Ironwood Pharmaceuticals (NASDAQ:IRWD) Q3 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the Ironwood Third Quarter 2020 Investor Update Conference Call. At this time, all participants on the list are in only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press Star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press Star 0. Thank you. Ms. Meredith Kaya, you may begin.

0:29 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 filing. 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.

1:16 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 GAP 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 our commercial performance, and Gina Conselman, our CFO, will review our financial results and guidance. Mike 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.

1:55 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 the standard of care for patients. We set out from the beginning with three strategic priorities. Drive Linzess Growth, Advance RGI Portfolio, and Deliver Profits. 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 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.

2:57 The resiliency of Linzess has shown over this unprecedented period is remarkable. Linzess' performance resulted in total net sales of $241 million for the third quarter. As you know, Ironwood shares equally with our partner AbbVie in the brand's profits. With a 78% commercial margin, Ironwood recorded $100 million in three-quarter revenue from U.S. lenses sales. We remain confident in the brand's potential to exceed $1 billion in 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 in our balance sheet and more than $50 million of cash generated in the third quarter, Ironwood is a strong cash flow generating business.

3:50 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 the quick, data-driven decisions to discontinue both programs and are now restructuring 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 needs, including highly symptomatic patient populations, many severe and debilitating diseases that often have limited or no treatment options available.

4:51 We understand the need for new therapeutic approaches to treat these diseases, and we believe we have a strong, tenured team with the knowledge and expertise to advance innovative science and build successful brands. We continue to explore accepting 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 broader market dynamic and continue to assess all options to enhance shareholder value. Working alongside the amazing Iowa 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 Danner. We announced this afternoon we'll be joining Ironwood's board. As many of you know, Alex is a seasoned healthcare investor and has broad experience as a board director in overseeing the operations of companies within our industry.

5:42 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. And with that, I'll turn it over to Mark.

5:54 Thanks, Mark, and good afternoon, everyone. Linzess has shown incredible resilience in the face of this pandemic, further strengthening its position as the number one prescribed medicine in the U.S. for the treatment of adults with IBSC 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 to new-to-brand prescriptions. Not surprisingly, fewer patients were going into the offices to see their physicians.

6:40 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 IBSC 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.

7:30 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 IBSC 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.

8:15 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 Abbey Field Force was mostly back conducting in-person details in territories throughout the country.

9:06 While REP's 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 improved the overall abdominal symptoms of bloating, discomfort, and pain in the adult population with IBSC. The team has already integrated some of the refreshed language on the LINSS website and in certain promotional materials. A full refresh of the consumer campaign is expected in the spring of 2021.

9:52 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 that telehealth as a channel has the potential to continue to play an important role in driving future growth of Linzess. The IBSC 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. With that, I'll turn it over to Gina to discuss the financial results of the quarter.

11:02 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.

11:48 These cost savings exclude one-time costs of approximately $15 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. $103 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 non-recurring license and milestone revenue related to the amendment of our ex-U.S. Linaclapide agreements in China and Japan.

12:45 Linzoff's 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 there were 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 Appy are not counted as an expense in the U.S.-Linzess commercial collaboration.

13:36 Turning now to Ironwood's profitability in cash, we delivered our sixth consecutive quarter of profitability in the third quarter. Gap 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.

14:29 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. With that, I'll turn it over to Mark for some closing comments before Q&A.

14:55 Thanks, Gina. In summary, we entered the final leg of 2020 with what we believe are sound business fundamentals, a 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've built at Ironwood. We believe that Ironwood is positioned well and are excited about the opportunity to improve lives of GI patients and deliver shorter-holder value. Thanks again for joining us this afternoon. And, operator, we can now open the line for Q&A. And at this time, I'd like to remind everyone, if you'd like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1.

15:46 We'll pause for just a moment to compile a Q&A roster. Your first question comes from the line of David Lebowitz with Morgan Stanley.

15:56 Thank you very much for taking my question. 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?

16:16 Thanks, David. Mark, why don't you take that question?

16:19 Sure. Thanks for the question. We're very pleased with the performance over the course of the entire pandemic that we've been experiencing, particularly in Q3. I think we really focused there on the result of our field being back to full strength, out, 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 good experience and potentially higher satisfaction, which will lead to brand loyalty and ultimately Stronger Adherence.

17:20 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, 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 21.

17:49 Can I answer your question, David? David. Okay, maybe operator, can we move on to the next call? Yes, your next question comes from the line of Eric Joseph.

