Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Ironwood Pharmaceutical first quarter 2019 investor update call. [Operator Instructions]. And now I would like to turn the call over to your host, Meredith Kaya. Please go ahead..

Good morning, and thanks you for joining us for our first quarter 2019 investor update. Our press release crossed the wire earlier this morning and can be found on our website, www.ironwoodpharma.com. Today's call and accompanying slides include 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, 2018, 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. Also included are non-GAAP financial measures, which should be considered only a supplement to and not as substitute for or superior to GAAP measures.

To the extent applicable, please refer to the table at the end of our press release for reconciliations of these measures to the most directly comparable GAAP measures.

During this today's call, Mark Mallon will begin with an overview of the first quarter, Tom McCourt will highlight our commercial progress, Mike Shetzline will review our GI development programs and Gina Consylman will close by discussing our first quarter financial results and 2019 financial guidance.

We'll be referring to slides available via the webcast. For those of you dialing in, please go to the Events section of our website to access the webcast lines. With that, I will turn the call over to Mark..

to develop and commercialize medicines that make a difference for patients living with GI diseases and to begin generating cash and profit that will unlock value for our shareholders. To do this, we to need start by strengthening our core.

As many of you have heard me say, we needed to -- this includes accelerating the LINZESS growth, advancing our late-stage GI development portfolio and beginning to deliver cash and profits for the first time in the company's history. And we are executing on all of this already.

We've seen a clear trend rate in LINZESS demand growth, which grew 14% year-over-year, impressive given the brand is now in its seventh year since launch. We're continuing to progress our late-stage GI pipeline. We're about to initiate our 7246 Phase II trial, and we expect data from our Phase III 3718 program in the second half of 2020.

We've made important business decisions to improve our cost structure and our bottom line, and we are exploring how best to strengthen our balance sheet and lower our cost of capital, such as refinancing our debt. Of course, there's is plenty more to do. For example, we need to improve LINZESS net sales growth.

The staggered growth in the first quarter was due to lower net price and a modest reduction in inventory in the channel. We expect net sales growth to be in low to mid-single-digit percent in 2019, and we are working very closely with our partner, Allergan, to explore ways to stabilize price in 2020 and beyond.

We also need to look for ways to accelerate our clinical programs and try to get these products, if approved, more quickly to the millions of patients in need.

And importantly, as we become a profitable company, we are committed to identify what we believe are the best ways to deliver maximum value back to our shareholders and are exploring all potential options.

Before I turn it over to the rest of the team, I want to close by expressing my deep appreciation for my colleagues at Ironwood and Cyclerion, who worked tirelessly over the last year to execute the separation.

Continuing to operate a business at a high level while going through a significant change such as this is not an easy task, and everyone at these 2 great companies should be proud of the work that they accomplished. With that, I'll turn it over to Tom..

first, a significant payer consolidation in 2018 such as the acquisition of Aetna by CVS and Express Scripts by Cigna, which we don't expect to see this scale moving forward; second, a higher utilization in Medicare Part D; and third, the impact of the emerging competitor in the class.

Even with some of the new competitors coming into the IBS-C and chronic constipation space, we don't believe this will be a substantial threat to net price moving forward given some of the undifferentiated clinical profiles and the limited labels of the emerging competitive products.

Our investments in payer access has helped to make LINZESS available to a broad population of patients suffering from both IBS-C and chronic constipation and has enabled us to grow LINZESS prescription demand at double-digit rates every year since launch. For these reasons, we expect to continue to invest in payer access in the future.

That said, we are working closely with our partner to explore options to mitigate further price erosion beyond 2019, such as innovative and/or more selective contracting approaches. Turning to some of the near-term drivers for the brand. I'll start with our direct-to-consumer campaign the most recent of which launched in the beginning of April.

LINZESS has always been highly responsive to DTC promotional efforts, consistently activating new sources of patients. The campaigns continued to be recognized as among the best performers in generating incremental business with our 2018 Yes LINZESS campaign as our most successful to date.

By applying our learnings from last year's campaign, we believe the new 2019 campaign has the potential to continue building on the power of last year's, and activate even more patients to discuss their symptoms with their physician and if appropriate, request LINZESS.

Another potential near-term driver of growth is the data that will be generated from our Phase III abdominal symptoms study. We have now completed the study, and we're anticipating reporting top line results in mid-2019. If positive, we expect to begin promoting these data as soon as possible.

We think these data are especially important as IBS-C patients often describe their symptoms using constipation as a catchall term for all of their symptoms, including abdominal pain, bloating and discomfort, which patients often report as the most problematic.

Further, our market research indicates that when patients actually do describe their abdominal symptoms to the physicians, they typically describe it as bloating and discomfort rather than pain. All of this can lead to an under treatment by physicians.

If the Phase III data are positive, we believe the ability to communicate these additional benefits to patients and physicians can enable an even more productive dialogue about IBS-C and the role LINZESS can play in treating adults suffering from the multiple symptoms of IBS-C.

We see these data as an opportunity to tap into a whole new additional patient population and one of the key growth drivers for the brand in 2020 and beyond. In summary, with patent coverage expected into 2030, we have a long runway to continue building the brand and the category over time.

