AZN - Ironwood Pharmaceuticals: The Right Play Now

2023-10-27 16:13:47 ET

Summary

• Ironwood Pharmaceuticals, Inc. is a Boston-based drug company focused on developing treatments for gastrointestinal disorders.
• The company's revenue-generating product is Linzess, which is approved for multiple GI indications.
• Ironwood recently acquired VectivBio and its drug candidate apraglutide, which is undergoing evaluation for the treatment of short bowel syndrome with intestinal failure.
• Where does Ironwood Pharmaceuticals stock go from here?  A full investment analysis follows in the paragraphs below.

People like to risk pennies to win dollars .”? Naved Abdali.

When we last looked at Ironwood Pharmaceuticals, Inc. ( IRWD ) in October 2022, the company possessed one commercial product, recently moved one asset into the clinic, and held an option on another after the failure of its IW-3718 (for irritable bowel syndrome with constipation (IBS-C)) and MD-7246 (gastroesophageal reflux disease) development programs in 2020. We speculated that the company would target other GI assets for purchase to leverage its domestic sales effort.

As a reminder, Ironwood Pharmaceuticals, Inc. is a Boston based commercial-stage drug concern focused on the development and commercialization of treatments targeting gastro-intestinal [GI]-related disorders. The company has one revenue generating product (Linzess) and two clinical programs, plus an option on a third, pursuing multiple GI indications. The company was formed in 1998 as Microbia, changed to its current moniker in 2008, and went public in 2010, raising net proceeds of $203.2 million at $9.42 a share, after giving effect to its 2019 spinoff of Cyclerion Therapeutics ( CYCN ). The stock currently trades just under nine bucks a share, translating to an approximate market cap of $1.4 billion.

Linzess

Ironwood’s Linzess (linaclotide) is an orally dosed, room temperature-stored agonist of the enzyme guanylate cyclase type C. By increasing the production of that enzyme in the lining of the intestine, Linzess speeds up transit through the intestine to reduce intestinal pain. It was approved by the FDA for adults suffering from IBS-C as well as chronic idiopathic constipation ((CIC)) in 2012 and is now available in Canada, Mexico, and parts of Europe (as Constella), as well as Asia. In June 2023, the FDA further approved Linzess for functional constipation [FC] in children aged 6 to 17.

IBS-C is characterized by abdominal pain, discomfort, bloating, and constipation symptoms with more than 65% of patients experiencing attacks at least once a week. It is believed to affect as many as 11.5 million Americans, whereas CIC afflicts up to 28.5 million. The recent approval for pediatric FC expands its domestic addressable market by an additional six million.

Beyond its own domestic sales efforts, Ironwood has collaboration agreements with several pharmaceutical concerns to market Linzess, the largest of which is with AbbVie Inc. ( ABBV ) . Under that arrangement, Ironwood splits the profits and losses 50/50 from the sale of Linzess in the North America and is eligible to receive royalties from AbbVie for all other territories ex-N.A., except China and Japan. Ironwood has a mid-single digit to low double-digit royalty arrangement with AstraZeneca ( AZN ) in China (including Hong Kong and Macau) and Astellas Pharma ( ALPMF , ALPMY ) in Japan. With that said, over 97% of the company’s FY22 top line ($410.6 million) was generated from North American sales of Linzess. However, Ironwood’s FY22 revenue was marginally below FY21 ($412.8 million), ending a slow but steady uptrend since its launch in 2012.

Attempts at generic versions of Linzess by Teva Pharmaceuticals ( TEVA ) and Sandoz have been thwarted until 2029 and 2030 (respectively), extending the life of this decade-long, one-drug company.

VectivBio Acquisition

While its other GI program was advancing through the clinic – more on that below – Ironwood bolstered its pipeline significantly with the acquisition of VectivBio in June 2023. The apple of its eye was apraglutide, a long-acting, self-injectable, synthetic analog of GI hormone glucagon-like peptide-2 (GLP-2), which is designed to improve nutrient absorption in the intestine. It is currently undergoing evaluation in the treatment of short bowel syndrome with intestinal failure (SBS-IF) and graft-versus-host disease (GvHD).

