Ironwood Pharmaceuticals Inc (IRWD) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Ironwood Pharmaceuticals Q1 2017 Investor Update Call. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Ms. Meredith Kaya. You may begin.

Good morning, and thanks for joining us for our first quarter 2017 Investor Update. Our press release crossed the wire earlier this morning and can be found on our website, www.ironwoodpharma.com.

Today's call and the 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 annual report on Form 10-K for the year ended December 31, 2016 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.

Joining me for today's call are Peter Hecht, Chief Executive Officer; Tom McCourt, Chief Commercial Officer; Mark Currie, Chief Scientific Officer; and Tom Graney, Chief Financial Officer. Our speakers will be referring to slides available via the webcast. For those of you dialing in, please go to the Events section of our website to access the webcast slides.

I would now like to turn the call over to Peter.

Thanks, Meredith. Good morning, everyone. It was great seeing so many of you at our R&D Day at our offices in March, where we provided an extensive review of our business and select value-creating opportunities. If you weren't able to attend or join the webcast, I highly encourage you to listen to the replay, which is still available on our website.

We're speaking with you today from GDW in Chicago. We're making many data presentations, and our team is having terrific conversations with leading gastroenterologists about linaclotide, visceral pain and crosstalk [about organs] in uncontrolled GERD and achalasia.

We're also hosting an investor reception tonight featuring three leading medical experts. I hope to connect with many of you while you are here. Please reach out to Meredith for details if you'd like to attend the reception.

As I emphasized at R&D Day, Ironwood has very strong momentum with 2 exciting commercial products and one of the most innovative mid- to late-stage pipelines in biotech. We continued to make progress in the first quarter with strong execution across all facets of our business. We gauge LINZESS performance by growth and prescription demand, patient access and net price. The brand is performing well on all of these measures, including more than 20% volume growth this past quarter compared to Q1 of 2016.

With that said, I know the LINZESS sales number for the first quarter was a bit surprising, and I'd like to quickly comment on that. LINZESS' net sales for the quarter were up about 8% year-over-year. The variation between volume growth and net sales growth during the period is primarily due to differences in trade-buying patterns year-over-year that resulted in a drawdown in channel inventory, which Tom Graney will speak with -- speak to shortly. This is consistent with what's been seen across the industry this quarter, especially for primary care brands.

LINZESS remains on track to exceed $1 billion by 2020, and we expect Ironwood revenues to generate greater than 25% CAGR growth between 2016 and 2020. This, in turn, is expected to fuel continued investments in innovation and drive high-margin growth for many years to come.

With that, I'd now like to turn the ball over to Tom McCourt.

Thanks, Peter, and good morning, everyone. As Peter said, LINZESS demonstrated continued strong demand growth year-over-year. Total LINZESS volume growth included a greater than 20% increase in capsules and a 17% increase in total prescriptions year-over-year. The difference between the two is accounted for by the increased size of the prescription.

Similar to what we've seen with LINZESS in previous first quarters and with many other branded primary care drugs, prescription growth was a bit lighter in the first quarter due to seasonality in the market, which was caused by patients changing their health plans at the beginning of the year and patients working through annual deductibles.

You can see this more clearly through the LINZESS rejection and refusal data. As expected in January, there's typically a sharp increase in rejections and refusals, which return to a normal level over the first quarter. This pattern is consistent with every first quarter since launching LINZESS, except 2016 due to a couple of big managed care wins with CVS and UnitedHealthcare that began January 1, 2016, and offset this normal seasonality.

Importantly, the most recent weekly prescribing data showed the largest week-on-week prescription growth since the beginning of the year, and this acceleration has continued through the early part of the second quarter. We believe LINZESS is just scratching the surface of its potential. In over 4 years on the market, LINZESS has been prescribed by nearly 180,000 physicians to nearly 1.5 million patients. With over 40 million adults in the U.S. estimated to suffer from IBS-D and chronic constipation and a majority of whom are in OTC treatments and dissatisfied, the opportunity to drive further growth is significant.

As the branded prescription market leader, we are investing into the brand and building a franchise that we believe will exceed $2 billion in peak annual U.S. sales. We expect to do this by continuing to grow the overall market as well as increased market share, ensure broad payer access and expanding the clinical utility. For example, we recently introduced a third LINZESS dose, the 72-microgram dose for adults with chronic constipation. We are very encouraged by the early uptake in the market and the fact that more than 70% of patients treated with the 72-microgram dose are new LINZESS patients previously taking OTCs. This strong performance validates what we heard from physicians, which is that dosing flexibility is important to help treat this large and heterogeneous chronic constipation population.

