Lisa Adler - SVP, Corporate Communications Peter Hecht - Chief Executive Officer Tom Graney - Chief Financial Officer Thomas McCourt - Chief Commercial Officer Mark Currie - Chief Scientific Officer.

Divya Harikesh - Goldman Sachs Anupam Rama - JPMorgan Ami Fadia - UBS Irina Koffler - Mizuho Boris Peaker - Cowen.

Good day, ladies and gentlemen, and welcome to the Ironwood Pharmaceuticals First Quarter 2016 Investor Update Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Lisa Adler, Head of Corporate Communications. Please begin..

Thank you. Good afternoon, and thanks for joining us for our first quarter 2016 investor update. Our press release crossed the wire earlier this afternoon and can be found on our website, www.ironwoodpharma.com. Today's call and accompanying slides includes forward-looking statements.

Such statements involve risks and uncertainties that may cause actual results to differ materially. A discussion of these statements and risk factors is available on the current Safe Harbor statement slide as well as under the heading Risk Factors in our annual report on Form 10-K for the year ended December 31, 2015, and in our future SEC filings.

All forward-looking statements speak as of the date of this presentation, and we undertake no obligation to update such statements.

Joining me for today's call are Peter Hecht, Chief Executive Officer, who will provide an overview; and Tom Graney, Chief Financial Officer, who will discuss our financial performance and guidance; Tom McCourt, Chief Commercial Officer; and Mark Currie, Chief Scientific Officer will also be available during the question-and-answer portion of the call.

Our speakers will be referring to slides available via the webcast. For those of you dialing in, please go to the Events section of our webcast to access the webcast slides. I'd now like to turn the call over to Peter..

Thank you, Lisa, and good afternoon, everyone. During the first few months of this year, we made great progress building a top-performing commercial biotech company. We delivered strong operational performance across all aspects of our business. Our first commercial product LINZESS continued on its solid growth trajectory.

We now have two Phase IIb programs ongoing in R&D, and we officially access external innovation with the license agreement that gives us a ready-to-launch product and establishes a new franchise in uncontrolled gout. All of this puts us in a strong position to become cash flow positive in 2018, at the same time as we execute on at least five U.S.

product launches by 2020 and invest in our robust pipeline. We continue to drive forward each of our core franchises, which are grounded in innovation to represent multiple blockbuster opportunity. Let's start with IBS-C and CIC. LINZESS demonstrated impressive growth in the first quarter, with U.S.

net sales up 44% from the same period in 2015 and commercial margins expanding to 55%. LINZESS is the branded prescription market leader for the treatment of adults with IBS-C or CIC. Since launch more than 4.5 million prescriptions for LINZESS have been filled by more than 1 million unique patients.

It is the most prescribed brand in its category by primary care physicians, gastroenterologists, nurse practitioners and physician assistants, and LINZESS is number one in its category in unrestricted access. The strong LINZESS growth we are seeing is driven by high levels of physician satisfaction.

In market research study, 89% of responding physicians reported high or very high satisfaction with LINZESS. That very high level of satisfaction was driven by three key performance attributes - effective abdominal pain relief, effective chronic constipation relief and a low incidence of side effects.

As we grow LINZESS, we intend to continue to innovate and help even more patients in this category. We and Allergan remain on track to launch the 72 microgram dose in early 2017, if approved.

We are also developing linaclotide colonic release, a second-generation product for this market, which has the potential to deliver both stronger and faster abdominal pain relief for adult IBS-C patient and to expand the IBS-C and CIC market.

We expect data from our Phase IIb IBS-C trial in the second half of 2016 and we are actively preparing to advance into Phase III in 2017.

With continued strong LINZESS growth expected into 2031 and patent protection for colonic release, if approved, expected into the mid 2030s, we believe our first two products in our IBS-C and CIC franchise have the potential to generate peak U.S. sales of greater than $2 billion.

