Ironwood Pharmaceuticals, Inc. (IRWD) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Ironwood Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Meredith Kaya. You may begin.

Good morning, and thanks for joining us to discuss our 3718 Phase III program. A press release crossed the wire this morning and can be found on our website, www.ironwoodpharma.com. Today's call includes 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 under the heading Risk Factors in our annual report on Form 10-Q for the quarter ended June 30, 2020, and in our future SEC filings. Our forward-looking statements speak as of today's date, and we undertake no obligation to update such statements. During this conference call, we will refer to 2020 adjusted EBITDA guidance. Adjusted EBITDA is not a substitute for GAAP net income, but without unreasonable effort, we are unable to provide guidance on GAAP net income or a reconciliation. Today's call will include prepared remarks by Mark Mallon, our CEO. Mark will then be joined for the Q&A session of the call by Tom McCourt, our President; Gina Consylman, our Chief Financial Officer; Mike Shetzline, our Chief Medical Officer; and Mark Plinio, our Chief Commercial Officer. With that, I'll turn the call over to Mark.

Thanks, Meredith, and thank you all for joining us this morning. I plan to keep my comments relatively brief so we can use this time to answer any questions you may have. Let me start by acknowledging that this is a very difficult day for Ironwood. We are discontinuing IW-3718, our developmental program for the treatment of refractory GERD. This decision was made following negative results from an early efficacy assessment from the 1 of 2 Phase III trials. It's always difficult to stop a program in an area where -- with so many suffering patients, but we believe it's important to maintain the rigor and discipline required to advance only those programs that have a high probability of success. The Ironwood team ran a very well-designed and well-executed Phase III program. Importantly, conducting this assessment on study 302 enabled us to obtain an early read on efficacy of 3718, allowing us to make quick decisions and comply a disciplined use of capital. In connection with this outcome, we are also announcing a planned reduction in workforce to further realign our capital and resources. This is not a decision that we took lightly, but we are doing so in an effort to further support our business moving forward. I want to thank all our employees for their commitment, passion and dedication to Ironwood's mission, those who may transition to new opportunities and those who will continue on this journey here at Ironwood. It has been inspiring to watch the incredible work you have all done in our efforts to meet the needs of GI patients. Turning to the results of 3718. As previously disclosed, we conducted an early efficacy assessment of data from 1 of our 2 Phase III trials, study 302. An independent data monitoring committee determined that the data from study 302 did not meet the prespecified criteria. After unblinding the study 302 data and conducting our own internal analysis, we confirm that the data did not meet the primary endpoint of achieving statistically significant improvements in heartburn severity. For this reason, we decided to discontinue the development of this program. While we plan to conduct a complete analysis of the data set, we believe these findings are definitive. We are now in the process of stopping enrollment in study 301, the second 3718 Phase III trial. We extend our gratitude to patients, investigators and the staff and the entire Ironwood team who played a critical role in advancing 3718. Looking ahead, we continue on our mission to advance GI medicines and redefine the standard of care for millions of GI patients. Ironwood remains on solid footing. We believe we are in a strong financial position and have the GI expertise to achieve our mission. LINZESS alone generated more than $300 million in commercial profit during the first half of 2020, resulting in $150 million in revenue to Ironwood. We continue to expect LINZESS to deliver mid-single-digit percent net sales growth for the full year 2020 and believe the brand is on track to become a $1 billion-plus drug. Ironwood as a company has also begun delivering positive cash flows and profitability. The second quarter marked our fifth consecutive quarter of generating profits, and we ended the quarter with over $250 million in cash. We maintain our 2020 guidance of Ironwood total revenue between $360 million and $380 million and adjusted EBITDA of greater than $105 million. We regularly undertake internal strategic reviews and remain focused on exploring all options to enhance shareholder value, including the potential to access complementary development and commercial space GI opportunity. In an effort to support our strategy moving forward, we recognize that streamlining our organization and reducing operating expenses is an important action for Ironwood. To do this, we expect to reduce headcount by approximately 100 employees or nearly 35% of the current workforce. This reduction is expected to affect both our field-based and home office colleagues, including the relevant G&A support function. We expect these changes to result in total cost savings of greater than $95 million, comprised of at least $45 million in annualized savings related to the planned workforce reduction and an additional approximately $50 million related to the external spend for 3718 that we previously expected to incur through 2021. These cost savings exclude onetime costs primarily associated with the planned reduction in workforce. To comment on the impact of our commercial organization specifically, let me be clear that we remain committed to LINZESS and to our efforts to maximize the brand. A learning from the evolving market dynamics due to COVID-19, including how we engage with health care practitioners, has provided significant insights into how we are planning to reorganize our commercial organization to continue to drive value. We plan to focus our field efforts going forward on the health care practitioners, mostly gastroenterologists, where we have strong established relationships and have demonstrated our ability to educate and impact treatment decisions. We believe our long-tenured, highly experienced and award-winning GI specialty field force, and our best-in-class marketing team are well positioned to drive strong LINZESS growth. There are approximately 70 million people in the U.S. living with GI disorders. And in a recent survey, nearly 2/3 of patients reported being burdened by GI symptoms at least once per week. New innovative therapeutic approaches to treat GI diseases are deeply needed. Grounded in GI innovation, we believe we have the knowledge, expertise and focused capabilities to bring innovative therapies for these patients and to build blockbuster GI brands. With a streamlined organization that we feel will be well positioned to deliver in this current environment, we aim to continue to drive strong growth of LINZESS and remain laser-focused on delivering further growth and profitability. Thanks again for joining us this morning. And operator, we can now open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Martin Auster from Crédit Suisse.

