Ironwood Pharmaceutcals – thinking about this one

I may be too late here but I will be watching for a pull back to start a position. Here are some notes outlining my thinking.

Overview:

Ironwood Pharmaceuticals is an early stage drug development company. It is developing Linaclotide, an oral drug for the treatment of irritable bowel syndrome.  The company has submitted an NDA and has a PDUFA date on June 8th, 2012. It has marketing partnerships in place to commercialise the drug worldwide.

The company was founded in 1998. Formerly known as Microbia, it changed its name to Ironwood Pharmaceuticals in 2008. In 2010 it raised $190M through an IPO that priced the stock at $11.25. Recently it has traded at the $13 level.

Product:

The company is developing Linaclotide for use in patients with irritable bowel syndrome with constipation (IBS-c) or chronic constipation (CC).  They have completed 4 double-blind phase 3 efficacy trials (two in IBS-C patients and two in CC patients). In addition two 18-month, open label, long-term safety studies are ongoing.  All four efficacy trials showed statistical improvement in symptoms over placebo. Side effects appear to be minimal with the most frequent being diarrhoea.

Here’s the IBS-C abstract

Here are the results of the CC trials

Here’s an NYT article after the release of the first phase III trial data.

An NDA was filed in the US in August 2011 and an MAA was filed with the EMA in September.  The PDUFA date is in June 2012.

Market:

The NIH estimates that ~20% of Americans experience symptoms of IBS. Of these, about one third are associated with constipation (IBS-C), one third with diarrhoea, and the remainder with both.  In addition to constipation or pain, patients often report accompanying pain.

Chronic constipation affects ~ 15% of the US population. It has a significant impact on healthcare costs as it is estimated to drive ~2.5M physician visits per year.

IRWD estimates the total market for IBS-C and CC at ~40M patients in the US.  This seems like a reasonable estimate.

There is currently only one drug marketed specifically for IBS-C – Amitiza.  Another drug, Zelnorm, was previously licensed for IBS-C, but was withdrawn from the market in 2007 due to a potential association with MIs and strokes. Prior to withdrawal it had achieved sales as high as $560M.

Amitiza’s sales have been disappointing. In 2009 it had WW sales of ~$215M. Sales had been expected to hit $800M and Amitiza has denounced its marketing collaborator, Takeda, for failing to effectively Markey Amitiza by pursuing a strategy focused on specialists (gastroenterologists) rather that a broad, primary care and DTC approach.

There is a significant and underserved market. Patients will continue to be initially treated with laxatives and analgesia, but a significant number will fail this regimen and will have few options to progress to. IRWD claims market research that shows 70% of patients relapsing with standard treatment.

A quick back of the envelope (with some obvious assumptions) shows that there could be sizable revenue potential here:

Financials:

In Q3 2011 IRWD had revenues of ~$12M and a net loss of $21M.  The company has $47M in cash on its balance sheet as well as 204M in short term investments.

Valuation:

If Linaclotide were to achieve revenues of $500M then IRWD could expect to receive $250M of that. A quick screen of biotech companies with revenues in that range shows some valuations that would give considerable upside based on current stock price (IRWD market cap. = $1.38B):

Partnerships:

Forest: IRWD has a partnership with Forest Labs to jointly develop and commercialise Linaclotide in North America.  The two companies share the development costs as well as future profits/losses in the US equally.  IRWD will receive royalties from sales in Mexico & Canada.  Forest made upfront payments and is committed to ongoing milestone payments.  Payments could eventually total $330M.

Almirall: IRWD has an agreement with Almirall to develop and commercialise Linaclotide in Europe.  The license agreement (including contingent milestone payments, as well as a contingent equity investment) could total up to $55M.  In addition IRWD will receive escalating royalties from sales in EU.

Astellas Pharma: IRWD has an agreement with Astellas to develop and commercialise Linaclotide in Asia. Payments associated with the agreement could eventually total up to $45M.

Conclusion:

IRWD has a compound before the FDA for a large, under-served primary care market. It appears to have solid partnerships with companies that should be able to successfully commercialise a drug such as Linaclotide.  Forest has a large salesforce and has several drugs in the primary care setting. It does not have any GO drugs so a question remains as to whether it will be able to engage in this area.  However, the lesson from Astexia seems to be that a primary care/DTC approach may be more promising than a specialist focused campaign.

The company is approaching a PDUFA date mid-year. The price can be expected to rise approaching this as more interest is focused on IRWD. If the FDA grants approval, and Linaclotide can be successfully commercialised, IRWD should continue to rise from its current levels.

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