Earnings Call Transcript - IRWD Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ironwood Third Quarter 2020 Investor Update Conference Call. Please be advised that today's conference is being recorded. Thank you, Ms. Meredith Kaya, you may begin.

Meredith Kaya, Investor Relations

Good afternoon, and thanks for joining us for our third quarter 2020 investor update. Our press release crossed the wire this afternoon and can be found on our website, www.ironwoodpharma.com. Today's call and accompanying slides include forward-looking statements. Such statements involve risks and uncertainties that may cause actual results to differ materially. A discussion of these statements and risk factors is available on the current safe harbor statement slide as well as under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended June 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 a reconciliation of these measures to the most directly comparable GAAP measures. During today's call, Mark Mallon, our CEO, will begin with an overview of the quarter; Mark Plinio, our Chief Commercial Officer, will review out commercial performance; and Gina Consylman, our CFO, will review our financial results and guidance. Michael Shetzline, our Chief Medical Officer, will also be available during the Q&A portion of the call. Our President, Tom McCourt, is unable to join us today due to a personal matter. We will be referring to slides via the webcast. For those of you dialing in, please go to the Events section of our website to access the webcast slides. With that, I'll turn the call over to Mark.

Mark Mallon, CEO

Thanks, Meredith, and good afternoon, everyone, and thanks for joining us today. Just over 18 months ago, we launched Ironwood as a purely GI-focused company. And since then, we've been resolute in our mission of advancing GI medicines and redefining standard of care for patients. We set up from the beginning with three strategic priorities: drive LINZESS growth, advance our GI portfolio, and deliver profit. While we have been presented with challenges along the way, we continue to execute well against our priorities and remain steadfast in our focus on our mission. Today, we believe Ironwood is in a strong position. LINZESS continues to grow at nearly double-digit rates compared to last year, contributing substantial revenue to our business, and we have now achieved our sixth consecutive quarter of profits. Let me speak briefly to each of these priorities, and then turn it over to the team for more detail. LINZESS continues to be the prescription market leader within its category. Prescription demand grew 7% year-over-year in the third quarter and in the face of continued COVID-19 pandemic. The resiliency that LINZESS has shown over this unprecedented period is remarkable. LINZESS's performance resulted in total net sales of $221 million for the third quarter. As you know, Ironwood shares equally with our partner AbbVie in the brand's profit. With a 78% commercial margin, Ironwood recorded $100 million in third quarter revenue from U.S. LINZESS sales. We remain confident in the brand's potential to achieve $1 billion of peak net sales, thereby providing a solid foundation to support future growth. We've also thoughtfully invested behind our business. This discipline supported our transition to profitability post-separation, and we've demonstrated our ability to generate profits in every quarter since then. Now with over $300 million in cash on our balance sheet and more than $50 million of cash generated in the third quarter, Ironwood is a strong cash flow-generating business. And as Gina will discuss, we are pleased to announce today that we are increasing our 2020 financial guidance. Turning to our pipeline. These past few months have clearly been disappointing as the outcomes of both 3718 and 7246 development programs were certainly not what we had hoped for. I commend the team on executing two very well-designed and robust clinical programs that delivered clear results. Unfortunately, based on the results, we made a quick data-driven decision to discontinue both programs and restructure our organization with a planned workforce reduction. I want to emphasize that a decision that impacts our colleagues in this way was not easy to make. But we believe it has the potential to help better position our company moving forward as we seek to continue advancing our GI-focused mission and enhancing shareholder value. As we look to the future, we recognize that GI remains a therapeutic area with significant unmet need, including highly symptomatic patient populations, many severe and debilitating diseases that often have limited or no treatment options available. We understand the need for new therapeutic approaches to treat these diseases, and we believe we have a strong tenure team with the knowledge and expertise to advance innovative science and build successful brands. We continue to explore accessing complementary commercial and development stage GI opportunities with the same high bar that we've always had. At the same time, we regularly review and evolve our strategy as we adapt to the bottom market dynamics and continue to assess all options to enhance shareholder value. Working alongside the amazing Ironwood team, who are true champions in the GI community, I look forward to what the future holds. Before I turn it over to Mark to discuss our commercial performance, I want to take a moment to welcome Alex Denner, who we announced this afternoon will be joining Ironwood's Board. As many of you know, Alex is a seasoned healthcare investor and has broad experience as a Board Director overseeing the operations of companies within our industry. We've developed a strong relationship with Alex over these past few years as Sarissa is one of our largest shareholders, and we look forward to collaborating with him on the Ironwood Board.

