Ardelyx, Inc. (ARDX) Earnings Call Transcript & Summary

All right. Great. Good morning. Before we begin, I need to read the following disclosure. For important disclosures, please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representatives. And my name is Bob Klingenberger, I'm an Executive Director with the health care team. My privilege to be joined by the team from Ardelyx this morning, Mike Raab, Justin Renz, and Eric Foster. Mike, maybe just to start off, could you give us a kind of a summary update on where things stand with Ardelyx and the recent progress you all have made with IBSRELA and XPHOZAH?

Sure. Bob, so thank you for the invitation, Morgan Stanley. We're really happy to be here. And share some of the perspectives that we have on where we are today with Ardelyx. So it's been -- when the idea for tenapanor was presented to the Board, it was December 23, 2008. And to see the evolution of the company to where we are today, where we've given guidance now for IBSRELA from $250 million to $260 million this year. I don't think people anticipated that we'll be able to accomplish that. And certainly, we're well on the way to our peak revenue that we've spoken about of $1 billion. So our ability to get that, I think, if you look at our growth rate year-over-year is very clear. For XPHOZAH, that has been a remarkable journey for us in '21, getting a CRL to where we are today, where in the first half of this year, we have generated about $50 million of revenue. So where we are headed, I think with XPHOZAH, is completely proving the idea that we had of not participating in the TDAPA period to ensure that all patients would continue to have access to XPHOZAH. So between both of those products and then, ultimately, our objective to build a sustainable enterprise in our corporate and business development efforts, I think, we're well on the way. And I think these next 6, 12, 18 months are going to be an exciting time for the company as the trajectory of our growth continues to expand.

And you mentioned the increased guidance for the year, maybe just beginning with IBSRELA, could you give us some kind of color on what's driving that from a -- in kind of the commercial strategies that you've all been implementing?

If I might, let me ask Eric to address it. Eric joined us now over a year ago and has done a phenomenal job in helping us see what the opportunity is, as we expanded the sales organization.

Thanks, Mike. Thanks, Bob. Yes, very confident going into Q2. When we think about the drivers for the sales team, for IBSRELA, the second quarter was our third full quarter post expansion of the sales force. Typically, it takes 2 to 3 quarters to get up to speed. The area business directors, they're building relationships, the reach and frequency into the offices. And what we saw in Q2 was significant increased activity, which led to more new writers, more total writers and, ultimately, led to more new and refill prescriptions. So I feel really good kind of about the recipe that we have on the sales side. From an omnichannel marketing side of things, we are very engaged on the social media side, driving awareness, intent for patients to go in, ask for IBSRELA. I feel really confident about the position that we have kind of post Linzess. I think it is important to mention that we do have an indication where we can be used first line, and we have seen some of that utilization first line. And really, what we feel there is physician confidence. So as physicians continue to write for the product, they're seeing the efficacy, the benefit to the patient, giving them greater confidence and they're able to go to it earlier. But we feel like we've got a really winnable position for the long term. We are very pleased with the success that we saw in Q2, giving us the confidence to raise guidance to that $250 million to $260 million for the rest of 2025.

Yes. And longer term, right, the $1 billion peak sales guidance for IBSRELA, I think that roughly translates to 10% of the market. Could you walk us through just sort of the characteristics that are differentiating about the product within the IBS-C market? And how do you feel like that market -- well, you see that evolving and the share evolving to kind of reach that peak number?

Yes, the IBS-C market is a very well-established market. It's a large market. We're talking more than 6 million prescriptions on an annual basis. Over the past few years, we've seen that market grow double digits. So that's giving increased momentum there. But we feel confident that we can achieve that $1 billion even if the market did not grow. But if you think about the patients that are out there, primarily Linzess and Trulance, they offer significant discounts for their preferred positioning with payers, where at this point in time, we do not. But we know that only about 1/4 of patients are very satisfied out there on their GC-C agonist or their secretagogue. So that leaves a very large market out there of patients that really are looking for something else. So if you think about IBSRELA, it works differently. It's the only product in a different class of therapy. So if a patient were to go on to a secretagogue and not experience the relief or potentially adverse events, there is another option out there for them. So from an efficacy and a safety standpoint, comparable to what I think physicians are used to seeing. So we've got, again, a winnable position, strong efficacy, safety. Patients clearly need different choices out there. It's a disease that has multiple factors in terms of the etiology of the disease. And so it's important for physicians to have multiple tools in their bag to be able to help patients and IBSRELA is a unique option for them to be able to do that.