Turning to refractory GERD, an estimated 10 million Americans suffering from GERD continue to experience heartburn symptoms despite treatment with the proton pump inhibitor. There are no approved prescription therapies for this indication, making this a highly underserved patient population.

The potential to help these patients is the reason we are so enthusiastic about the recent progress we have made in this area. In the first quarter, we initiated a Phase IIb dose-ranging study for IW-3718, our gastric-retentive bile acid sequestrant, which is a wholly-owned asset, and we expect data in 2017.

If positive, that will enable us to roll into the Phase III trial. We believe IW-3718 could generate more than $2 billion in peak U.S. sales. On April 26th, we signed an agreement with AstraZeneca for an exclusive U.S. license for all products containing lesinurad, establishing an innovative product franchise with IP into at least 2028.

This agreement includes FDA-approved ready-to-launch ZURAMPIC for the significant unmet need in hyperuricemia associated with uncontrolled gout as well as the lesinurad-allopurinol fixed-dose combination, which is expected to be submitted for FDA review in the second half of this year.

Our entire team is very excited about this opportunity and it's a great strategic fit for us. There are as many as 2 million patients suffering uncontrolled gout, and these patients are highly motivated in seeking new treatment options.

This transaction enables us to further leverage our demonstrated commercial capabilities and is precisely the kind of opportunity the Ironwood team is already successfully executing on in IBS-C and CIC. We expect to launch ZURAMPIC in the middle of the second half of this year and look forward to updating you on our progress.

You can access detailed information on this transaction by listening to the conference call we conducted on April 26th, which is archived on our website. Moving to our vascular and fibrotic franchise, we are leveraging our expertise in guanylate cyclases to develop multiple sGC stimulators, our wholly-owned asset.

We believe there are several blockbuster opportunities for Ironwood in this area, and we expect to initiate multiple Phase II proof of concept studies with our two lead molecules later in 2016. As you can see, we have made substantial progress so far in 2016 with important advances in each of our priority franchises.

Looking ahead, we are focused on vigorous execution across the portfolio with continued LINZESS brand growth, expected approvals of the 72 microgram dose in the U.S.

and IBS-C approvals in China and Japan, the ZURAMPIC launch, the initiation of multiple stage II's in our vascular fibrotic franchise and data from our Phase IIb study in refractory GERD and colonic release.

We are really excited about our progress and our future, and we look forward to continuing to update you as we focus on innovation and solid execution. With that, I'll hand it over to Tom..

Thank you, Peter, and thanks everyone for joining us this afternoon. I will cover some of the first quarter 2016 financial and performance highlights and review our 2016 financial guidance. Please refer to our press release for the detailed financial statements. As Peter said, we delivered strong operating performance in the quarter.

Beginning with LINZESS, increased demand in the quarter resulted in $137 million in net sales, an increase of 44% compared to the same period last year. Commercial margin for LINZESS expanded to 55% for the quarter, compared to 39% in the first quarter last year.

While commercial margin will fluctuate from quarter-to-quarter, we expect margins in general to expand as the brand continues to grow. The LINZESS brand collaboration in the U.S. recorded $58.4 million in total net profit for the quarter, compared to $15.2 million in the first quarter last year, growth of 284%.

Brand net sales increased by $42 million year-over-year while brand net profit increased by $43 million, once again demonstrating the high degree of operating leverage we are driving with the brand. Turning to financial highlights, Ironwood revenue for the quarter was $66 million, an increase of 128% compared to the year ago period.

Ironwood's revenue consists of revenue from our LINZESS collaboration with Allergan, our co-promotion agreement with Exact Sciences, the Cologuard, and with Allergan's VIBERZI, as well as additional collaboration, royalty and amortization revenue from our global partnerships.

In the quarter, we received $15 million milestone payment from Astellas related to the filing for regulatory approval in Japan, of which $12.9 million was recognized as revenue.

