Description

IRONWOOD PHARMACEUTICALS (IRWD) 

Summary

IRWD is a profitable one asset drug company with recent management turnover and an activist (Sarissa Capital Management) that has a history of getting targets sold. At the current price of $10.59, profitable and FCF positive IRWD trades at 7.7x 2022 EBITDA. A DCF on the core drug results in a target price of $13 on a 8.5% discount rate (current WACC is 6.1%). 

Company

Ironwood Pharmaceuticals is a Boston based drug company focused on the development and commercialization of treatments targeting GI-related disorders. The company has one profitable revenue generating product (Linzess, partnership with Abbvie).

Linzess is an oral room temperature treatment that speeds up transit through the intestine to reduce intestinal pain. It was approved by the FDA for adults suffering from irritable bowel syndrome with constipation (IBS-C) as well as chronic idiopathic constipation (CIC) in 2012 and is available in North America, Europe, and Asia.

The company’s Linzess product is fairly stable. Recent results have been above expectations,: Q4’20 sales were guidance with $110.7MM for Q4’20 for the partnership or full year revenue of $390MM, management’s previous guidance of $370-$385MM. Prescription trends are also favorable and not impacted by COVID. Total prescription demand was 38MM in the most recent quarter (+8% y/y) up from 37MM the previous quarter (+7% y/y). The company is profitable and generates free cash flow, with recent operating expenses lower than expected due to a 100-employee headcount reduction announced after pipeline asset failure late last year.

IRWD’s challenge has been its assets outside of its core Linzess product. In H2’20, the company had two notable pipeline failures (MD-7246 and IW-378). With the failure of early stage pipeline assets, the company’s strategy is to build a pipeline of GI assets internally (such as IW-3300 for visceral pain) or look to acquire assets externally. A risk is management buys early sizable stage non-core assets.

Management has recently turned over. CEO and board member Mark Mallon stepped down as of 3/12/21 to pursue another leadership opportunity.  The company’s president Thomas McCourt is serving as interim CEO as the board initiates a search.

Activist

Activist investor Dr. Alex Denner from Sarissa Capital Management owns nearly 10% of outstanding shares with an average price of $11.45/share. Dr Denner also joined IRWD’s board on 11/9/2020. Sarissa was instrumental in the spinoff of IRWD’s soluble guanylate cyclase unit into a separately publicly traded company, Cyclerion Therapeutics (CYCN, market cap of $93.7MM) on 4/1/2019 and has since increased his stake in IRWD. The most recent increase was 2.35MM shares as of a 3/15/21 filling. 

Past successes of Sarissa include:

·   ImClone sold to Eli Lilly (LLY) for $6.5 billion;

·   Genzyme sold to Sanofi (SNY) for $20 billion;

·   Idenix sold to Merck (MRK) for $3.85 billion;

·   The acquisition of ARIAD Pharmaceuticals by Takeda for $4.7 billion;

·   The spinoff from Biogen (BIIB) and subsequent sale of Bioverativ to Sanofi for $11.6 billion.

A potential target for IRWD is obviously partner Abbvie. As IRWD is essentially a one product royalty company, the company could be sold for its single drug and residual pipeline assets spun out in a CVR.

An asset sale is my base case with IRWD, either to partner Abbvie, or another party.

Sarissa is also involved in INVA ($1.2bn market cap, written up on VIC on 12/15/20). INVA invested $300MM as an LP into Sarissa and Sarissa owns just over 6% of INVA’s equity. While IRWD’s market cap is $1.7bn, a merger would be a creative transaction and likely done at a premium to IRWD’s current stock price.  

Valuation

Recent results are at the high end of the company’s guidance. IRWD trades at 7.7x forward EV/EBITDA or a target of $13/share on a DCF basis using a 10% discount rate to 2031 and a terminal growth rate of 0%.

With IRWD trading at a discount on a DCF and comparable basis, the IRWD bonds trading near par offer upside potential in the event that Sarissa is able to facilitate a sale of the company.

Conclusion

IRWD sets up well at the current level. The company is profitable, the CEO just departed and an activist with a strong history in the sector is involved.

Catalyst

Company sale