And Bob, one thing I would add to that and ask Eric to comment on it is, obviously, we all have probably experienced our health care system in which we all live today and, ultimately, getting prescriptions for new drugs filled is not an easy task for a patient. So I think one of the strategies, Eric, if you could talk about it is we have field access managers that really function pulling through the prescriptions that the [ AVDs ] have generated on the top of the funnel. I think it's a really critical part of what we're accomplishing for that growth.

Yes. And we saw that early success in Q2. So as Mike mentioned, we expanded our field access manager team. And these are individuals that are in the field, working with physicians' offices, working with patients to help be able to pull through that prescription. The last thing we want is for a physician to identify a patient, write a prescription and that patient not be able to have access. So we know with the additional help of the field access manager team, we saw an increase in resubmission rates and approval rates early on in Q2. So as Mike mentioned, it's really a combination of driving to the top of the funnel, but then improving the efficiency of how patients can have access to the product and the physicians so that they can have greater confidence that they know when they write that prescription that the patient will actually receive it. And we saw really good indicators of that in Q2. And again, all of that together is what's given us that confidence for the remainder of the year and to be able to reach that $1 billion.

Yes. And I guess as you think about -- you mentioned the market doesn't -- you don't feel like it needs to grow to sort of get to that $1 billion peak. Can you just walk us through a little bit of like what the funnel looks like to kind of get to that $1 billion? And maybe a little bit of how you see kind of going from 2025, your guidance now to that $1 billion, kind of the ramp to there -- to get there?

Yes, sure. So as I mentioned, Linzess, Trulance, they are kind of the predominant first-line payers. Tens of thousands of new patients go on to therapy every single month for the class of product. So again, this is a very large product or a market, more than 6 million prescriptions and only 1/4 of those patients feeling very satisfied. So we know that those patients are going to need something else, and IBSRELA is that option for them. So when we think about what are the levers that we have in order to drive to that $1 billion, continue driving top of the funnel, improving pull-through, and that's what the field access manager team is working on. I think we have a very engaged and motivated patient base. So 35- to 55-year-old females, they are out there seeking information. They are looking for different options, and they're looking for treatments. And we're meeting them where they are. I mentioned social media. It's an area of strong presence for us out there. And so for us, it's about meeting them where they are, making sure that they have the awareness of IBSRELA. They understand the benefits of the product, the safety of the product, and they feel confident going in and talking to their physicians. So as we think about that over long term, I think there's probably a lot more that we can do as we're looking at patient engagement and something that we'll be focused on for sure.

And Bob, as I look at the market in the way Eric just described it, remember, we said 6 million prescriptions. And over the last couple of years, that business has grown double digit year-over-year. We're seeing tens of thousands of new prescriptions every month. And when we launched, we said it's $1 billion, 10%, and the market has subsequently grown. And at our growth rate, 10% of that 6 million is a really small number relatively. And the opportunity set is spectacular for this product given the benefit it's providing patients. So to me, I'm incredibly excited about the progress that Eric and the team have made and the beginning of seeing the fruits of the labor with the field access managers coming in and understanding that those investments make sense to accelerate our path towards that peak.

Yes. And as you think about -- you mentioned some of the commercial initiatives kind of early this year and seeing the dividends of that. Are there others that are in the pipeline you have planned kind of to continue throughout the rest of the year and into next year?

Yes. I mean one that I would highlight would be on the patient side. As I mentioned, there are millions of patients that are out there. And for us, I feel really confident in terms of our strategy coming out of the gate and how we've been able to have success over the past 2.5 years to 3 years. But yes, we need to continue to evolve. And I think that really engaging the patients because we know they are out there seeking information. So we need to be there for them. So I think, again, that's one that I would certainly highlight. But in the future, I would expect to see a stronger presence from us with regards to how we work with patients.