And we and Allergan are committed as well as enthusiastic about the future of LINZESS. Turning briefly to our global efforts with linaclotide. We and our partner, AstraZeneca, are preparing for an expected launch of LINZESS in China in the second half of 2019.

Astellas, our partner in Japan, is marketing LINZESS to patients with either chronic constipation and IBS-C. As Astellas mentioned in their call recently, they continued to see steady growth since the launch of their second indication for adults with chronic constipation last fall. The sales are up 184% in the fiscal year of 2018 compared to 2017.

With that, I'll turn the call over to Mike to discuss our GI pipeline programs..

one, does 7246 relieve abdominal pain in IBS with diarrhea; and two, does it show no change to bowel function. We believe that IBS-D represents the appropriate patient population to help us answer both of these questions.

Overall, our GI pipeline candidates represent an opportunity to advance care for millions of patients in areas of high unmet medical need. We're working diligently to move these trials as expeditiously as possible. I will now pass the call over to Gina to discuss our first quarter financial results..

Thanks, Mike. I will spend the next few minutes highlighting our first quarter financial results and updating our 2019 financial guidance. Please refer to our press release for the detailed financial information.

As a reminder, the first quarter of 2019 reflects the pre-separation company meaning that it includes both new Ironwood and Cyclerion-related expenses as the separation was not completed until early in the second quarter.

When we report our second quarter results, we expect to reclassify historical Cyclerion-related assets, liabilities and expenses and separation-related expenses as discontinued operations for the 3- and 6-month periods in 2019.

With that said, in an 8-K filed last month, we reported approximately $88 million for full year 2018 discontinued operations, which averages approximately $22 million per quarter.

Directionally, in the first quarter of 2019, we expect this to be higher than the 2018 quarterly average as we incurred higher separation costs in Q1 compared to prior quarters. Turning to Slide 17. Ironwood revenues in the first quarter were $69 million, driven primarily by LINZESS.

Total LINZESS net sales were $161 million during the first quarter with a commercial margin of 67%, resulting in Ironwood collaboration revenue of $64 million. Linaclotide API sales were $2.6 million during the first quarter.

We expect API sales to fluctuate quarterly depending on the timing of shipments and anticipate full year 2019 revenue from API sales to be flat to down compared to the $70 million we recorded in 2018. We incurred $123 million in total operating expenses during the first quarter.

This consisted of $65 million in SG&A expense, $54 million in R&D expense, $3 million in restructuring expense and $1 million in cost of goods sold. We recorded approximately $19 million in separation-related expenses during the quarter, primarily within SG&A.

GAAP net loss during the first quarter was $59.3 million or $0.38 per share and non-GAAP net loss was $40.5 million or $0.26 per share. Note that we are now adjusting for separation and restructuring expenses in our non-GAAP disclosures. We ended the first quarter with approximately $119 million in cash and investments.

The reduction in cash in the first quarter was primarily due to the cash payment of approximately $30 million made to Allergan during the quarter as a result of the gross-to-net adjustments that we reported in the third quarter of 2018. And in first quarter, we also made our first principle payment on the 8.375% notes of just over $12 million.

I will now turn to Slide 18, highlighting our 2019 financial guidance. Following the completion of the separation on April 1, we expect to transition to profitability for the first time in the company's history. Specifically in 2019, we expect adjusted EBITDA from continuing operations to be greater than $65 million.

Adjusted EBITDA from continuing operations relates to the full calendar year in 2019 and is expected to be calculated by subtracting net interest expense, taxes, depreciation and amortization from non-GAAP net income from continuing operations, as detailed in our press release.

To be clear, this profitability metric excludes all separation and Cyclerion-related expenses.

Beginning to general profits is an important step for Ironwood as we expect it will enable us to increase our operational flexibility, continue to invest prudently into our core business and evaluate ways to lower our cost of capital and strengthen our balance sheet through the potential refinancing of our existing debt.

With that, I will turn the call over to the operator to begin the Q&A portion of the call..

[Operator Instructions]. Your first question comes from the line of David Lebowitz from Morgan Stanley..

With respect to the upcoming Phase IIIb data, what will you be able to -- assuming the data comes out positive, what will you be able to use and, I guess, effectively present to doctors immediately to help promote the drug? And what actually has to wait for an NDA supplement?.

Yes. This is Tom, so I'll take that question. Based on the OPDP guidance, you're required to demonstrate with substantial evidence the claim. So you don't -- it's not required to actually have a label change in order to promote a claim as long as it's within the existing indication, and that's exactly what we have here.

So we have an opportunity to further expand the claim set within the IBS-C population to speak to some very specific symptoms that patients better identify with and more broadly identify with than pain. So our intention is as soon as we have data, we'll move forward with, first, educating physicians on the expanded claim structure.

And then certainly, we'll be working with the FDA to be able to communicate more broadly to patients through direct-to-consumer advertising. And I think the key piece here is being able to use the language that patients use in identifying their unmet medical need, which is traditionally bloating and discomfort in addition to pain.

