank you all for the past two years.

Thomas McCourt, Interim CEO

Certainly, Mark. I want to express gratitude on behalf of the Board and the management team for the incredible experience we've had working with you. We've learned a great deal from your leadership. Over the past few years, we have successfully resized the company, sharpened our focus, and enhanced profitability. You are leaving us in excellent condition. As I step in as Interim CEO, I am genuinely excited about the opportunities ahead. I am a strong advocate for LINZESS, and I believe we have a significant journey ahead, particularly with a robust product life cycle. We are fortunate to have AbbVie as a fantastic partner, and our innovative approach allows us to broaden our perspective on the brand, especially regarding its life cycle and market innovation. The telemedicine sector is particularly promising for this brand, and we have a highly skilled team ready to move forward. Thank you for everything, and I look forward to the coming year as we work with the Board to make the right decision regarding the future CEO. Thank you.

Mark Mallon, CEO

Thanks operator, that’s it for us.

Operator, Operator

This concludes today's conference call. You may now disconnect.