Yes. Maybe just moving on to the XPHOZAH side. Obviously, this year has been a bit of a kind of a relaunch in terms of strategy. Do you want to maybe just talk us through how you've navigated kind of that relaunch, so to speak, and kind of how you feel about the performance so far and kind of the outlook for the rest?

Yes. So for us, it's really been about putting the patient first. And our strategy has been making sure the patient has access to XPHOZAH, regardless of who their payer is, if it's Medicare or if it's a non-Medicare payer. And in Q1, we saw that, that strategy worked, and we were really pleased to see that. And in Q2, it was all about can we now start to grow. And we did see that we can start to grow that in Q2. So to your point, there is confusion out there in the market, there is disruption, and it's our job to cut through the clutter. So we know working with dialysis organizations, working with HCPs, the physicians, renal dietitians, there are lots of stakeholders in this environment. So our team is very focused on providing the access message, but then also that they understand the reason why is because when you give XPHOZAH in addition to a binder, patients can lower their phosphorus levels. And about 70% of patients that we know cannot lower their phosphorus level. So just like there's a sizable market with IBS-C, there certainly is a sizable market here as well. And these patients are very sick and they need products like XPHOZAH. So for us, it's about being persistent, cutting through the clutter, making sure that the physicians understand how to access this product. And regardless of who their payer is, they can be confident that the patient can have access to XPHOZAH, and we saw that happen in Q2.

And Bob, I think, as we think about this as a relaunch, certainly, our decision to do what we chose to do has been adding to the clutter, if you will. But the most important thing in that is, as Eric said, having the patient be first. So we gave up 60% of our TAM, right? So 330,000 patients no longer can pay for the drug. But that doesn't prevent us from providing it through our patient assistance program. And the way I look at it is our TAM shrank from 550,000 to 220,000 patients. So what does that mean in terms of for us to get to the $750 million peak that we described, you only need 60,000 of those 220,000. It's 1/3 of that TAM. And given the clear need that's needed for XPHOZAH what's doing for patients, that certainly seems very doable in our mind. What we do know is if you look at precedent out there of other therapeutics that have gone into the bundle that are innovative, they have some penetration that's better than when it started during the TDAPA period. After that period, it goes away. And to me and to us as a company and as a team, to know that there was a potential for XPHOZAH to go away for these patients after it's been helping them for a 2-year period of time is unconscionable. So we made the hard decision to do what we're doing, and we believe wholeheartedly, it's the right thing to do.

Yes. And maybe just to help, you talked about the TAM kind of moving. How -- I guess, how do you think about the strategy with the relaunch to make sure that you're getting to that kind of 1/3? The different strategies, you're...

Well, the fundamental part of it, and I'll ask Eric to address is that, let's say, you're a nephrologist, we don't want you to worry whether I'm commercial -- or your patients, I'm commercial, Eric's Medicaid and Justin's Medicare. We don't want you to think about that. We want you to write a prescription if you believe any of the 3 of these patients require additional phosphorus lowering. And then we adjudicate behind the scenes in our ArdelyxAssist program where those will land. So that's the idea is, ultimately, you don't worry about it, we'll adjudicate appropriately thinking.

Yes. And I would just add, just like we have the field access managers on the IBSRELA side, we also have them on the XPHOZAH side, too. So to Mike's point, helping the offices be able to kind of work through the system, it is a new environment for them. And so we're glad that we have a resource there for them and for the patients so that they can help navigate this new environment. And we've seen that success. We saw a month-over-month growth from March. We saw as a percentage of patients that go on to XPHOZAH, more patients were getting on product in Q2 than ever before. So those are good early indicators for us that the strategy is working. Now it's still early. So we know that we need to continue to move forward and make sure that we don't lose focus. And that's what the team is doing right now.

And just to reemphasize the point Eric just made, Q2 was the largest number of scripts written. Now we lost revenue because Medicare went away, but the demand is there for physicians recognizing that XPHOZAH is required. And so it's working. It just is a new environment and a relaunch that we're doing.

Yes, and maybe just to clarify, more than even prior to the decision.

Yes. I mean, before that, it was Q4 in our growth and Q2 eclipsed it.

