MORGAN STANLEY RESEARCH March 17, 2010 Investment Perspectives — US and the Americas
New Coverage March 15, 2010
Ironwood Pharmaceuticals Blockbuster Opportunity with Near-Term Catalyst Morgan Stanley & Co. Incorporated
Stock Rating: Overweight Reuters: IRWD.O Bloomberg: IRWD US Price target $19.00 Shr price, close (Mar 12, 2010) $12.91 Mkt cap, curr (000s) $1,258,294 Range Since Feb 2, 2010 IPO (Price: $11.25) $14.36-11.20 Fiscal Year ending ModelWare EPS($) P/E Cash and cash eq($000) e = Morgan Stanley Research estimates
Steven Harr, M.D. Steven.Harr@morganstanley.com
Sara Slifka Sara.Slifka@morganstanley.com
12/09 (0.66) NM 82,218
12/10e (0.57) NM 209,611
12/11e (0.47) NM 147,468
12/12e (0.54) NM 204,479
We have initiated coverage of IRWD at Overweight with a $19 price target. Ironwood has a Phase III drug, linaclotide, being developed for chronic constipation (CC) and irritable bowel syndrome with constipation (IBS-C). We see a high chance of clinical and regulatory success as well as blockbuster sales potential for linaclotide, which is likely to be the first IBS-C drug with a significant pain benefit. The key debates for IRWD are: 1) will linaclotide show a benefit on abdominal pain in its Phase III trials; 2) what is the potential commercial opportunity of linaclotide in IBS-C and chronic constipation; and 3) how will the company allocate capital and build a pipeline beyond linaclotide. We believe investors overestimate the risk to Phase III trials in IBS-C and underestimate the commercial opportunity in this indication. Why we are optimistic: Previous data have been convincing that linaclotide works in IBS-C, and we see a high probability of Phase III success in both the composite IBS-C endpoint and treating pain. We expect linaclotide will take share from current drugs because of its efficacy, and more importantly, bring more patients in for treatment. Our peak linaclotide estimates for IBS-C in the US ($850mn+) and WW (~$1.2 bn) are higher than consensus. Key factors beyond IBS-C: 1) Linaclotide has positive Phase III data in CC, which we view as adequate for approval. We (and investors) are generally less optimistic on the commercial opportunity in CC given a variety of over the counter options. Our bull case outlines the value (~$28/share) if Ironwood is successful in CC, which could lead to peak linaclotide sales of $2 bn+. 2) Ironwood does not have a pipeline beyond linaclotide; long-term returns will depend on the company’s ability to invest cash flows wisely. Key upcoming catalysts include: 1) presentation of Phase III chronic constipation data at Digestive Disease Week in May; 2) data from two Phase III trials in IBS-C (2H10); 3) submission of linaclotide NDA (1H11); 4) potential FDA approval of linaclotide for IBS-C and CC (2012).
Company Description Ironwood is a pharmaceutical company that discovers, develops, and intends to commercialize innovative medicines targeting important therapeutic needs. Ironwood's lead drug candidate Linaclotide, a first-in-class compound for treatment of patients with irritable bowel syndrome with constipation or chronic constipation, is currently in Phase III development. Industry View: In-Line — Biotechnology We prefer the defensive nature of large cap over small caps as a general rule. In the small cap world, we look to avoid companies with illiquidity, high risk, need for capital, and no catalysts. We still like select names with characteristics that make them potential strategic targets for pharmaceutical companies (US rights, late-stage, etc). In general, though, biotech remains a stock picker rather than industry call (long-term returns are almost all idiosyncratic to company performance).
from Morgan Stanley back in march: We see a high chance of clinical and regulatory success as well as blockbuster sales potential for linaclotide, which is likely to be the first IBS-C drug with a significant pain benefit. The key debates for IRWD are: 1) will linaclotide show a benefit on abdominal pain in its Phase III trials Looks like we hit all those concerns. Up up and away we go!!
Yes...but be careful at this time. The pain reduction component of the trials did not really show a robust response versus placebo. If in the US trials that part is not stat significant they might not be able to label the drug as effective for abdominal pain reduction for IBS which could hurt sales substantially worldwide. Holding through the US trials definitely carries some risk.
I'll be taking some profits off the table tomorrow.