Ironwood Pharmaceuticals Just Served Up a Nice Opportunity to Buy the Dip

Sometimes, the markets serve up an opportunity to take advantage of a one-off scenario. The scenarios themselves vary, naturally, but the concepts that underpin them are often the same. Take, for example, an earnings estimate miss. A company can beat on previous earnings and grow sales from one period to another, but if it falls short of consensus estimates (which, we’ve got to remember, are just best guesses by a bunch of analysts at their desks) it will often decline in market capitalization. We’ve seen Apple Inc. (AAPL) do this a few times. Facebook Inc (FB) did it post-IPO. Both of these two aforementioned are up considerably since dipping on the back of consensus misses and the opportunity, therefore, lay in picking up shares at the dip.

Another great example of this sort of scenario applies to the biotechnology space and one just presented itself in the form of Ironwood Pharmaceuticals, Inc. (IRWD).

The company is a multi billion-dollar biotechnology stock that’s got a whole host of products in development for the treatment of various conditions, including (and primarily) areas of unmet need, such as irritable bowel syndrome with constipation (IBS C) and chronic idiopathic constipation (CIC). It’s also got a product on shelves called linaclotide (or, as its now better known, LINZESS) that’s indicated for men and women suffering from IBS C or CIC in the United States.

Ironwood generated $52 million in revenues during the first quarter this year and $87 million during the final quarter of last. The dip isn’t anything to be overly concerned about (the market for its products is seasonal) and there’s plenty of cash on the books to carry it through any temporary top line downturn – a little over $133 million as of March 31, 2017.

We just got data from a phase IIb trial of one of its investigational assets; a drug that, to date, has shown considerable promise in its target indication. It’s called IW-3718 and Ironwood is trying to prove that it can be an effective addition to the current standard of care (SOC) treatments in adults with a condition called uncontrolled gastro-esophageal reflux disease (GERD). In patients with this disease, stomach acid (or sometimes bits of non digested food) get forced up into the esophagus and cause irritation and a burning sensation. Mild forms of this same concept are just a sort of heart burn type condition. In people with GERD, however, it’s far worse than heart burn.

Anyway, the current SOCs are broken down into two primary types of drugs – proton pump inhibitors (PPIs) and H2-receptor antagonists. The latter have long been established as a sound treatment mechanism for GERD, but their impact isn’t perfect. Many patients don’t get total relief and – in some patients – they just don’t work. With this in mind, physicians prescribe PIPs to these sub categories of patients, in conjunction with H2s, to boost clinical benefit.

Again, however, it’s far from a perfect treatment. There remains a large portion of patients in this condition that aren’t getting sufficient relief from PIPS, H2s or a combination of the two.

And this is where Ironwood’s IW-3718 comes in. It’s designed to be taken in combination with PIPs to boost the efficacy of the latter, just as PIPs are designed to boost the efficacy of H2s. The phase IIb trial for which we just got results was set up to prove just that.

And it did.

The primary endpoint of the study was based around a 45% or greater reduction in heartburn severity. Specifically, the company wanted to show that more patients that took its investigational drug and PIP achieved this 45% or greater severity reduction than did a group of patients that just took PIP. As per the data, 53% of the former group achieved this reduction versus just 37% of the latter group.

So that’s a 12% difference – enough to warrant statistical significance and a clear endpoint hit on the study. Despite this, the company is trading down around 10% on the news.

So why the decline?

Well, back in the May, company CSO Mark Currie said on a conference call that the study was set up to show a 15% improvement in the active arm versus the placebo arm. Based on this metric, the company missed out on its target difference by 3%. Markets are taking this miss and applying it to their sentiment equation and, as a result, selling off on Ironwood.

Why is this an opportunity?

Because markets have to realize that this is a self imposed target and not one that the FDA or any physician is going to care about farther down the line. Just as the above mentioned Apple can miss analyst estimates but still grow sales and earnings, Ironwood can miss an arbitrary target mentioned in passing by its CSO and still consider its phase IIb trial a success.

The opportunity? Buy the dip before markets wise-up to the misinterpretation and close out the gap.

The company is going to sit down with the FDA for a meeting over the next few weeks and – at that meeting – we will likely see a pivotal trial discussion take place. When the details of this discussion hit press (say, mid to late third quarter), there’s a very strong chance that Ironwood will have recovered at least the recent lost ground and, in all likelihood, be trading higher than it was pre-announcement in anticipation of a pivotal trial initiation for this asset, in this indication.

Disclosure: The author holds shares of Facebook (FB) but not of any other companies discussed in this piece.