Yes. No, that's -- I mean -- and I think as you've talked about the $750 million peak, the sort of smaller TAM, that's now going to only be driven by the commercial, right?

Commercial and Medicaid.

Medicaid.

We like to refer to it as the non-Medicare payer segment. And what that is, is commercial and Medicaid are the 2 predominant, but there's some VA and TRICARE and DoD. And what we saw in Q2 is that part of the business grew from Q1. And that's a really important indicator because that essentially is the paying business moving forward. And so we've got a really close eye on that, and it was good to see that growth in Q2.

Yes. And so we've talked a little bit about kind of your peak goals and some of the guidance you've given for the year. And maybe, Justin, this is a little bit for you as well is, as you think about kind of moving into next year and the evolution of the business, I know, obviously, you haven't given guidance, but approaching that kind of breakeven profitability, how do you all think about that as a kind of a priority for Ardelyx to kind of achieve in the near term?

Yes. I'll make one quick comment and then pass it over to Justin is, we're at a place right now where we've hired an excellent corporate and business development team headed by Mike Kelleher. And we are approaching cash flow breakeven, where we will be able to meaningfully reinvest into this business, whether it's in our associated -- our direct therapeutic areas, associated ones and to be opportunistic. I think as Justin has shepherd us through the various financings that we've done over the last 4 years to get to where we are today, I think it's a critical juncture for the history of the company of where we're going to be in the next 6, 12 months.

Our balance sheet is getting to the point where we have that flexibility and soon optionality to make those decisions that Mike mentioned with our great corporate development team. So you think about the second quarter, where even in spite of the environment where XPHOZAH has less net revenue compared to Q4, with that growth trajectory, we still only lost $17 million in Q2, but that included around $14 million to $15 million of noncash charges. So you can see we're really approaching that cash flow breakeven point relatively soon. And that will allow our team to really be able to thoughtfully look at a lot more things than maybe we could have in days gone by and really build that pipeline and help build us a great company.

Yes. And maybe just talk us through, Justin, if you could, kind of where you sit kind of Q2 balance sheet and how that kind of -- from a capital allocation priorities going forward, how you think about kind of utilizing the various levers that you mentioned there?

Sure. We finished the second quarter with about $238 million in cash, which is great. And as I mentioned, our utilization for operations is quite low. So we've always tried to thoughtfully invest in the business. Our inventory is in great shape as we prepare to meet the needs of these patients that's coming. So we're in great shape there as well. We've always tried to be thoughtful about capital. We look very closely at our cost of capital and whether that's equity debt or another instrument. So I think now we're at that position where our team will have a lot of optionality, if you will, flexibility to look at different things because we can support a growing business going forward.

And maybe in terms of allocation of that capital, Mike, maybe talk to us a little bit about -- you mentioned the corporate development team, but is there -- what areas might you kind of initially look to kind of build? And are there kind of...

We have actually a Board meeting this week up in Boston. And one of the questions we all continue to ask, Eric, is, hypothetically, if money weren't an object, what else would you be doing with the 2 teams that we have, right? So you can't forget the bird in the hand, right? So as you look at capital allocation and are we optimizing what we're doing with the conversation we just had about IBSRELA and XPHOZAH. So that's always going to be probably job one is to make sure that capital is appropriately and investments are appropriately focused on those 2 areas. Secondly, if you look at renal, GI, that makes sense. But then what are the associated nearby indications or therapeutic areas, cardiorenal, you look at hepatology and other things like that. And then as I said, you'd be opportunistic. We always want to optimize our manufacturing. So that's something we will continue to do because every percentage improvement, even though our gross profits are phenomenal, any improvement there is going to be critical given the volume is going to be going through.

Yes. And maybe, Eric, today, how much -- with the existing portfolio, how much sort of synergy is there in terms of kind of GI...

Yes. They're very distinct and different. As I think about it, they're very different, and that's one of the reasons why we have 2 completely separate really businesses, not just sales force, but 2 completely separate business units led by 2 different general managers. And really, the -- that's important because we want to be able to pull through those insights and go deep. And so when we think about business development, we have a lot of deep insights in GI and nephrology that can really help us out. But I also like to say we also have a core strength in commercial execution as well and pull-through. So while those 2 are very different, our commercial strategy and execution kind of brings them together. So in the event that we were to find something that was adjacent or different, I do feel confident that we can take and be successful.