Turning to our Gout franchise. We continue to make progress in developing the market with our first lesinurad product, ZURAMPIC. We expect net sales to be nominal in 2017 as we focus on market development including educating physicians to recognize uncontrolled gout and introducing the efficacy and safety of lesinurad plus allopurinol for appropriate patients, while we secure payer access. We are monitoring certain metrics to assess our progress across all these areas and plan to update you moving forward.

Specifically regarding physicians, our focus is on the breadth of this rapid subscriber base and the responsiveness to brand promotion. Our sales team is currently calling on roughly 30,000 high-prescribing physicians most of whom are primary care physicians, who we believe will be the primary growth driver for years to come. Regarding payers, we are working to secure payer access and reimbursement, so the estimated 2 million uncontrolled gout patients can get ZURAMPIC at a reasonable copay. We've had some early wins, and our parent team will continue to work on this throughout the remainder of 2017 and into 2018.

We believe DUZALLO, the fixed-dose combination of lesinurad and allopurinol will be the critical growth driver behind the lesinurad franchise helping it to grow to over $300 million in U.S. sales. DUZALLO provides the potential for just one pill once a day, which is one copay, to enable nearly twice as many uncontrolled gout patients reach goal compared to allopurinol alone. We expect DUZALLO to be approved this fall with the launch soon after approval.

Before I close, I just want to comment that we've had a very productive Digestive Disease Week. As the branded prescription market leader, LINZESS has had a big presence, and we're having some great conversations with gastroenterologists about the management of IBS-C, chronic constipation and visceral pain associated with a number of GI disorders.

Equally as exciting are the advancements in science that our teams are bringing to the GI community including linaclotide DR1 and DR2, IW-3718 for uncontrolled GERD and IW-1701 for achalasia, all of which reinforce our commitment to innovation and fit well into our commercial model.

With that, I'll now turn the call over to Mark Currie.

Thanks, Tom, and good morning, everyone. As Tom said, it's been a great couple of days at DDW. We're making exciting progress across our R&D efforts, and it's been fun to share some of these advancements with our peers in the GI community. We're looking forward to continued progress throughout the remainder of 2017 with a number of important advancements expected from our pipeline.

Beginning with IW-3718 for uncontrolled GERD, we expect data from a Phase IIb dose-ranging clinical trial midyear. As a reminder, IW-3718 is a wholly-owned gastric-retentive formulation of a bile acid sequestrant designed to work in combination with the PPI to reduce the effect of bile on the esophagus. The Phase IIb trial is set up to detect a 15% or greater difference for heartburn severity between IW-3718 plus PPI versus PPI alone. The trial also includes a patient-reported outcome measure designed to help define for the first time ever clinical meaningfulness for these uncontrolled GERD patients.

We believe the data from this study, if positive, will reduce a significant program risk for this greater than $2 billion U.S. annual peak sales opportunity. In addition to the IW-3718 data, additional catalysts expected later this year include: the DUZALLO approval in launch that Tom just mentioned; the Phase III initiation of linaclotide DR1 and IBS-C, Phase IIa result for IW-1973 in diabetics with hypertension and for IW-1701 in achalasia; and 3 Phase II initiation for IW-1973 in resistant hypertension, heart failure, preserved ejection fraction and diabetic nephropathy.

It's going to be an active year and one that should set us up for continued momentum in 2018 and beyond. With that, I am going to turn the call over to Tom Graney.

Thanks, Mark. I will spend the last few minutes providing some additional color on LINZESS' performance as well as recapping our financial results and guidance. You can find the detailed financial statements in our press release.

As Peter and Tom mentioned, LINZESS demonstrated strong demand in the first quarter with more than 20% increase in volume year-over-year. Total LINZESS net sales for the first quarter were up 8% year-over-year to $147.6 million. The higher growth in volume compared to net sales was due primarily to differences in trade-buying patterns year-over-year resulting in a nearly $20 million impact.

We have always focused on growth and demand measured by volume gain, patient access and net price as our key metrics and have encouraged investors to do the same. We believe the brand is demonstrating strong performance against these measures, and we now are again invested strongly behind the brand in the first quarter of 2017 as we continue to build the franchise.