This is Mark on for Marty. Sorry about the news today. So I just have one question. So the company continues to have positive cash flows. Could you provide more details on your capital allocation plans between R&D, business development versus returning capital to shareholders and the relative importance of each in your strategy?

Thank you, Mark. I'm going to ask our CFO, Gina, to answer that question on capital allocation.

Sure. And thanks for the question. So the first part of the capital allocation strategy really just remains unchanged in that we're continuing to focus on LINZESS and profitability, and that means growing profitability over time. In addition, as Mark mentioned earlier during his comments, we regularly review our capital allocation plans. And that does include taking a look at possible BD activity along with a possible return of capital to shareholders.

Thanks, Gina. And I just want to reiterate that we strongly believe that there is more growth ahead in LINZESS and more opportunities for that brand. We can get into that later. We believe we can do even more in -- from profitability over time. And we do believe and have been looking at opportunities in the GI space because there's high unmet need and innovation coming forward. But the priorities are, as we laid out there, with LINZESS and delivering profits as our key priorities.

Your next question comes from the line of Jacob Hughes from Wells Fargo.

Could you -- Mark, you spoke a little bit about -- 4 strategic alternatives. Could you touch on how you and the Board are thinking about that with respect to LINZESS and the partnership with AbbVie? And then secondly, maybe if you could just elaborate on the changes to the commercial organization and how that might impact LINZESS going forward?

Sure. I'll take the first question, and I'll let Tom comment on the changes in the commercial organization, Tom and Mark. So as we've said, I think I've said this since I arrived at Ironwood, that we are going to always look at new strategic options and possibilities if there are ways to deliver shareholder value -- more shareholder value more quickly. And so we've not excluded anything in those reviews. We regularly look at our options for that, and we'll continue to do so. Obviously, I can't get into specifics. The relationship with AbbVie has gotten off to a really strong start. We found them to be a great and supportive partner. They've been fully excited and energized behind LINZESS. And we're working together on some new initiatives that I think will be exciting for the brand. So that's what I can say in terms of the question of a sort of strategic direction. Obviously, we'll work with the Board to continuing to lead the company in the right direction. Tom, do you want to say a few words about the commercial organization?

Sure, Mark. And I just want to echo your initial comments about the alignment with AbbVie and how well it's going. We both are fully committed to LINZESS. We still see this as a very strong growth brand with significant upside as we move forward with a rather long IP. Obviously, this investment encompasses certainly in the selling effort as well as the consumer and the life-cycle management effort. Certainly, we will work very closely as a team to make sure that we have an adequate share of voice on the street to drive growth. And as Mark mentioned, we'll be working diligently to really streamline the organization to make sure that we have what we need to deliver on our collaboration as far as the field force obligation as well as what we do moving forward. So I think we have absolute confidence in LINZESS. We have absolute confidence in our commercial organization. And we're working very closely with AbbVie to make sure that we continue to stay on the path that we're on today.