We do have shared services and ArdelyxAssist and reimbursement, a lot of the strategies there go back and forth. So the field force, the physician-facing, the HCP-facing people are clearly distinct, but there's a lot of shared services internally.

Yes. And maybe we talked beyond the therapeutic kind of criteria when you think about business development, what other criteria are out there kind of...

So great question. For us, certainly, it's got to be distinct. It can't be -- me too is not terribly interesting, even me better. So it's got to be an unmet need. This is -- everyone says this, right, that it's got to be an unmet need. It's got to be novel, all those things. So it's not unique that we're saying things like that, but that's the lens that we look at opportunities through.

Yes. And any sort of phase in development kind of looking broadly or...

Well, obviously, what we can afford today is different than what we can afford a year, 2 years, 3 years from now. So you always look at it through that lens. As Justin pointed out, we're -- we try to be very thoughtful about capital allocation and where and how we spend dollars that aren't ours, right, shareholders' money. So we try to be very thoughtful about that. But -- so what does that mean earlier stage now? Ib2, thereabouts sort of things. And then later, buying revenue is tough just philosophically because one would argue that mostly that's baked into the price. But we'll look at everything across the stages of development and commercial as well.

Yes. And how do you think about kind of in the context of kind of the approaching cash flow breakeven at something earlier stage, kind of incremental investment in that. How do you think about kind of balancing all of that capital allocation, P&L?

Yes. I mean, any time -- I mean, you know this, Bob, any time you look at a transaction, you do a deal model, that's going to include the additional regulatory, clinical, all the headcount that are required in there. So I think you look at the entire cost of development of something that you're bringing in, and then we look as to whether or not it's affordable at this stage. Or is it affordable now? Almost, but then clearly will be, so you can take a little bit more risk. So I think as we balance both where we are with cash on hand, we're collecting money now, which is amazing to be able to do and the growth of the business kind of gives you a line of sight in terms of what is and isn't affordable.

Yes. And we've talked about what individually with each product, sort of the $1 billion and the $750 million of peak kind of revenue. You all have talked about kind of the IP profile of the product. That implies kind of a lot of growth in the medium and longer term. How do you kind of think about balancing the investment needed for that, investment needed to add additional portfolio?

Yes. I mean it's a good problem to have, right? First and foremost, is as we look at the expansion that was done and the lift that we're seeing, the investment now in the field access managers and the lift that we're seeing, any script that doesn't get filled, the fact that you as a physician have written a script for me, your patient, and I go to CVS, Walgreens, whatever it might be, and it doesn't get filled, that's awful, right? Because you've got 2 parties that are critical for ultimately generating the revenue for us that have done their job and the system then fails them, right? So for us, the fans and what we do with ArdelyxAssist is absolutely critical. So I think we will always look at that first because it is the bird in the hand to make sure that you are optimizing those. Anything to add to that, Eric?

No. I mean, I think I would just reinforce that the opportunity is there, and we just -- we need to continue to improve to pull through those patients. And I like what Mike said, we've got 2 parties there, 2 stakeholders there that have done their job. And if we can help pull through the system, that will only make things better. And we feel like we've got the right number of salespeople out there given the market that we're focused on to drive top of the funnel. We're always continuing to kind of look at our organizational design and our numbers there, but feel good that they're driving top of the funnel, we've got the field access managers pulling through, and we just need to continue to keep getting better there and the opportunity is there.

Yes. And it's -- I talked a little bit about the kind of the trajectory from today to where you have your peak guidance. Maybe just kind of as a thought exercise, 5 years in the future, end of the decade, where do you sort of aspirationally perhaps kind of see the company?