Mark Plinio, Chief Commercial Officer

Thanks, Mark, and good afternoon, everyone. LINZESS has shown incredible resilience in the face of this pandemic, further strengthening its position as the #1 prescribed medicine in the U.S. for the treatment of adults with IBS-C or CIC. In fact, LINZESS leads all other brands in this category in total prescription share, achieving an all-time high of approximately 40% in September. In addition to 7% prescription demand growth year-over-year, we have seen new-to-brand prescription demand continue to grow in the third quarter as well. As a reminder, beginning in late March at the start of the pandemic in the U.S., we saw a negative impact on new-to-brand prescriptions. Not surprisingly, fewer patients were going into the offices to see their physicians. We believe this, coupled with our decision to pause in-person promotion at that time, resulted in fewer new patients receiving prescriptions for LINZESS. However, we believe the launch of our new DTC campaign in late spring and our sales force beginning to return to the field contributed to the rebound in new-to-brand prescription demand in the second quarter. This growth continued to strengthen in the third quarter, returning to pre-COVID-19 levels and outpacing the broader IBS-C and CIC branded prescription market. In the third quarter, average new-to-brand prescription demand increased 10% compared to the second quarter. By comparison, the rest of the branded prescription market, in aggregate, grew new-to-brand prescriptions by 8% during the same period. Another driver of prescription demand is the continued growth in the share of 90-day prescriptions, which now represent approximately 20% of total LINZESS prescriptions in the third quarter. In the third quarter, total average LINZESS prescription size grew 4% year-over-year to 42 pills per prescription. And new LINZESS prescription size grew 5% to 46 pills per prescription. As we have mentioned before, data suggests that compliance on LINZESS increases substantially with 90-day prescriptions as we believe patients with IBS-C are more likely to experience greater abdominal pain relief from LINZESS over the course of a 90-day prescription as compared to those on a 30-day prescription. Since launch, our LINZESS commercial strategy has been focused on three core fundamentals: increasing awareness of LINZESS among physicians, motivating appropriate patients to seek care, and securing broad payer access. We believe it is our focus on these fundamentals and our ability to demonstrate strong execution against them that has supported the brand's success to date. We see additional drivers, including the return of our customer-facing employees to the field, the overall abdominal symptoms sNDA approval, and our innovative consumer efforts leveraging telehealth, helping to support continued growth moving forward. First, by the end of the quarter, the combined Ironwood AbbVie field force was mostly back conducting in-person details in territories throughout the country. While reps' access to physician offices isn't where it was prior to the COVID-19 pandemic, it continues to increase, especially among the higher prescribing doctors. Second, in September 2020, the FDA approved the supplemental new drug application for LINZESS, resulting in an updated label that now includes data demonstrating that linaclotide improves the overall abdominal symptoms of bloating, discomfort, and pain in the adult population with IBS-C. The team has already integrated some of the refreshed language on the LINZESS website and in certain promotional materials. A full refresh of the consumer campaign is expected in the spring of 2021. Third, we have been leveraging innovative new channels like telehealth to amplify LINZESS consumer promotion in an effort to bring awareness and support to patients. Telehealth has been a significant driver of prescriptions written by gastroenterologists during the pandemic. At the peak of the pandemic in April, a significant portion of LINZESS new patient starts came through telehealth. While the share of telehealth interactions has declined from the April peak as offices have opened up, we believe telehealth, as a channel, has the potential to continue to play an important role in driving future growth of LINZESS. The IBS-C category overall continues to experience remarkably stable growth, in line with what we have seen in recent years. With approximately 40% market share in the U.S. as of the end of September, LINZESS remains the prescription market leader in the category. This strong position, combined with what we believe are multiple remaining growth drivers, reinforces our confidence in our ability to continue to drive LINZESS growth now and into the future.