Commercial cost and expenses were $70.9 million, which included $3.7 million in cost of goods sold and $67.2 million of LINZESS sales and marketing expenses. LINZESS brand collaboration in the U.S. generated $76.7 million in total net profit and a 52% commercial margin for the first quarter. As you've seen over the past few years, commercial margins fluctuate quarterly. We expect them to expand over time and to exceed 70% by 2020.

Turning to Ironwood's financials. We ended the first quarter of 2017 with approximately $295 million of cash, cash equivalents and available-for-sale securities. Cash used in operations was $27.8 million compared to $200,000 of cash generated in operations in the first quarter of 2016. The increase in cash use year-over-year primarily reflects $15 million cash milestone we achieved from Astellas in the first quarter of 2016 and costs associated with the launch and commercialization of ZURAMPIC in the first quarter of 2017.

We recorded $52.2 million in Ironwood total revenue on our P&L for the first quarter of 2017 compared to $66 million in the first quarter of 2016. Again, revenue in the first quarter of 2016 benefited from the $15 million milestone from Astellas.

Total operating expenses were $91.8 million for the first quarter of 2017 including $55.6 million in SG&A expenses and $33.7 million in R&D expenses. Our investments in the first quarter reflect the launch and commercialization of ZURAMPIC as well as the advancement of our pipeline program.

Turning to our non-GAAP disclosures. We exclude 3 noncash adjustments to arrive at our non-GAAP measures. The mark-to-market adjustment related to the convertible note hedges and warrants, the amortization of acquired intangible assets and the change in fair value of contingent consideration associated with our licensing agreement with AstraZeneca for lesinurad. These three adjustments resulted in a charge of $4.2 million or $0.03 per share in the quarter.

GAAP net loss for the quarter was $52.5 million or $0.36 per share and non-GAAP net loss was $48.3 million or $0.33 per share. In the first quarter of 2016, the GAAP net loss was $13.3 million or $0.09 per share and non-GAAP net loss was $11.7 million or $0.08 per share.

Moving to our 2017 financial guidance. We continue to expect R&D expenses of $145 million to $160 million and SG&A expenses of $235 million to $250 million. Total LINZESS marketing and sales expenses of $250 million to $280 million. Net interest expense of approximately $40 million and cash used from operations to be less than $100 million.

In closing, we're making important progress as we work to become a top-performing commercial biotech company. We expect to deliver rapid top line growth over the next several years, while advancing an innovative pipeline. Commercially, we continue to build our branded prescription market-leading position with LINZESS in IBS -C and chronic constipation. We look forward to launching DUZALLO into the uncontrolled gout market expected in the second half 2017. We are also excited about our opportunity to deliver additional innovative medicines to patients. As Peter mentioned, we're hosting an investor reception this evening at DDW and hope to see many of you there.

With that, I'll turn it over to Catherine to begin the Q&A portion of the call.

(Operator Instructions) And our first question comes from Ying Huang with Bank of America Merrill Lynch.

I have a question first on LINZESS sales. So even if you add back the $20 million in inventory destocking, you get to roughly 23% growth from 1Q. But then, you also see that the 20% increase in capsules distributed. So I'm wondering, can you comment on the net pricing trend? Because I do notice that from 1Q '15, you saw a 15% increase in WAC. And then related to that, are you seeing any more impact at all from the synergy launch in the marketplace? And then a quick question on the R&D side. Can you comment exactly which biomarket data would we expect from IW-1973 in the second half?

Ying Huang, thank you for your question. As we saw in the first quarter, we did have 20% increase year-over-year in volume. And as I think you heard from Tom McCourt's comments, that was in a difficult comparison to last year's first quarter as a result of some really important managed care wins we had to start 2016. So we did have that strong growth. And when you adjust for the stocking of inventory as you did in your math, you achieve even better growth as you mentioned. When it comes to price, we did see, in the first quarter, a minimal price, net price increase year-over-year. As we continue to invest behind making sure that we've got the best branded market access in this category, we do enjoy terrific managed care access with 90% coverage in Med D and about 70% of patients with commercial plans get access to LINZESS for about $1 a day, so we feel great about the position we've been in on the payer front, which, as you know, since launch, has been an important part of our strategy to grow the category.