The candidate’s unique peptide sequence potentially offers advantages over native GLP-2, as well as Takeda’s ( TAK ) synthetic GLP-2 analog Gattex (teduglutide), which will be addressed shortly. For what it believes to be a pipeline in a product with peak sales of $1 billion plus, Ironwood paid VectivBio $17 per share, or a consideration of $1.1 billion net of cash acquired.

The late-stage study in question is the 164-patient Phase 3 STARS trial, which is evaluating the efficacy and safety of apraglutide in adult patients with SBS-IF, a disease characterized by a patient’s inability to absorb enough fluids and nutrients necessary to survive, which occurs due to a physical or functional loss of a significant portion of the small intestine due to trauma, congenital defects, or conditions such as Crohn’s disease. A healthy subject’s GI tract is ~25 ft. long, whereas an SBS patient’s is typically less than 7 ft. Patients are classified by the anatomy of the remnant intestine post-surgery: colon-in-continuity (C-I-C) (~60%); or stoma (~40%), which lacks C-I-C and requires a colostomy (stoma) bag. The ‘IF’ in SBS-IF represents a threshold where a patient requires intravenous supplementation to maintain health (or to survive), known as parenteral support [PS]. Severe cases can result in connection to a PS line for 10 to 15 hours a day, which can lead to infection, blood clots, and liver damage, amongst other maladies. Five-year and ten-year survival outcomes in adult patients are estimated at 70% and 52%, respectively. Approximately 19,000 patients are afflicted with SBS-IF in the U.S., Europe, and Japan.

The potential advantage apraglutide holds over Gattex and native GLP-2 involves its superior ability to bind to plasma protein, which promotes a significantly longer-half life (72 hours) and more consistent on-target drug exposure. These advantages allow for once-weekly dosing, engendering greater adherence, which is only 34% after two years on once-daily, subcutaneously injected Gattex, a remedy that delivered 2022 sales of $757 million. Also, to date, apraglutide has demonstrated greater intestinotrophic activity effects on the small intestine (i.e., it stimulates intestinal growth) versus other GLP-2 analogs, allowing for greater nutrient absorption. Owing to these superior attributes, apraglutide can cut into Gattex’s dominance while simultaneously expanding the market, if approved.

That approval will hinge on the STARS study, where 164 individuals were initially randomized based on their SBS anatomy (stoma or C-I-C) and then randomized 2:1 to receive either a weight-based dose of apraglutide or placebo. The primary endpoint is relative change from baseline in actual weekly PS volume at week 24. Secondary endpoints include patients who achieve a reduction of at least one day/week of PS from baseline at weeks 24/48; and patients reaching enteral autonomy (total cessation of parenteral nutrition) at weeks 24/48. A topline readout is expected in March 2024. There is confidence in a positive trial outcome based on two very small Phase 2 studies encompassing 16 patients where apraglutide demonstrated improvements in intestinal absorption of net weight, urinary output, and energy absorption.

It should be noted that Gattex is ripe for a generic, but even if that occurs, the substantial administration advantage provided by apraglutide should mitigate any intrusion from a low-cost inferior alternative.

The candidate is also under assessment in a Phase 2 trial treating patients with steroid-refractory gastrointestinal acute GvHD. Data are anticipated in 1Q24. The bet here is that with a new set of eyes on this indication, it will be deprioritized post-data.

Apraglutide has received a Fast Track designation from the FDA for SBS-IF.

Other Programs

Ironwood is also advancing IW-3300, which like Linzess, is a guanylate cyclase type C agonist that is being investigated in a proof-of-concept study for the treatment of visceral pain conditions in interstitial cystitis/bladder pain and endometriosis. No data timeline has been forwarded.