18:10 Hi, Eric. Hi, thanks for taking the question. I guess first on Lindess, another pretty strong quarter on commercial margin. I'd be curious to get a sense of sort of how durable you see this going into fourth quarter in 2021. I guess, is there any sensitivities on that front? How do you... Let me leave the first question there. And then secondly,

18:51 Eric?

18:57 Hello? Hi, Eric. Go ahead.

19:00 We seem to have lost you there. Apologies. Sorry about that. So my first question, can you hear me now? Yes. Okay. So my first question was about commercial margin, which continues strong. Just wondering how you're thinking about, I guess, spend into the brand and how commercial margin might look into the end of the year and into 2021, if there are any sensitivities there. And then secondly, I don't want to ask you to speak for Alex Jenner, but curious to get a sense of how, with his joining the board, you're thinking about or how you anticipate the strategic direction of the company shifting between investing more heavily in the brand, potential pipeline expansion, or potential exit. Thanks.

19:56 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. Thanks.

20:01 Sure. Thank you. And good afternoon, Eric. I'm happy to take the commercial brand question. Margin question. So maybe just a comment on Q3 first before I talk about subsequent quarters and our expectations. Just keep in mind, you know, we were able to see the 78% commercial margin, which, you know, is one of our strongest to date. It's up significantly year over year. We had about 66% margin last year at the same quarter. It's a combination of two things. One, so one, you know, just the revenue continues to increase. That contributes to the margin. But if you note, our expenses are about $20 million or so lighter than they have been in the prior year. And that's really just related to what we were talking about on the number of in-person calls. It's primarily related to the number of in-personal calls that were made.

20:51 We noted that our sales force has been ramping up and getting back out there face-to-face with physicians, but they were doing that and continuing to do that through the quarter, which means there are less calls charged to the collaboration and then a higher brand margin. and now maybe more specifically to Q4 and I think beyond. In general, Q4 has traditionally been our highest margin quarter every year. It's usually our highest revenue quarter and the costs remain relatively fixed so it translates to a higher margin. But I did have that cautionary note in my script and the reason I had that is because While the revenue could possibly increase, I wanted to be cautious on the expense side because since our reps are back in the field more, we would expect more charges in Q4 related to those face-to-face calls. And then lastly, just sorry to make it a long answer, but on the longer term, you know, we are just very optimistic about the continued growth for Linzess and, you know, with maintaining expenses roughly fixed and combining that with growing revenue, that just leads to increasing margins over time.

21:59 Thanks, Gina. And Eric, to your second question that I mentioned, I mean, our strategy remains the same, which we talked about, which is really maximizing, Lynn says, growth, continuing to make sure we're driving good profit from and growing profit from our business, and then continuing to look for complementary assets to, Lynn says, that would meet unmet needs from a GI perspective, disease perspective, but also there'll be a value to patients. and so that will continue. We've also said, of course, that we do regularly sort of look at our overall strategy and if there are opportunities to do something that would add value to shareholders more quickly, more impactfully, we're open to sort of all possibilities.

22:44 I'm excited, actually, to have Alex to come on board on all of those dimensions. He's got, as you probably know, a lot of experience in the industry, and he's seen many great brands. We've had good discussions in the past about Linzess, and having him engaged and thinking about how we can do more there will be great. He's a very savvy businessman, so I think thinking about how we can optimize profit and performance will be another area that he can engage on. and then he's got a lot of experience also in corporate development and, of course, you know, even also thinking overall strategically with the business. So the strategy remains the same. I mean, Alex is going to be able to, I think, really participate in all of those areas and we'll continue to, you know, with him now as part of the team, evaluate overall long-term what we're going to do.

23:31 Great. Thank you. It does. Thank you. One other question. Can you just remind us where, maybe just, yeah, remind us what the standstill provisions are under the company charter and to the extent they're still in place when they might be up for reconsideration.

23:51 So, Dean, do you want to comment on the, I'm sorry, Marius, do you want to comment on the standstill? Were you talking with Abby, correct, Eric? Correct. What have you said publicly about the standstill agreement?

24:04 We continue to have a standstill agreement with AbbVie that will extend throughout the life of the partnership.

24:13 It's a fixed part of the contract. There's no changes, etc.

24:17 Okay. Appreciate it. Thank you. Your next question comes from the line of Tim Chang with Northland Security.

24:31 Hi, thanks. Hi, Mark. So, you know, I guess you guys have a good problem here with building cash from operations. You know, you have, what, $300 million plus of cash on the balance sheet now. I mean, as you sort of work into 2021, you know, how should we sort of think about business development? I mean, are you looking for assets outside of G.I.? ? that might complement Linzess. And then also I had a follow-up on the Linzess joint venture, which is really, you know, how much of this additional growth is really because of AbbVie? Is it just because they're just a bigger company and they're able to put more boots on the ground with Linzess?