Yes, and as far as the progress synergy has made, I just want to start off by saying we are the market leader in a very large and growing market, and there's room for multiple players here. And generally what we'd see in markets like this when you have additional entrants into the market, the market growth and, of course, the market leader will benefit largely the most from that effort. What we need to be focused on right now is really continuing to behave like the market leader. We're going to continue to grow the market. We're going to continue to invest in DTC. To continue to grow that market, we're going to capture the market, which has been largely driven by this high-level satisfaction that the physicians are feeling about the drug and certainly how patients are experiencing the benefit of the drug. And as Tom mentioned, the payer access here is really, really key. It is the #1 reason, the #1 obstacle for choosing any brand in this category and, of course, our active physician promotion. So when we look at where we are and where we want to go, now it's all about raising the bar. And 72 microgram, it was a big step forward. We're seeing very, very encouraging growth out of the gate. These appear to be new patients coming right from OTC. So we see this expanding the market and I think, all the lead indicators look very strong.

Yes, with respect to what we expect to see on the biomarket side for IW-1973 in our diabetic hypertension study, first, we'll -- we're very focused on the pharmacodynamic activity and the cardiovascular effect, particularly blood pressure. These patients do have hypertension, so we're looking to see the effect on lowering blood pressure in this population. Obviously, also tolerability. And then with respect to specific biomarkers, we're focused in on a number of metabolic biomarkers because of the effect we've seen in animal models with 1973 on both glucose and lipid lowerings. And also inflammatory markers, looking at -- we've seen some of the effects relative to lowering some of the inflammatory cytokines that we've seen in a number of different models.

And our next question comes from Tim Chiang with BTIG.

I think -- I'm here over at the DDW conference as well with you guys, and certainly a lot of buzz about new treatments actually in the GERD base. And Mark, could you talk a little bit about, assuming your Phase IIb trial is successful, how quickly could you actually start a Phase III trial? And what's your bile acid sequestrant?

Yes, we haven't given any guidance yet, Tim, on when we -- how quickly we would expect. Obviously, there are a number of things once we have that data. We will want to focus on then having discussions with the FDA and then continuing to get ready for a preparation. We would expect to be in 2018. I think that's what we've indicated, but specifically how fast we would then get that study started, we haven't given it -- it would be in 2018.

And Mark, let me just...

Tim, just a comment, I really agree with the enthusiasm we're seeing in the GI community in a space in GERD where there really hasn't been any innovation for a long, long time. And the conversations that we're having with these esophageal experts and the interest in the role of bile acid in addition to acid control is really encouraging. So we're looking forward to seeing the data, but we're getting a lot of interest and a lot of questions here at DDW around uncontrolled GERD.

Yes, that -- yes, I think that certainly if you guys can show successful results, you'll have a market for this product. But I also wanted to highlight or question the DR1 formulation, when do you guys expect to meet with the FDA? Is that still sometime later this summer, to discuss how the Phase III trial will be designed?

Yes. Obviously, once we had our Phase IIb data and we've pretty much packaged it together. We've had dialogues and communication with the FDA since that data, and they will continue through the summer.

We continue to expect to start that study in the second half, Tim.

And our next question comes from David Maris with Wells Fargo.

This is actually Patrick Trucchio on for David Maris. I have 2 questions. The first one on LINZESS inventories at trade. Have inventories normalized the trade following destocking in Q1? Or should we anticipate some additional destocking in Q2? And then secondly, can you talk about the GERD data in terms of the timing? And can you remind us what the specific endpoints are? And what would constitute a definitive move into Phase III?

Patrick, it's Tom Graney. I'll take your first question. As we've seen since launch and you see this frequently with primary care brands, there is often pretty sizable fluctuations in both wholesaler and retailer inventory levels during the course of the year based on the buying patterns of our customers. We see the current service level still being maintained with the current inventory levels, so we don't really speculate on what we think our customers are going to do going forward. Right now, we're just making sure that we're focused on driving demand and ensuring that the supply chain has a robust level of inventory to make sure they're able to maintain service levels for our end-user patient customers. Mark, can you take the second question?

Yes, so the key endpoint focus around the heartburn severity scale, and we do expect data in the mid-this year. One of the things that, as you indicated, what would be the clear go/no go, we powered this specific study for 15% improvement on heartburn severity over placebo, but there's a component here that's also critical, which is determining clinical meaningfulness. And as you know, we've been pioneers in the patient-reported outcome work with what we did in the IBS-C field. And now we're taking that type -- same type of expertise and bringing it to these patients. And so what we're doing is bringing both efficacy data that we will see and the PRO data determining what is clinically meaningful change for these patients. That will then define the go/no go.