The company is also involved in the development of CNP-104, a tolerizing immune modifying nanoparticle that is undergoing evaluation as a treatment for primary biliary cholangitis, a rare autoimmune disease of the liver. Currently, COUR Pharmaceutical is advancing CNP-104 through the clinic, with Ironwood owning the option to develop and commercialize it in the U.S. In return for this option, Ironwood paid COUR a consideration of $19.5 million, including $6.0 million upfront and $13.5 million in non-contingent development milestones in FY21. If the option is exercised, COUR will receive an additional $35 million and could amass commercial milestone payments up to $440 million and high-single to low-double digit royalties on products containing CNP-104. Early (T-cell response) data from a proof-of-concept study is anticipated in 2H23, which will inform both the timing of the topline data and Ironwood’s potential option exercise.

Q2 2023 Financials

Although Linzess sales stagnated in FY22, they have picked a bit in FY23. That was reflected in the company’s Q2 '23 financial report of August 8, 2023, in which it posted – on an apples-to-apples basis – non-GAAP income from operations of $55.9 million on revenue of $107.4 million versus GAAP income from operations of $55.7 million on revenue of $97.2 million in 2Q22. The top line was $3.7 million better than Street expectations, buoyed by a 9% year-over-year increase in U.S. Linzess prescriptions to ~47 million capsules. There was significant noise in the GAAP bottom-line figure (a loss of $6.84 per share), related to the acquisition of VectivBio and internal job cuts prior to the deal.

On the back of this strength and the recent approval for the pediatric FC indication, management raised the midpoint of its FY23 top-line estimate range from $427.5 million to $442.5 million, representing a 7% improvement over FY22. That said, the market did not respond positively to the quarter – possibly due to the pivotal trial results for apraglutide being pushed from 4Q23 to March 2024 to expand the trial size by 20 to 164 – selling shares of IRWD 9% lower in the subsequent trading session. They are currently down some 25% since its 2Q23 report.

Balance Sheet & Analyst Commentary:

Before the acquisition of VectivBio, Ironwood was on track to generate Adj. EBITDA north of $250 million. That figure has been lowered to ~$200 million (net of noise) to reflect the onboarding of VectivBio’s R&D efforts. To finance the purchase, Ironwood used cash on hand and tapped a revolving credit facility for $400 million, bringing its total debt to $797.0 million against cash of $175.3 million on June 30, 2023. Year-end 2023 net leverage is projected at ~3.0. Management expects cash generated from Linzess to lower net leverage below 2.0 by the time of a potential apraglutide launch in 2025.

The Street has made little commentary on Ironwood. JMP Securities initiated IRWD as a new Outperform rating with a $22 price target in late September due to the potential of its recently acquired drug apraglutide. Last week, Piper Sandler reissued its Buy rating and $20 price target on the stock.

CFO Sravan Emany issued the most recent (and bullish) opinion on Ironwood by purchasing 36,072 shares at $8.32 on September 15, 2023.

Verdict:

The future of Ironwood rides on the apraglutide readout in March 2024. Slam-dunk results should compel the market to conservatively assign a $1 billion valuation to apraglutide (3.5 x peak sales of ~$285 million) before Ironwood files an NDA, propelling its overall valuation towards $2.5 billion, or ~$16 per share. A negative outcome – although not a death knell – would suggest it just spent north of $1 billion for nothing.

The bet here is that the news on apraglutide will be positive – although given the small size of its previous trials (n=16), a wide range of outcomes exist. However, even with early data due from CNP-104 before the end of the year and apraglutide’s GvHD indication in 1Q24, shares of IRWD are likely to trade sideways to slightly higher into the SBS-IF news. In the meantime, the (still) best way to tackle Ironwood is via a covered call strategy.

By gaming we lose both our time and treasure: two things most precious to the life of man.” ? Owen Feltham

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