25:23 Is that why the growth is accelerating here?

25:28 So I'll say, I want to comment on your second question, and Mark, you can expand on it if you'd like. So I would say a little bit of yes and yes. So I think the main reason why we're continuing to see growth is that we've had the right strategy, first with Algorand and continuing with AbbVie, and we've been executing against it well, and Mark went through the levers. And AbbVie's been fully committed to that, and we continue to resource it. But source, they're a great company, and so we are... You know, seeing them engaged fully, their sales teams are fully out there. And I think what we're really excited about is the future possibilities where we're talking about new areas where we can collaborate and do more with the brand. So we have the right strategy in place, and really the transition to AbbVie has been seamless. I think it's a little bit early to say how much could be an acceleration from that. It's hard to say now. It's probably more of the momentum that we had.

26:23 But going forward, we certainly both, I think, are hoping to do more with what's left.

26:27 Yeah, Mark, I think you're spot on with that. I think what I'd add is we've been in this space for some time with a heavy focus in GI. We've built a lot of relationships over time. I think what we bring to the equation from an Ironwood perspective are those strong relationships and focus in GI, which has helped make that transition with AbbVie seamless. And I think you're seeing that pay off right now from the standpoint of how we've been able to essentially deliver strong demand growth ever since this brand was launched back in 2012. And the one constant factor in this whole thing has been Ironwood. I mean, we've had multiple changes over time. We've been able to transition through those changes. We've had great partnerships along the way, and AbbVie is no different. We have a great partnership there. We stand to benefit from a lot of the capabilities that they have in place. We're looking forward.

27:15 We've only just begun, quite frankly, them coming out of the transition of their acquisition of Allegan. So, you know, we're really looking forward to really reaping the benefits of that collaboration overall. So I'm really excited about what the future holds, and we look forward to 21 and beyond.

27:33 Thanks, Mark. So in terms of business development or corporate development, let me just say a few words. So first, you know, our focus will continue to be in GI. That's what we've stated and will continue to be there. Certainly with gastroenterology diseases or GI diseases or diseases that gastroenterologists play a big, big role. For example, of course, acute hepatic porphyria in a partnership with Lilan is not, you know, specifically a GI disease but you know it's hallmark symptoms very like similar to IBS and gastroenterologists do get very involved in managing or particularly identifying AHP patients and so we saw that as a good fit for a co-promotion. But we'll be staying focused on GI diseases and diseases that gastroenterologists are heavily involved in treating.

28:19 I think the second thing we've talked about is it needs to be a product of products that we think over time can really support continued growth So wherever we can do something that synergistically is going to enhance what we're doing with Lintez, that's a key priority. We are committed to sustaining profit generations over time. Of course, that can fluctuate, you know, if you're in, depending on the phase of development of a product or the launch stage. But we're committed to generating profit. And so, as we've said, we're focusing at this point primarily on late stage or commercial assets that hopefully can get deliver revenue sooner rather than later has been our primary focus. And, of course, you know, we want things that we're confident really will address high areas of our met needs, bring innovation, and then do something we'll be confident is value-created for shareholders.

29:15 You know, There are a lot of different areas within the GI space that can meet those criteria, so we don't necessarily specify particular diseases. We've been fortunate in that we've had a very high amount of inbound opportunities, and we continue to see them, and we'll continue to evaluate them, but with a pretty careful eye and a pretty high bar, because obviously we've still got a lot we can do with linsets. Does that answer your questions, Tim?

29:42 Yeah, 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?

29:55 So we haven't shared the final size of the new sales force. The team is very much working on the redesign of that. As soon as we have that complete, you know, at appropriate time, we will share that externally. As you can imagine, the organization is waiting to hear the results of that work. We want to share that internally and communicate that with our partners before we go public. But that's what we've given for now, just the guidance at the total company level. I will say that you can assume that We're going to still, you know, maintain our strong relations with gastroenterologists and the highest prescribers, that we're going to continue with AbbVie as a partnership, make sure that we're not shortchanging Liz's at all. We're going to continue to really make sure we're doing everything to get behind the band, brand. Now, that doesn't mean just personal promotion.

30:46 I think you probably, you know, over time, because you've followed us for a long time, that we've been gradually... and many more. and again if you'd like to ask a question and let's start one on your telephone keypad.

31:50 Operator, any more calls? There are no questions at this time.

31:58 Okay. I think, well, then, we will say thanks to everybody who participated in the call this afternoon. Again, thanks to 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. This does conclude today's conference call. You may now disconnect.