As a reminder, we will be recording on our P&L, the non-cash unrealized gain or loss on derivatives each quarter, as a result of the $336 million convertible debt financing completed last June. This is related to the change in fair value as we mark to market the convertible note hedges and warrants which comprised the cost spread overlay.

In the quarter, this was a non-cash loss of $1.6 million and has been excluded from our non-GAAP measure as it is not related to operational performance.

There is a comprehensive webinar discussing the accounting considerations associated with our 2015 convertible debt financing posted in the IR section of our website and I encourage you to review it to ensure that you're capturing all elements of these instruments accurately in your models.

GAAP net loss for the quarter was $13.3 million, or $0.09 per share, and non-GAAP net loss was $11.7 million, or $0.08 per share. In the first quarter last year, the GAAP and non-GAAP net loss was $33.2 million, or $0.24 per share.

We ended the first quarter of 2016 with $434 million in cash, cash equivalents and available-for-sale securities, a decrease of $5 million from the end of the fourth quarter 2015. We are always exploring ways to optimize our capital structure, which may include utilizing the capital markets to restructure our debt.

We feel very good about our financial condition today and into the future, and we believe the growing LINZESS revenue and profit and our cash on hand will enable us to fully fund our current business going forward without the need for incremental capital.

Regarding our 2016 financial guidance, cash used for operations is expected to be less than $70 million, up from less than $60 million as previously guided. We revised this number as of April 26, 2016, at the time of the lesinurad deal announcement.

We are reiterating that combined Ironwood and Allergan marketing and sales expense for LINZESS is expected to be in the range of $230 million to $260 million, the same range as in 2015.

As we stated when we announced the licensing agreement with AstraZeneca for lesinurad, we anticipate updating our guidance for annual operating expenses for 2016, including R&D and SG&A expenses when we report our second quarter investor update in August. I'd like to close with an observation about our growing operating leverage.

We are really pleased with the strong growth of LINZESS revenue this quarter and with our growing operating leverage as we are able to reach more and more patients with the similar level of investments.

We are also pleased with the growth in Ironwood total revenue which reflects progress in leveraging our commercial capabilities and advancing linaclotide with our global partners. We look forward to further maximizing our commercial capabilities with ZURAMPIC to create additional shareholder value.

With that, I'll hand it back to Latoya [ph] to begin the Q&A portion of the call..

Thank you. [Operator Instructions] The first question is from Jami Rubin of Goldman Sachs. Your line is open..

Hi, this is Divya Harikesh on behalf of Jami Rubin. A couple of questions and you've launched the DTC program.

Just wanting to know your thoughts on how we should think about the expected impact relative to previous years? Secondly, I noticed IW-1709 [ph], the top-line data timeline has been pushed out to second half '16 from first half, so any comments on what's causing that delay? Thank you..

Hi, this is Tom McCourt. As far as the DTC campaign, we're delighted with the early indicators of its overall performance. This, as you know, has been evolution of the campaign which -- it's certainly been a progression. You know, at the first campaign we saw very significant lift of well over 22% of the pre-DTC trend.

The second campaign, which was more focused on chronicity of symptoms, which provide us an additional lift on top of that and this campaign which is really leveraging the core inside around patient frustration, the early signs shows a third incremental lift. And it's extremely rare that you see consistent increases off the pre-DTC trends.

So we're very encouraged by the early signs and it's certainly continuing to add to the growth of the product..

Yes, and with respect to 1701, again, we're very excited about this program. It is on track. We expect to be moving into Phase I very soon..

Thank you. And the next question is from Anupam Rama of JPMorgan. Your line is open..

Hey, guys. Thanks so much for taking the question.

Given some of the recent speculation related to the real world safety of LINZESS, wondering if you could comment on what you're hearing from physicians, how the safety tolerability profile commercially compares to the clinical trial setting and how frequently you communicate with the FDA on sort of LINZESS commercial safety? Thanks so much..

Sure, Anupam, thanks for the question. Maybe I'll start and then Tom, you can talk about the commercial experience and Mark can talk about FDA. Let me just start by saying patient safety is our first priority. We and our partner Allergan take it very seriously.