Gina Consylman, CFO

Thanks, Mark. Over the next few minutes, I will provide some additional color on recent corporate actions, followed by some highlights from our financial performance and our revised guidance for the year. Please refer to our press release for our detailed financial information. In connection with the recent decision to discontinue our 3718 program, we are planning to reduce the workforce by approximately 100 employees. We continue to expect both the discontinuation of 3718 and the planned workforce reduction to result in total cost savings of approximately $95 million, comprised of at least $45 million of annualized savings related to the planned workforce reduction and an additional approximately $50 million related to external spend for 3718 that was previously expected to incur through 2021. These cost savings exclude one-time costs of approximately $15 million to $18 million, primarily associated with the planned workforce reduction. Our decision to reduce our workforce was not one we made lightly, but one that we felt was important as we further support our business moving forward. Ironwood remains on solid footing, as indicated by our strong financial performance in the third quarter. Ironwood revenues were $103 million, driven by U.S. LINZESS collaboration revenues of $100 million. Our core business, our U.S. LINZESS collaboration revenues, increased 18% compared to the third quarter of 2019. It's worth noting that the year-over-year Ironwood revenue comparison is not apples-to-apples. Ironwood total revenue generated in the third quarter of 2019 included $42 million in nonrecurring license and milestone revenue related to the amendment of our ex-U.S. linaclotide agreements in China and Japan. LINZESS net sales were $241 million during the quarter, as reported by AbbVie, a 10% increase compared to the third quarter of 2019. The growth for the brand was driven primarily by increased prescription demand combined with modest net price improvement and inventory fluctuations. Brand margin, including both commercial and R&D expenses, was 73% during the quarter. The increase in margin was primarily due to higher net sales and lower brand expenditures. Keep in mind that we're limited in-person details by the combined sales teams during the quarter due to the COVID-19 pandemic. However, as Mark mentioned, the combined field force is now mostly back, conducting in-person details in territories throughout the country. A reminder that remote selling activities conducted by Ironwood and AbbVie are not counted as an expense in the U.S. LINZESS commercial collaboration. Turning now to Ironwood's profitability and cash. We delivered our sixth consecutive quarter of profitability in the third quarter. GAAP net income was $34 million, and adjusted EBITDA was $47 million. Additionally, we generated $54 million in cash flow from operations and ended the third quarter with $308 million in cash. We believe our continued financial performance, our current cash balance, and the numerous steps taken in 2019 and 2020 to strengthen our financial profile positions us well to continue to invest thoughtfully behind our business and pursue inorganic assets. As we head into the last few months of the year, we are pleased to announce that we are increasing our 2020 financial guidance. We now expect high single-digit percent LINZESS net sales growth year-over-year compared to our previous guidance of mid-single-digit percent net sales growth. We also expect total Ironwood revenue to now be between $370 million and $385 million compared to our previous guidance of $360 million to $380 million. And for adjusted EBITDA, we expect to generate greater than $130 million in 2020 compared to our previous guidance of greater than $105 million.

Mark Mallon, CEO

With that, I'll turn it over to Mark for some closing comments before Q&A. Thanks, Gina. In summary, we entered the final leg of 2020 with what we believe are sound business fundamentals of focused strategy and a resilient and growing business. I would be remiss if I did not take a moment to commend the hard work that all of my colleagues at Ironwood have put in during a very challenging year. In light of the ongoing pandemic and the clinical trial setbacks this year, our colleagues' continued commitment to and passion for our mission has reinforced what a remarkably agile culture and community we built at Ironwood. We believe that Ironwood is positioned well and are excited about the opportunity to improve the lives of GI patients and deliver shareholder value. Thanks again for joining us this afternoon. And operator, we can now open the line for Q&A.

Operator, Operator

Your first question comes from David Lebowitz with Morgan Stanley.

David Lebowitz, Analyst

With the uptick in the quarter, I guess you're attributing most of it to the DTC campaign. Has there also been, I guess, more embracing of prescribing patients with telemedicine in the current environment?

Mark Mallon, CEO

Mark, why don't you take care of that question?