Elegant question. We haven't guided as to when -- but I like the thought exercise. But if you look at our growth rate and look at our gross profit, look at our expenses, I think the math is pretty straightforward. And the trajectory that we're on gives me great confidence that we will be generating that free cash flow not too far on the horizon where we can continue to build this. And then the amount of free cash flow that comes allows us to do bigger and more interesting things that we contemplate now, but can't afford it, right? So there are things that we look at and say, gosh, that would be ideal. It's not yet time. So it gives us flexibility. And then to challenge Eric, with the 2 products that are on the market now, what more can we do for those? What more can we do to expand those peaks if it's even possible, right? So that should be the thought exercise when you have products like these that are making such a difference for the patients that are taking them. You must always go through it at 10% penetration, what about the 90% they don't get it. 25% of patients are satisfied. 75% of patients are not satisfied. So how do we make sure that we do everything we can to address all the patients that have the need. So that's the exercise we go through.

Yes. And maybe as you've guided for IBSRELA for the rest of the year, as you think about 3Q, 4Q, anything kind of that -- aside from the different commercial initiatives, anything else that you guys are kind of laser-focused on for the rest of the year in terms of execution?

Eric, anything pop back to you? I mean, I think, the answer is everything. You have to be juggling 1,000 things in businesses like this, just given the complexity of the health care environment in which we all operate. And you can see when you have metabolic drop that it ripples through the system. So it is something Eric and his team are laser-focused is execution as well as possible because there are patients at the end of this that is, again, you the physician being the patient, we do our job, always looking at optimizing that pull-through is certainly one of the most important thing.

Yes. I would say 17 days. We've got 17 days left in this quarter, and that's all I want the team focused on right now. So 17 days to help as many patients as we possibly can. I believe in our team, I believe in our company, I believe in our products, I believe in our strategy. And the team through strong commercial execution and improved prescription pull-through put up some record numbers for us in Q2. And I just want the team right now focused on these 17 days. When Q4 comes, we'll deal with it then. But I do think a lot of it is execution for us right now. And we know if we do our job, it helps the company out, it helps more patients, and it's a good win-win story.

My guess is that was a message to the field.

Yes.

Yes. Well, I'm sure they're listening. As you talk about the Ardelyx story with investors and analysts and the like, what kind of the 1 or 2 things aside maybe from a lot that we've been through already, but do you feel like people are kind of maybe just missing or you want to just make sure that to kind of reemphasize for folks?

Yes. Very simply, right, and clearly, I'm terribly, terribly biased with what I'm about to say, is that we're undervalued, right? If we've just gone through some of the metrics that support, justify, demonstrate why $1.750 billion are doable, and we're on the path for that. I would argue at just shy of $1.5 billion market cap, we're well undervalued given the trajectory of where these businesses are and what this team has accomplished and what it can continue to accomplish, whether it's with these 2 programs and/or additional ones that we can bring in. Again, that's my bias as CEO of the company that we don't get the recognition that I believe the company and all of our employees deserve. That to me is probably one of the most important things that we try to emphasize when we're speaking to whether it's investors, analysts, anyone who wants to hear the story of the opportunity set that lies here.

Yes, yes. I know we're kind of running up against time, but is there -- aside from the things people are missing, as you look kind of to the rest of the year, we talked about the motivation and things like that. But anything else you want to just emphasize for folks?

Yes. I mean, Eric said it is if you look at quarter-over-quarter record-breaking growth with double-digit trajectory, we're navigating and doing something certainly with XPHOZAH that's never been done before. And just to remind people, when we got the CRL in 2021, we did something. We did a formal dispute resolution and then in the AdCom, no one believed we'd win either of those. We won that, and that's never been done in the history of the country, right? That is -- most people feel that, that's a failing path to go down with the regulatory agencies. However, because of the data, the patients need that's there and the results that we've now demonstrated with the products on the market, obviously, we celebrate the fact that we were right. So I think continue to have faith in the fact that this organization, this company, our focus on the patient, drugs that are differentiated are going to literally and figuratively pay dividends for the patients who need these drugs and for our shareholders or prospective shareholders with what we can accomplish from here going forward. And again, that's my bias speaking, but I think it's also some pretty black and white trajectories and performance that have happened since we've launched these drugs that should demonstrate to folks what the organization can accomplish.

Well, we're just about out of time. But Justin, Eric, Mike, I appreciate you all joining us this morning, and good luck with the rest of the conference.

All right. Bob, thank you very much.

Thank you, Bob.

Thank you.