Ironwood(US:IRWD)2020-08-06 20:05PART I — FINANCIAL INFORMATION Financial Statements The company's unaudited financial statements show improved net income driven by lower operating expenses despite a decrease in total revenues Condensed Consolidated Balance Sheets Total assets increased to $443.5 million, and the total stockholders' deficit improved significantly Balance Sheet Items | Balance Sheet Items | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $374,275 | $306,852 | | Total Assets | $443,538 | $402,748 | | Total Current Liabilities | $26,695 | $40,929 | | Total Liabilities | $480,390 | $495,999 | | Total Stockholders' Deficit | ($36,852) | ($93,251) | Condensed Consolidated Statements of Operations Q2 2020 net income from continuing operations more than doubled to $25.2 million despite a decrease in total revenues Key Operational Metrics | Metric (in thousands) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $89,432 | $102,215 | $169,375 | $170,945 | | Collaborative arrangements revenue | $89,423 | $77,322 | $163,868 | $143,474 | | Sale of active pharmaceutical ingredient | $9 | $24,893 | $5,507 | $27,471 | | Income from Operations | $32,713 | $21,577 | $45,940 | $4,643 | | Net Income (Loss) from Continuing Operations | $25,204 | $12,283 | $28,549 | ($9,563) | | Net Income (Loss) per Share - Diluted | $0.16 | $0.08 | $0.18 | ($0.06) | Condensed Consolidated Statements of Stockholders' Deficit The stockholders' deficit improved from ($93.3) million to ($36.9) million, driven primarily by net income - The total stockholders' deficit decreased from $93.3 million at the end of 2019 to $36.9 million at the end of Q2 2020, mainly due to net income of $28.5 million for the six-month period22 Condensed Consolidated Statements of Cash Flows The company generated positive operating cash flow of $63.7 million, a significant reversal from the prior year Cash Flow Summary | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $63,691 | ($51,622) | | Net cash used in investing activities | ($1,814) | ($5,406) | | Net cash provided by (used in) financing activities | $14,352 | ($16,265) | | Net increase (decrease) in cash | $76,229 | ($73,293) | Notes to Condensed Consolidated Financial Statements Notes detail the company's focus on LINZESS, key collaboration revenues, and outstanding convertible debt - The company is a gastrointestinal (GI) healthcare company focused on its commercial product LINZESS® (linaclotide) for IBS-C and CIC, with key strategic partnerships with AbbVie, Astellas, and AstraZeneca for global commercialization262728 - On April 1, 2019, the company completed the separation of its sGC business into Cyclerion Therapeutics, Inc, which is presented as discontinued operations in the financial statements3856 - As of June 30, 2020, the company had three series of convertible senior notes outstanding with a total net carrying amount of $418.9 million180 Collaborative Revenue Breakdown | Collaborative Revenue Source (in thousands) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | AbbVie (North America) | $86,926 | $75,498 | $158,618 | $140,283 | | Astellas (Japan) | $504 | $0 | $983 | $0 | | AstraZeneca (China) | $187 | $0 | $519 | $0 | | Alnylam (GIVLAARI) | $1,061 | $0 | $2,006 | $0 | | Total Collaborative Revenue | $89,423 | $77,322 | $163,868 | $143,474 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management analyzes financial performance, operational results, and liquidity, highlighting LINZESS's success and pipeline developments Overview The company focuses on its GI product LINZESS, manages pipeline changes, and addresses COVID-19 impacts - The company's primary focus is on its GI product LINZESS, commercialized through partnerships with AbbVie, AstraZeneca, and Astellas209210212 - The development of MD-7246 was discontinued with partner AbbVie after a Phase II trial failed to meet its primary endpoints214 - The COVID-19 pandemic has impacted the business, notably by slowing patient enrollment in the Phase III clinical trials for IW-3718213223 Financial Overview Revenues are driven by LINZESS collaborations, while R&D expenses are concentrated in IW-3718 and linaclotide programs - Revenues are primarily generated through collaborative arrangements for linaclotide, including profit sharing with AbbVie in the U.S, royalties, and milestone payments225226227 R&D Expense by Program | R&D Expense by Program (in thousands) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Linaclotide | $6,362 | $8,284 | $14,149 | $18,147 | | IW-3718 | $13,629 | $18,562 | $32,522 | $35,464 | | Early research and development | $2,085 | $1,757 | $3,432 | $6,974 | | Total R&D Expenses | $22,076 | $28,758 | $50,103 | $60,956 | Results of Operations Higher LINZESS profits drove revenue growth, while reduced spending led to a significant increase in operating income - Q2 2020 collaborative arrangements revenue increased by 16% YoY to $89.4 million, primarily due to an $11.5 million increase in the company's share of net profits from LINZESS sales in the U.S267 - Sale of API revenue dropped nearly 100% in