Risks x Linaclotide could fail in Phase III trials for IBS-C x Linaclotide could struggle to gain meaningful traction commercially x Ironwood could fail to both invest future cash flows wisely and build a pipeline beyond linaclotide x The company still needs to complete linaclotide carcinogenicity studies, and while preliminary results are benign, final data are due in 2H10 Exhibit 1
IRWD: Linaclotide Benefit on Abdominal Pain and Penetration in Chronic Constipation Drive Risk/Reward $30 $28 (+117%) 25
20 $19.00 (+47%)
10 $8 (-38%) 5
Linaclotide gains greater acceptance in chronic constipation than expected with total sales >$2bn. Our bull case assumes greater sales in chronic constipation, as the drug’s effects on abdominal discomfort, bloating etc. are enough to drive use in this market (our market penetration estimate grows to ~30% of the addressable patient population — still <10% of patients currently diagnosed and seeking treatment). This scenario will take longer to play out than either of our other scenarios (need to see commercial trends), and over the next year, investors will largely be dealing with whether the base or bear case plays out. Linaclotide improves abdominal pain and sells ~$1bn in IBS-C, but struggles to gain meaningful penetration in chronic constipation. Our base case assumes linaclotide shows a large enough benefit on abdominal pain (data 2H10) to drive meaningful use in IBS-C, but chronic constipation remains a challenging market commercially given the number of over-the-counter options. We estimate Ironwood’s share of those patients diagnosed with IBS-C and currently unsatisfied with therapy of ~40-45%. The key to this scenario will be the Phase III data in 2H2010. Linaclotide fails to show improvement on abdominal pain and drug falters commercially in IBS-C. Abdominal pain is the key potential point of differentiation for this drug. Failure to show this benefit in upcoming Phase III trials in 2H10 would significantly limit its commercial success as IBS-C patients are largely defined by their abdominal pain. In this scenario, we assume penetration of the addressable patient population (IBS-C patients that are diagnosed and not satisfied with current therapies) of ~15-20% (equates to <2% of individuals with IBS-C symptoms). Our chronic constipation assumptions are similar to our base case.
Source: FactSet (historical price data), Morgan Stanley Research. Above valuations are DCF-based (WACC of 12.5%, intermediate growth rate of 8%, terminal growth rate of 2.5%).