Biotech CFO Pitches Fundamentals, not Financials

Ironwood’s Tom Graney tries to focus investors on the firm’s pipeline rather than its revenue.
David KatzJune 28, 2017

“Why Is Ironwood (IRWD) Up 6.9% Since the Last Earnings Report?” That was one of the headlines on the website Zacks, the stock research firm, on June 12.

As the headline suggested, the story went on to question the earnings rise, given other less-than-stellar indicators recorded by Ironwood Pharmaceuticals, a biotech firm that manufactures medicines. For example, the company reported first-quarter total revenue (including revenue it shares with Allergan from the product Linzess) of $52.2 million, down 20.9% from the year-ago period.

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Further, sales misses on prior forecasts of Linzess, a drug used to treat irritable bowel syndrome, hurt Ironwood’s revenues for the quarter, according to Zacks. Linzess, one of the pharmaco’s two trademarked products, generated U.S. net sales of $147.6 million, down 15% over the prior quarter, although it did represent a 7.7% rise over the first quarter of 2016. The other trademarked product is a drug used to treat gout called  Zurampic.

Tom Graney

Tom Graney

To Ironwood CFO Tom Graney, however, the narrative of the company’s future is much more significant than that of the historical accounting on which financial reports are based. “It’s much more of an innovation story than a quarterly, hit-your-numbers, meet-and-beat expectations story,” he says. “That fits with our strategy of continuing to invest in innovation and bring important medicines to the market.”

Graney, who came to Ironwood in 2014 after 20 years in varying roles at Johnson and Johnson, would much rather talk about the  forthcoming data on a heartburn drug in the the company’s pipeline or its plans of expanding into a full-blown pharmaceutical company than about quarterly results.

Founded in 1998, the company went public via an IPO in 2010. Linzess, its first drug, has been marketed since December 2012. In April 2016 Ironwood entered into a licensing agreement with AstraZeneca for the exclusive U.S. rights to Zurampic. In addition, it has a pipeline of medical products in development.

In a recent interview with CFO, Graney also discussed the company’s attempt to gain traction with a select group of investors and its methods of developing new drugs. An edited version of the conversation follows.

How do you respond to questions about the quarterly decline?

We’re in a category that has some seasonality to it, which I think some specialty sell-side analysts may not have fully accounted for in their models. We had strong year-over-year growth in revenues. The fundamentals of the business were something that the analysts and investment community appreciated.

One of the things we’ve been trying to focus on is to make sure investors look at fundamentals and not at accounting results. And I think we’ve been pretty successful at orienting our investors and analysts, for example, to focus on the underlying performance of our major drugs in the marketplace with respect to consumption in the market, not necessarily trade sales, which are subject to stocking or de-stocking, depending on the period.

How does seasonality work in your business?

At the beginning of the year, most people who get their insurance through employer- sponsored health plans have a reset of their deductibles or experience other benefit-plan design changes, which may change their coverage with respect to prescription medicine.

Every year, that does create some disruption right at the beginning of the year, as patients settle into what their new plan looks like and also work through their deductibles as they cover other health-care spending out of pocket.

Regarding Ironwood talking more about the fundamentals than about accounting, is that unique to the biopharmaceutical sector or your company?

There are some aspects of it that are more prevalent in biotech than in other industries. When you look at the financial statements of a biotech company, they really don’t capture much information for an investor. What an investor really wants to know is what’s happening with the innovation in the company and what kind of data it has reported. None of that makes its way into the financial statements, so it becomes a supplemental disclosure in the SEC documents, in the MD&A, and press releases and conference calls throughout the quarter. It’s much more reliant on information that is explicitly outside of the financial statements.  

In terms of the financial statements, we’ve never yet made a profit, so there’s a lot of interest in making sure we’re managing our capital efficiently. And a lot of that [relates] to our expectations on cash flow.  We also spend a lot of time on  making sure that investors understand that we take a very long-term view of value creation.

We try to attract investors that share our sentiments around how a biotech company creates value, and that’s on the innovation side. And we do that by talking about the long-term value of our franchise, of our innovation. That aligns both the company’s strategy and aspirations with those of the investors that would be attracted to a company like that.

What were the challenges in acquiring Zurampic from AstraZeneca?

Acquisitions are always challenging. When you look at why acquisitions fail, it’s usually that they fail to create value for the acquiring company. It’s usually a result of either the acquirer not viewing the opportunity in the correct way and, as a result, overpaying for the asset, or the asset not being integrated well into the new company. We’ve been fortunate that we were able to structure the transaction with Astra Zeneca in a way in which there’s a lot of contingent consideration based on the success we have with the asset. That takes the first risk off the table, the possibility that the market may be different than we expected.

On the integration side, our team here has been making sure that the product was integrated into our company in a way that puts us on a firm footing to make this product as big as we possibly can make it as quickly as we can.

When you acquire a product, do you also acquire the people who are working on it?

This was an asset acquisition, rather than a merger or a purchase of a whole company. Whether people, plants, or liabilities come in the transaction is all negotiated. In this case, we also acquired  the intellectual property of the asset and it clinical data. So we acquired no people, no plants, no fixed assets, nothing like that, all intangible assets.

From our perspective it’s been a very capital-efficient way to acquire an asset, and we are absolutely focused on return on capital over the long term. We don’t want to be in the manufacturing business.

Why is that a capital efficient way to buy an asset?

It’s based upon the asset that we were buying. It was not overly complex to manufacture, so there’s not a lot of value put into the manufacturing. Therefore we don’t want to own it. We only want to own the parts of the value chain that create the most value, and in this case it’s just the intellectual property. We don’t want to buy things that are unnecessary, because, with our level of capital. we want to make sure that we’re preserving it to invest in R&D.

How does Ironwood differ from other pharmaceutical biotechs?

In certain respects we are an outlier, having discovered, developed, and are now selling a drug [Linzess]. Much less commonly, we have a second drug [Zurampic]. There aren’t that many biotech companies that have done that. A lot of biotechs will get acquired, for example, before they launch their first product.

We actually are a company founded with the intent to grow into a pharmaceutical company. An exit strategy of selling the company is not really part of our mindset. So that, in and of itself, makes us pretty unique.