Mark Plinio, Chief Commercial Officer

Sure. Thanks for the question. We're very pleased with the performance over the course of the entire pandemic that we've been experiencing, and particularly in Q3. I think we really focused there on the results of our field being back to full strength, calling on physicians in person. We did launch DTC, which is driving patients in. I think on the telehealth front, what we've seen is, with the pandemic, as I mentioned earlier, we saw a significant portion of new starts coming through the telehealth channel. Now interactions have declined a little bit since that time. But we do see that telehealth will continue to be a channel as we look forward. And I think the opportunity for Ironwood and, quite frankly, the rest of pharma is how do we transition from a more transactional approach to really looking at the patient holistically, driving a good experience and potentially higher satisfaction, which will lead to brand loyalty and ultimately, stronger adherence. So we do continue to see telehealth as a great channel for us to really leverage LINZESS because it's made for a telehealth environment, with a strong clinical profile and safety profile, easy to diagnose based upon the symptomatic disease and patients' willingness to engage over the digital channel. So we're looking forward to leveraging those opportunities as we look into later in the year and into 2021.

Mark Mallon, CEO

Does that answer your question, David? Okay, maybe, operator, can we move on to the next call?

Operator, Operator

Yes. Your question comes from the line of Eric Joseph.

Eric Joseph, Analyst

I guess, first on LINZESS, another pretty strong quarter on commercial margin. I'm curious to understand how sustainable you think this performance will be as we approach the fourth quarter and into 2021. Are there any sensitivities to consider? Let me stop there for my first question. And then secondly...

Mark Mallon, CEO

Eric? Eric, go ahead, we seemed to have lost you there.

Eric Joseph, Analyst

Apologies. Sorry about that. So my first question is, can you hear me now?

Mark Mallon, CEO

Yes.

Eric Joseph, Analyst

My first question is about the strong commercial margin. I'm interested in your thoughts on spending for the brand and how you see the commercial margin performing as we approach the end of the year and into 2021. Are there any sensitivities we should be aware of? Additionally, while I know I can't speak for Alex Denner, I would like to understand how his joining the Board may influence the company's strategic direction, particularly regarding investment in the brand, potential pipeline expansion, or possible exits.

Mark Mallon, CEO

So Gina, why don't you take the first question on commercial margin? And then I'll come back and take the second question, Eric.

Gina Consylman, CFO

Sure. I'm glad to address the question about commercial brand margins. First, regarding Q3, we achieved a commercial margin of 78%, which is one of our strongest figures so far and shows a significant increase compared to the same quarter last year when we had a margin of about 66%. This improvement can be attributed to two main factors: our revenue continues to rise, positively impacting the margin, and our expenses are around $20 million lower than in the previous year. This reduction is largely due to the number of in-person sales calls. Our sales team has been actively engaging face-to-face with physicians, which has resulted in fewer calls charged to collaboration and, consequently, a higher brand margin. Looking ahead to Q4 and beyond, Q4 has typically been our most profitable quarter annually, often coinciding with the highest revenue and relatively fixed costs, leading to increased margins. However, I want to express some caution as we anticipate our expenses may rise due to more face-to-face calls from our reps in the field. Overall, we remain very optimistic about the long-term growth of LINZESS. By keeping expenses stable and focusing on increasing revenue, we expect to see margins grow over time.

Mark Mallon, CEO

Thanks, Gina. Regarding the second question, our strategy remains focused on maximizing LINZESS growth while ensuring we generate good profits from our business. We will continue to seek complementary assets for LINZESS that address unmet needs in gastroenterology and provide value to patients. We regularly review our overall strategy and remain open to opportunities that could add shareholder value more quickly and significantly. I'm excited to have Alex join us in these efforts. He brings a wealth of industry experience and has seen many successful brands. We've had productive discussions about LINZESS, and having him involved will be beneficial. He is a savvy businessman, and I'm looking forward to optimizing profit and performance with his input. He also has extensive experience in corporate development and strategic planning for the business. Our strategy stays the same, and with Alex on the team, we will continue to evaluate our long-term plans. Does that answer your question, Eric?

Eric Joseph, Analyst

Great. It does. One other question. Can you remind us about the standstill provisions in the company charter and when they might be reconsidered if they are still in place?

Mark Mallon, CEO

So Gina, do you want to comment on the standstill?

Eric Joseph, Analyst

Was AbbVie, you were talking about AbbVie, correct, Eric?

Meredith Kaya, Investor Relations

Yes. We continue to have a standstill agreement with AbbVie. That will extend throughout the life of the partnership.

Mark Mallon, CEO

It's a fixed part of the contract. There are no changes.

Operator, Operator

Your next question comes from the line of Tim Chiang with Northland Securities.