We've been continuously monitoring LINZESS safety together with our partners and regulatory authorities around the world for many years. And today we have now over 7000 patients who have participated in placebo controlled trials worldwide, and there are greater than a million unique patients in the U.S.

who have filled more than 4.5 million prescription since launch. And I wanted to just say emphatically that the adverse event profile observed is consistent with the improved label.

And we and Allergan thoroughly review the insinuations from the recent short report and those conclusions are false, misleading, disruptive and pretty clearly financially motivated. We are very confident of the safety and efficacy of linaclotide.

We are excited about the opportunity in front of us to bring the benefits of this drug to millions of additional patients in the U.S. and around the world. I just want to make sure to clarify any questions on that. Tom, Anupam was asking specifically about feedback we're hearing from physicians about real world experience with safety..

Sure, as far as the physicians' impression, they've reported very, very high level of satisfaction with the drug and certainly confidence in particularly the safety of the drug, which obviously speaks to more than 190,000 physicians, who have now chosen LINZESS for their patients.

We've had a handful of questions that have popped up around this particular communication, the sales reps were extremely well poised and prepared to answer the questions. And the feedback that we get from physicians is consistently positive and certainly reporting a very strong willingness to expand their use to additional patients.

And Mark, maybe you can talk specifically about the correspondence and communication with FDA..

Yes, so we obviously are very often in communication with the FDA. We provide the update to the database from the call center on a regular basis. We also file any severe adverse events within 15 days of that adverse event being determined and coming into the center.

So those interactions are pretty much continuous, and we certainly update them on a regular basis throughout. So from our perspective [indiscernible] communications..

Great. Thanks so much for the color and thanks for taking the question..

Thank you. The next question is from Geoff Meacham of Barclays. Your line is open..

Hi, guys. Good afternoon. It's Carter [ph] on for Geoff. Peter, I appreciate your emphatic comments on the adverse events report.

Maybe just to put the issue to bed one last time, do you expect any additional sort of one-off communication with the FDA on the matter? And then separately on the margin side for LINZESS, you guys have shown really good improvement over the past two years.

Should we still anticipate the commercial cost to be sort of volatile quarter-to-quarter or are we entering more of a stable run rate? Thank you..

Yes, so, thanks for the question Carter [ph]. As I indicated, we are routinely in communication with the FDA around the pharmacovigilance database, both ours and their database. So from our perspective, nothing has changed before or after the reports..

Hey, Carter [ph], it's Tom Graney. Thanks for the question on margin, I'll take that.

We do see and expect to continue to see the margin fluctuate quarter-to-quarter really as a function of where we pulse our DTC investment based on when during the year we think we're going to get the best return on investment and also the phasing of the R&D investments behind linaclotide.

As you can imagine, those investments will vary quarter-to-quarter based on the stage of development we are in lifecycle management..

Great. Excellent. Thanks for answering the questions..

Thank you. And the next question is from Ying Huang of Bank of America. Your line is open..

Hey guys, it's Aspen [ph] on for Ying. Thanks for taking my question. So let us first, what is the average duration of LINZESS treatment in patients starting to look like? Has it been improving lately or is it somewhat stabilized? And then do you have any other plans to in license commercial assets after the lesinurad deal? Thank you..

Hi, this is Tom. I'll take the question with regard to patient adherence. The patient here, as we're seeing, has been quite consistent.

As you know or we've talked about before, we've been following four separate cohorts of patients since we launched the product and what we're seeing is pretty consistently these patients are running 40% to 50% -- at 40%-50% higher rate of adherence than we'd seen -- what we've seen with other analogs, i.e., prescription laxatives as well as Zelnorm and Amitiza.

So we are very encouraged with consistency of the adherence we are seeing and it's actually perked up a little since we initiated DTC, obviously due to the reminders of their symptoms and the need for refilling their prescriptions..