(Operator Instructions) And our next question comes from David Lebowitz with Morgan Stanley.

I'm just curious, has there been any feedback from the sales force regarding new competitive products? Have - has there been a substantial outreach that they are already detecting on -- with respect to your competitors? Or is it still relatively quiet as far as the bulk of the physician base?

Yes. This is Tom, I'll take the call. We haven't heard a whole lot. I mean, obviously, there's -- they're out there, they're calling on physicians, they're introducing the product, but it hasn't been disruptive in any way, shape or form with regard to our ability to deliver the message and drive demand. As you know, the level of satisfaction with LINZESS is very high. And our challenge with any emerging competitor is to keep the sales force focus on our game as the market leader and that is certainly driving demand and capturing market share. But so far, it's early, but we're not hearing a whole lot.

And quickly jumping over to the 72-microgram dose. What types of patients are these -- the profile of a typical patients that that dose is being selected by? And I guess previously, what about the -- why didn't these patients jump over earlier when it was higher doses? Had they experimented with prescription therapies before? Or was there an alternate reason why they held back?

That's a -- it's a great question. And what we've heard -- what we've consistently heard from physicians in the past is they tend to hold both 290 and 145 for people that have fairly severe symptoms, and they were asking for a lower dose for patients that may have more mild symptoms or more -- may be more sensitive to the drug. But what we're -- and what we're seeing, and it's early, so we have -- we still have some work to do, is it appears that the majority of these patients are indeed these patients that tend to be a bit more mild and are coming right off OTCs into the market. So this clearly looks like it's expanding the market as opposed to cannibalizing the 145 dose.

And our next question comes from Anupam Rama with JPMorgan.

It's Eric in for Anupam this morning. Just a couple on 3718 in refractory GERD. It's obviously still pretty early days here in terms of development, but in thinking about the market opportunity and the type of feedback, the market feedback that you're getting, I'm just wondering maybe how you guys are thinking about potential pricing? Any indication maybe relative to historical PPIs, given that this is intended as an adjunct therapy? And secondly, what are you guys monitoring in terms of the competitive landscape for refractory GERD?

Yes. First, as I mentioned earlier, this is a whole new area. And this is, as you know, this is a huge market, we're talking -- PPIs were a $12 billion market, and there really hasn't been much innovation in this space. And there really isn't -- as we look at other competitors entering the market, there really isn't much as far as both treatments or technologies to treat these patients. So we see this as a tremendous opportunity for us. As far as pricing, obviously, that's work that we have to do, and it's going to be really dependent on the value proposition, which is going to be driven on how strong is the clinical profile, how broad do we think the -- we believe the penetration could be. And our #1 objective here is to secure broad payer access. This is a -- we're talking millions and millions of patients, and we don't want the payer to be a barrier. So we want to be very thoughtful about the value proposition and the value that we can bring to the payer as well as the healthcare community, but everything is very exciting. Like I said, it's been very encouraging to see the level of enthusiasm that we're seeing at DDW from the gastroenterology community.

And our next question comes from Boris Peaker with Cowen and Company.

This is Justin on for Boris. It's more on 3718 for GERD. I just wanted to get an idea of mid this year for the top line data. Might the spectrum of detail of your approval percent be just P values that are hit or not? Or do you think there will be actual numbers in there? How will they be sure if you need to preserve the data for a publication or a conference? And then at that same time that you put out this first press release, will you actually say if you're going to go ahead or make it a go or no decision then? Or is there going to be a waiting period after that?

Yes. I think I've got that, Justin. This is Mark. So I think historically, we will give top level, top line data in our press release and that will give an indication if we intend to go forward. Obviously, going forward is always contingent on FDA meetings when we're going forward to Phase III. But -- so we would expect again to be giving a very clear go/no go, as far as both the efficacy data and clinical meaningfulness and the profile we feel that the commercial team is seeking to be able to market. I think I got -- did that address your questions?

Yes. Yes, it looks like we'll get to see actual numbers and that you don't need to preserve anything for publication so that's great.

The top line numbers, and then we'll put out a publication for sure to follow up.

And I'm showing no further questions at this time. I'd like -- I would now like to turn the call back to Peter Hecht for any closing remarks.

Thank you, Catherine, and thanks to everyone for joining us today. We're available throughout the day, so reach out to Meredith if you'd like to follow up after the call with any questions. And if you're here in Chicago, we hope to see you this evening at our reception. Thanks again. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.