Timothy Chiang, Analyst

It seems you have a positive challenge with generating cash from operations. You currently have over $300 million in cash on your balance sheet. As you move into 2021, how should we view your business development efforts? Are you considering assets outside of gastrointestinal treatments that could enhance LINZESS? Additionally, I have a follow-up regarding the LINZESS joint venture. How much of the recent growth can be attributed to AbbVie? Is their larger size allowing them to deploy more resources for LINZESS, which is driving the acceleration in growth?

Mark Mallon, CEO

I want to address your second question, and Mark can elaborate if he wishes. I would say there's a bit of affirmation on both parts. The primary reason for our ongoing growth is that we have the right strategy in place, first with Allergan and now with AbbVie, and we have been executing it effectively, as Mark outlined. AbbVie is fully committed, and we continue to provide the necessary resources. They are a fantastic company, and we are witnessing their full engagement, with their sales teams actively operating. We are especially excited about future collaboration opportunities and expanding our work with the brand. Our strategy is solid, and the transition to AbbVie has been smooth. While it's still too early to determine the extent of potential acceleration from this transition, we believe it is primarily driven by the existing momentum we had. Moving forward, we both hope to expand our efforts with LINZESS.

Mark Plinio, Chief Commercial Officer

Yes, Mark, I completely agree with you. I would add that we have been engaged in this field for quite some time, concentrating heavily on gastrointestinal products. Over the years, we've established many strong relationships. From Ironwood's perspective, our robust connections and dedication to GI have facilitated a smooth transition with AbbVie. You can see the results of that effort in the solid demand growth we've experienced since launching this brand in 2012. Throughout this journey, Ironwood has remained a constant presence. Despite various changes, we've managed to navigate through them successfully, thanks to our excellent partnerships. AbbVie is no exception; we enjoy a strong collaboration with them and look forward to leveraging their capabilities. As they emerge from their acquisition of Allergan, we are eager to begin reaping the benefits of our collaboration. I am truly excited about the future and anticipate great things for 2021 and beyond.

Mark Mallon, CEO

Thanks, Mark. In terms of business development, I want to highlight our continued focus on gastrointestinal diseases. This has been our stated priority and will remain so. While conditions like acute hepatic porphyria may not be classified strictly as GI diseases, they share hallmark symptoms akin to IBS, which gastroenterologists are heavily involved in diagnosing and managing. This made co-promotion with Alnylam a logical fit. Our commitment remains on GI diseases and conditions where gastroenterologists play a significant role. Additionally, we seek products that can support the ongoing growth of LINZESS. Our priority is to identify opportunities that will synergistically enhance our LINZESS initiatives. We are dedicated to sustained profit generation, which can vary depending on the product's developmental phase or launch stage. Therefore, we are currently focused on late-stage or commercial assets that can deliver revenue in the near term. We are also looking for innovations that address high unmet needs and add value for shareholders. There are various opportunities within the GI space, and we are fortunate to have received many inbound offers, which we will continue to assess carefully with high standards. We still see significant potential with LINZESS. Does that answer your question, Tim?

Timothy Chiang, Analyst

Yes. Maybe just one last question is, how big will your sales force be post the personnel reductions? I mean is it still going to be pretty sizable?

Mark Mallon, CEO

We haven't disclosed the final size of the new sales force yet. The team is currently focused on redesigning that structure. Once it's completed, we will share the information at the right time. As you can imagine, the organization is eager to learn about the outcomes of this initiative. We plan to communicate this internally and with our partners before announcing it publicly. For now, we have provided general guidance at the total company level. I want to emphasize that we will maintain our strong relationships with gastroenterologists and top prescribers, and we will continue our partnership with AbbVie to ensure that there are no changes to LINZESS. We are committed to supporting the brand in various ways, not limited to personal promotion. If you've followed us for a while, you know that we have been gradually reducing personal promotion while increasing our investment in consumer outreach. You can expect this trend to continue. This is part of why we believe we can explore this option. However, the final design is still a few weeks away.

Timothy Chiang, Analyst

Okay. Great. Congrats on the quarter.

Operator, Operator

There are no questions at this time.

Mark Mallon, CEO

Okay. I think, well, then we will say thanks to everybody who participated in the call this afternoon. Again, thanks for the team, and we look forward to continuing to engage with you through the rest of the year. Everybody, have a great weekend and stay well.

Operator, Operator

This does conclude today's conference call. You may now disconnect.