And just to emphasize what I said earlier. So we shared the total number of force reductions of 100. We're not ready today to get into the specifics of how that is allocated across the organization. But clearly, we're going to -- as we said -- as I said, that it will be also the field as well as headquarters. We're going to be focused primarily on gastroenterologists and the highest prescribing primary care physicians, so really in our wheelhouse. And we will maintain the key capabilities that have helped drive LINZESS' success since its launch; our consumer capability, our capability to save science and work with KOLs and really make a big difference on the treatment patterns and the treatment approach for the treatment of GI diseases.

David Lebowitz from Morgan Stanley.

I guess now you are clearly at a strategic crossroads in a lot of ways. Given that you are downsizing the workforce, is that suggesting in some way that you're deciding that from this point on, you're going to focus more on LINZESS and back away from additional R&D products? Or could you consider some sort of licensing or something that might allow that side of the business to ramp up once again?

Well, I don't know if we will be able to focus more on LINZESS because we've been pretty focused on it all along. But if we can, we will. So clearly, that's going to be -- continue to be the first priority of the company, as it has been. And there's definitely more that we can do there. We still are only a few quarters into driving profitability. So we're going to continue to look at sort of how we execute, what levers we have to pull, both in terms of revenue and cost, to maximize profitability. And then as I've said, yes, we are going to continue to scan the environment. We've set a high bar because we've got a great asset in LINZESS to invest in, and shareholders have high expectations. But there's clearly unmet need, and there's clearly new innovation coming forward in a number of different disease areas within GI category. So that's how we're thinking about it.

Eric Joseph.

I just wanted to follow up a little bit more on potential plans for pipeline expansion here, just if you can provide a little bit of color on the type or stage of assets that you might be contemplating for the purposes of development if that’s the road that you go down. Have you had, I guess, preliminary discussions on certain assets that are irons in the fire, so to speak? And I guess at what point do we kind of get clarity, given that you are at a crossroads here? In -- I'm going to take it that some of your discussions, one possibility is a strategic exit and a possible sale because the other is pipeline extension. At what point do you arrive at that decision? What would trigger that?

So thanks, Eric. There's a couple of different questions in there. I'll try to get all in. If I miss anyone, let me know. So first of all, in terms of more specifics on what we might be looking at in terms of GI, what I can tell you is basically what we said we've been doing. So we're looking at commercial and late-stage or development-stage GI assets. In terms of activity, actually, we have a significant amount of inbound queries with people having innovation or potentially innovative products that they're interested in getting into the GI space. They recognize the unique capabilities that we have. And we're -- every month, we're seeing it continuing and actually an increasing flow of opportunities. But we've set the bar high. And we recognize that we can generate really substantial returns and impact patients through investing in LINZESS and that we also need to make sure that we're delivering on the promise of profit and cash flow in the time. So those 2 remain our top priorities. But what I've also said is that there are a number of areas where we think there is emerging technology. We're a leader in the functional GI space. We're obviously going to keep looking in that area. There are a number of rare diseases in the GI space and more severe diseases. Again, we're -- we think science is starting to create possibilities, but we'll continue to look there. There's a number of -- we've talked about a number of immune-related or inflammation-related diseases outside of IBD, which are interesting examples. So we're active. We're keeping a critical eye on making sure we're going to bring something in that will deliver value to patients and shareholders. But we're confident that there are going to be interesting opportunities in that space. But the first priority will remain LINZESS in generating profit. In terms of -- you asked about the decision on or time line on when we might make a sort of a strategic decision about the company. But what I would say is that we're -- have been and we regularly with the Board evaluate our options, and we're going to continue to do that. We're not going to be able to give you -- if we're going to make a major change or a strategic option, we may -- that's the type of things we don't comment on, if it was something transformative for the company, until we're able to do that. So not ready to give any time line on that because -- and the other point is we've got a really strong business here that's going to be growing significantly, generating significant profit, and we've got a team that I think has outstanding capabilities in GI that we may -- we're hopeful that we can deploy against other assets in the future. So did I get to your questions?