Positive for Ironwood is Positive for Synergy

Ironwood Pharmaceuticals (IRWD) reported 2Q earnings on Tuesday morning, trouncing analyst estimates for sales of Linzess and assuaging a major overhang on the stock. The news is good for Synergy Pharmaceuticals (SGYP) as well, which develops plecanatide, a fellow guanylate cyclase-C (GC-C) agonist that will enter Phase III trials in the next nine months. We consider the stock (SGYP) a quality long-term holding.

Sales of Linzess (linaclotide), Ironwood’s approved treatment for Chronic Idiopathic Constipation (CIC)  and Irritable Bowel Syndrome with Constipation (IBS-C), came in at $28.8M in the second quarter, a strong beat compared to consensus estimates for $23M. The sales figures come as a major relief to many, as first quarter sales, reported in April, were considerably lower than expected. The miss has weighed on the stock and raised questions about Linzess’ launch ramp and market potential. Linzess was launched in December of 2012.

First quarter Linzess sales of $4.4M were well-below Wall St. consensus expectations for $12M. The miss, it appears, was attributable to the flow of inventory given the initial launch quantities of the drug stocked within the distribution channel. A look at the prescription trends for Linzess in the first quarter and price per prescription suggested at the time that sales would have been in-line with expectations had it not been for some early overstocking. Here’s what we wrote in our May update on Synergy.

“. . .given that the distribution channel was loaded with initial product in December, it makes sense that little sales were booked in 1Q 2013 as wholesalers sold inventory they already had in 1Q. We note that this is typical of products that are just launched, and this ebb and flow is not unusual. In fact, 2Q 2013 is likely to contain some channel reloading that could mean Linzess sales come in higher than expected.

Tuesday’s news is good for both Ironwood and Synergy. The improving sales ramp helps to validate the GC-C agonist class as a whole. Remember, Synergy’s placenatide is a GC-C agonist but with a better tolerability profile than Ironwood’s Linzess (read the full bull thesis here). More importantly for Synergy, Ironwood and Forest Labs’ marketing efforts pave the way for plecanatide by increasing provider awareness and prepping payers. Ironwood discussed the possibility of television advertising in the fourth quarter of last year, suggesting that they had not decided whether to make “that kind of investment [expensive]”. We think the company pulled the trigger on “that kind of investment” when they raised $138M towards the end of May, and while we have yet to hear about Linzess ads on the airwaves, it’s important to note that sales of Zelnorm, a previous CIC and IBS-C drug, took off in tandem with a strong direct-to-consumer marketing effort.

A few takeaways from Ironwood’s conference call: 

The company has primarily advertised digitally (online), and believes this patient population has been quite responsive to online advertising. Ironwood will, however, adjust its marketing mix to incorporate a mixed-media advertising approach while remaining inside of its $250M budget. This suggests that television advertising may take a role in the near future.

Ironwood reported 120,000 total prescriptions filled in the second quarter, over 200,000 since launch. New prescriptions make up 50% of scripts — driven by 1000 new prescribers per week. When asked about the disconnect between new prescribers and the slowing Nrx numbers (see chart below), management said that a lot of prescribers are testing the product with a few prescriptions before re-upping with new prescriptions. In May we wrote about Linzess’ acceptance among physicians, gauged at the Digestive Disease Week meeting.

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Ironwood said it’s seeing 4 weeks of inventory at the wholesale level, but the trend is heading downwards and should be at 3 weeks by the end of the year. They ultimately expect underlying demand to correlate with ex-factory sales.

As of June, 80% of the target population with commercial insurance had unrestricted access to Linzess, and approximately 50% of patients will have access at Tier 2.

Ultimately, although it’s still early, the 2Q Linzess numbers are encouraging, particularly if management’s assessment of Nrx trends is correct. With a robust beat on the top-line, likely due to channel re-stocking, we suspect that sales should begin to move in-line with analyst estimates, and stronger marketing tactics should support. We have not taken a position, but believe that IRWD is attractive in the next few months as expectations shift. Nevertheless, the company has a high cash burn, $80M in the second quarter, and had $301M on the balance sheet at June 30. An equity raise is likely towards the end of the year. Note that the company should have top-line data from an ongoing Phase IIIb study of Linzess evaluating the drug’s effectiveness on abdominal symptoms in patients with CIC. For those trading IRWD, it’s wise to be prepared for an offering following the new data.

Our interest is primarily in Synergy, however. SGYP should continue to track IRWD and the Linzess ramp. Bear in mind, good news from Ironwood regarding Linzess is further validation of plecanatide. Again, you can read our previous explanation of the bull thesis here.

 In connection with SGYP, PropThink has taken a long position.