And I'll take the question on additional end-licensing opportunities. I hope you can tell how pleased we are to welcome ZURAMPIC into the Ironwood family.

You know, it fits right within our core capabilities on the commercial side, and we're looking forward to the launch of that product and bringing it to the many suffering patients where ZURAMPIC really is filling an unmet need in the marketplace.

As far as additional opportunities, we do have what we feel is a strong and differentiated commercial capability and capacity especially in the primary care space, so to the extent that we can in-license additional assets that are already of commercial stage where that would create a value creating opportunity for us, we are certainly going to continue to look for assets that fit that mould.

However, we have a very high bar in terms of ensuring that anything we bring in, does fit with our commercial strategy and is providing an opportunity for us to create long-term shareholder value.

In addition to that, likewise the pre-commercial assets that we would look for innovation externally to bring into the company is also an area where we will continue to look, but as I said, the bar is pretty high in terms of value creating potential..

Okay. Thanks guys..

Thank you. The next question is from Marc Goodman of UBS. Your line is open..

Hi, this is Ami Fadia on behalf of Marc. Couple of questions on LINZESS.

Could you give us an update on what type of benefit you saw in the quarter for LINZESS from the CVS contract that was won on the turn of the year? And with the DTC advertising and the other sales efforts, where you do see this IBS-C market expand to over the course of this year? And also lastly, just in the quarter, was there any inventory stocking for LINZESS? Thanks..

Tom, why don't I take the first two and you can handle the stocking question..

Sure..

So first -- as you know, we, as of January 1st, we had a huge win with CVS Caremark. We have seen really strong growth within the plan, which obviously is fuelling part of our growth as we move forward as the other plans that we have done consistently.

As far as the OTC -- sorry, the DTC campaign, again our primary focus as the market leader is on growing the category and capturing disproportionate share. And that is solely the focus of the DTC campaign, to focus on patients who are now taking OTC laxative treated and not satisfied, and it seems to be working quite well.

But I think, you know, as we move forward, our primary focus will be on those OTC users, to grow the market. And of course, the value proposition of our brand is very strong and we've a very high willingness of physicians to honor patient request. So it's important to keep in mind, we still only scratch the surface in this market.

While we've had over a million patients treated -- we've only had a million patients treated and there’re still over 30 million Americans out there in need of effective therapy..

And just on the stoking question, thanks for the question, you can imagine, we and Allergan watch this very carefully to ensure that we're able to have enough product in the channel to provide good service levels. What we see is some fluctuations from quarter-to-quarter but for the first quarter we were within our expected range..

Thanks.

Can I just ask a follow-up on the CVS contract, maybe if I could reword my question, have you seen the full benefit of what you think this contract could bring or are we yet to see part of it? Or any of you could quantify that for us in some way, that would be helpful?.

I mean it's relatively early days. I mean, we're seeing steady growth. So, no, we have not realized the full potential of the move in CVS as far as having a preferred status in that plan. So we're going to continue to focus on that plan and the usage of that plan or the physicians who are members of that plan to continue to drive growth.

And the second question, as far as the financials, we haven't provided specific guidance at a plan level with regard to what we think the economics are, specifically to that.

But I think you know that this is one of the largest plans in the country and to have a preferred status in a plan that size puts us in a very strong place to continue to drive growth..

Thank you..

Thank you. And the next question is from Irina Koffler of Mizuho. Your line is open..

Hi, thanks for taking the question. I have one on DTC and one on the copays environment. And I guess on DTC, how many more ways can you guys do over time to have people still paying attention to them? You know, having inflection results until they get stale over time after the brand is really mature.

And then the second question is, are you seeing any impact from the Takeda zero copay campaign for the Amitiza brand? Thanks..

Thanks, Irina, this is Tom. As far as the DTC campaign -- I mean, really highly effective DTC campaign, the primary objective is to focus on segments of patients that you can reach out to, get them to self-identify and activate them.