Q2 2020 to just $9,000 from $24.9 million in Q2 2019, mainly because of a decrease in API sales to Astellas in Japan267269 - Total operating expenses for Q2 2020 decreased by 30% YoY to $56.7 million, driven by lower R&D spending on IW-3718, reduced SG&A costs, and the absence of restructuring charges271272274 Liquidity and Capital Resources The company holds sufficient cash to fund operations for at least twelve months but notes COVID-19 as a financial uncertainty - The company held $253.3 million in unrestricted cash and cash equivalents as of June 30, 2020289 - Management believes that cash on hand as of June 30, 2020, is sufficient to meet projected operating needs for at least the next twelve months296 - The COVID-19 pandemic is noted as a significant uncertainty that could adversely impact the company's future financial condition and ability to obtain financing292 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are equity price risk from its convertible notes and minimal interest rate risk - The company's main market risk exposures are interest rate risk and equity price risk313 - Interest rate risk is low due to short-term investments and fixed-rate convertible senior notes314316 - Equity price risk arises from convertible senior notes whose conversion is based on the company's stock price, with hedges in place to manage potential dilution317321323 Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of June 30, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020327 - No material changes to the company's internal control over financial reporting were identified during the quarter329 PART II — OTHER INFORMATION Risk Factors The company faces significant risks from the COVID-19 pandemic, dependency on LINZESS, and intellectual property challenges Risks Related to the COVID-19 Pandemic The pandemic poses risks to operations, LINZESS sales, and clinical trial timelines, with uncertain long-term impacts - The COVID-19 pandemic has impacted business operations, with remote work and limited in-person interactions potentially harming LINZESS sales332335 - Enrollment in clinical trials, specifically the Phase III trials for IW-3718, has been slowed by the pandemic, leading to delays and expected increases in trial expenses338 - Potential disruptions to the manufacturing and supply chain for LINZESS and clinical trial materials due to the pandemic pose a risk to revenue and trial progression337 Risks Related to Our Business and Industry Key business risks include heavy reliance on LINZESS, third-party manufacturing, competition, and pricing pressures - The company is highly dependent on the commercial success of LINZESS in the U.S, which constitutes a significant portion of total revenue342 - The company relies entirely on contract manufacturers and partners, exposing it to risks of supply disruption, quality issues, and regulatory non-compliance351 - LINZESS faces competition from other prescription therapies such as AMITIZA, TRULANCE, MOTEGRITY, and ZELNORM, as well as over-the-counter products395 - The business is subject to significant uncertainty from pricing and reimbursement policies in the U.S and abroad, as well as broader healthcare reform initiatives368370 Risks Related to Intellectual Property The company's success depends on defending its LINZESS patents against challenges from generic drug manufacturers - The company's success is dependent on its ability to obtain and maintain patent protection for its products, particularly LINZESS442444 - The company has received Paragraph IV certification notices for ANDAs filed by generic drug manufacturers and has filed patent infringement lawsuits in response455456 Risks Related to Our Finances and Capital Requirements The company has a history of losses, substantial debt, and uncertain future funding needs dependent on LINZESS revenue - The company has a history of significant losses, with an accumulated deficit of approximately $1.5 billion as of June 30, 2020, and may incur losses in the future464465 - As of June 30, 2020, the company had total indebtedness of approximately $520.7 million, which could adversely affect its financial condition474 - The ability to service its debt depends in part on receiving payments from AbbVie from the LINZESS collaboration470473 Risks Related to Securities Markets and Investment in Our Stock The company's stock price is expected to be volatile, and anti-takeover provisions could prevent a change of control - The market price of the company's Class A Common Stock is expected to fluctuate substantially due to commercial performance, clinical trial results, and other factors499 - Anti-takeover provisions, including a staggered board of directors (being phased out by 2022), could delay or prevent a change of control488 Exhibits This section indexes the exhibits filed with the report, including corporate documents and required officer certifications - The exhibits filed with this report include corporate governance documents, CEO and CFO certifications pursuant to SEC rules, and interactive data files (XBRL)501504