And that's exactly what we've done over the first three campaigns and we're going to continue to do, as long as it continues to drive incremental growth.

Keep in mind, over time the DTC campaign gets baked into the kind of the baseline trend, but to be able to maintain that level of growth, you've constantly got to find new patients and activate new patients to continue to drive the growth.

So as we continue to torture the market research, identify new patients that we can speak to and activate as well as remind patients to refill their prescriptions, we are going to continue to move forward.

As far as the fatigue of the campaign, it's also something that we constantly monitor because you really do need a fresh campaign to break through the clutter on TVs and other communication channel to get people and patients' attention and making sure that the creative is clear, the communication is concise and it's motivating the patient.

And we've been delighted with the success we've had so far. As far as the copay assistance program, we really haven't seen any effect today with regard to the zero copay program applicators, although it's early days and it's something that we will continue to monitor..

Thank you..

Thank you. The next question is from Boris Peaker of Cowen. Your line is open..

Great. My question initially is around lesinurad.

I just want to get a sense of how much do you plan to invest in that franchise and when do you anticipate that particular franchise to become cash flow positive?.

Boris, I'll take the first question. Out of the gate, as you know, we're going to focus primarily on the high prescribing, early adopters and we think that prescriber base is somewhere between 20,000 and 30,000 physicians and there's a great overlap with that and LINZESS. So we're already calling on roughly 14,000 of those target physicians.

So we're going to have a very focused commercial effort focusing on these high volume early prescribers. The initial investment that we've mentioned is going to be less than $75 million that would encompass both sales and marketing expenses.

We're going to watch the promotional response very carefully to inform where we go in the future, because keep in mind the primary focus of this asset certainly is to improve the productivity of the commercial effort but also make sure that it's creating positive cash flows.

And Tom, maybe you can talk just specifically on kind of what we're think about as far as positive return..

Sure, thanks Tom. Boris, one of the attractive things we liked about bringing in ZURAMPIC, in addition to everything Tom talked about, is actually the economics of the deal for us. We feel like we're able to access highly differentiated product very efficiently with the cash we had on hand.

As you heard from Tom, we're going to be very thoughtful about our investments over time. A lot of the contingent consideration is back-end loaded, which also is pretty attractive for us. So to answer your question, we're looking for cash flow breakeven or accretion rather in 2019 for the product..

Got you. And just want to understand lastly, on the synergy, you know, you're talking about the synergy between lesinurad and your LINZESS franchise and leveraging the sales force obviously.

But lesinurad is going to be targeting primarily rheumatologist and LINZESS is more GI specialist, GI docs, can you just talk a little more about what specific synergy should we be aware of?.

Sure, Boris. I mean actually the majority of the prescribers are actually primary care physicians. So there are a small number of rheumatologists, 2000, 3000 rheumatologists, that are highly influential and certainly very productive prescribers.

So we're going to call on those, very similar to the GI community, where you have roughly 9,000 gastroenterologist who are writing a significant portion of the business and they are very productive.

But really the growth potential for both LINZESS and ZURAMPIC really resides in a very focused group of primary care docs and that's the 20 to 30 high volume early prescribers that we've been talking about and there is a good deal of overlap.

So to have both LINZESS and ZURAMPIC side by side in a back for the sales rep to be able to manage within their territory certainly drives the growth across that target physician population but probably more important it really increases the overall productivity of the sales rep. So we're trying to maximize the value that all of our assets create.

Obviously, the sales force is a key one and this really gives us the opportunity to do that in the sweet spot in the market, which is this high potential, early adopting primary care physicians..

Oh, great. Thank you very much for clarifying that. And thanks for taking my questions..

Thank you. And at this time I'd like to turn the call back over to Peter Hecht for closing remarks. .

Thanks again and thank you all for your attention. We'll be here all this evening and tomorrow. So please reach out to Lisa or to Meredith should you like to follow up after the call with any additional questions and have a good evening..

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day..