So we see this as a whole new opportunity to unlock and also tap into a whole new patient population as we move forward..

Your next question comes from the line of Eric Joseph from JPMorgan..

I was just hoping to unpack guidance a little bit.

I'm wondering whether the LINZESS growth guidance, how that factors in potential expansion from the additional abdominal symptoms claims, provided that the data are positive? And also just curious, whether in thinking about the launch, the China launch of LINZESS, whether just sort of how to think about the commercial spend, the upfront commercial spend associated with that and how it impacts the P&L in 2019..

So let me comment first on both of those. So in terms of the impact on growth of the -- in the guide in -- the abdominal symptom claim, that isn't included in the guidance. We're certainly going to be working to do better than that.

But basically that we believe that captures substantial volume growth, but the ongoing pricing pressure that we've guided to. In regards to China, so as Tom mentioned, we're expecting the launch to be in the second half of this year, but we won't be getting reimbursement likely. It's unlikely this year, more likely in 2020.

And so along with AstraZeneca, our partner, we will be scaling those resources really linked to as reimbursement comes onboard, right? So the substantial spend or behind the brand will only occur once that reimbursement has been obtained..

Great. A follow-up, if I could. Just on persistent GERD, I'm just curious to know what you're seeing in the competitive landscape and whether in particular you anticipate any of the potassium-competitive acid blockers being adapted for the U.S. market.

And just sort of how you view them as potentially differentiated from the PPI or H2 class or the treatments with 3718 as well..

So I'm going let Tom comment on that..

Sure. As you know, that clearly has been, look, a unique mechanism. However, it doesn't look like it's much better than traditional PPIs, which is the reason why I think the companies that have developed them are reluctant to come to the U.S. with it.

Also, I think you recognize the market is pretty sensitive right now with regard to this chronic suppression of acid, and these products are even more potent. Now I'm not suggesting that PPIs aren't safe. They are. I think they're very safe, and they're very effective. But I think, we have a very unique offering.

Certainly, the reduction in heartburn will enable us to get the drug approved and clearly will improve the patient care. But I think, the real differentiator with 3718 is the impact that we're seeing in regurgitation, which is really debilitating to these patients with persistent GERD. It's what wakes them up night.

It's what disrupts their sleep, and I think this is a clear step forward in managing these patients. So we're excited to see, certainly, the data as it unfolds, both with regard to the reduction of heartburn, but equally as important, the improvement in regurgitation symptoms..

Your next question comes from the line of Vamil Divan from Crédit Suisse..

This is Inanc on for Vamil.

Could you just quantify the impact of inventory reductions during the quarter? And can you sort of break down the 2019 LINZESS net sales guidance in terms of what you expect from volume and what you expect from price?.

Okay. Thanks for that question. I am going to ask Gina to take that..

Sure. Thank you for the question. On the inventory channel, it was a modest reduction over in Q1. And just a remember, we typically see some seasonality throughout the year where we see some build in Q4 and then we see some tick down in Q1. The Q1 burn was just slightly more than the Q1 burn a year ago.

And then on the LINZESS net sales guidance that we provided as of low to mid-single digit growth, it's a combination of obviously all 3 components, which is volume, price and demand. We've guided to lower net price in 2019, and we expect the inventory fluctuation to work themselves out throughout the year..

Your next question comes from the line of Ying Huang from Bank of America..

Ying? Are you on mute?.

Can you hear me now?.

Yes..

So for Tom, you guys benefited from the withdrawal of the generic MiraLAX. So I was wondering, for the rest of the year, the next, 3 quarters, do you continue to forecast the benefit from switching or not from the MiraLAX to LINZESS.

And then secondly, maybe can you comment on the commercial margin? Because I saw you expanded the margin by about 300 basis points compared to first quarter of last year.

Do you expect that trend to continue for the rest of 2019?.

One, physicians and patients are extremely satisfied with the drug. Two, there is still a lot of patients out there that can benefit from the drug. And certainly the third is our broad payer access.

And we've been able to be pretty consistent with our investment over time so the margins we see continuing to improve over time as we move forward, and it's something we're always thoughtful of. One, we wanted to -- we certainly wanted to invest at the appropriate level.

But on the other hand, if we see a real opportunity to continue to accelerate growth, we can't ignore that either. We certainly want to take advantage of that. So I think, this is still a growth brand. We're going to approach it like a growth brand, but the wonderful thing is the margins that continue to grow on it..

Your next question comes from the line of Geoff Meacham from Barclays..

A commercial and a financial one. So the commercial one is, Tom, when you look at the unmet need or the underserved need, let's call it, with LINZESS, how do view the incremental opportunity for the new dose assuming the Phase IIIb is positive. Is it higher compliance? Is it an uptick on new starts? I wasn't sure if it's directly quantifiable.

Then I have a follow-up..

Yes, Geoff, just so we're clear. This isn't a new dose. This is, as you know, we have three doses on the market, which really allows the physician to tailor the dose to the need of the patient. What we will get is a broader claim set. In other words, we're going to be able to describe the improvement in bloating, discomfort as well as pain.

And what we've seen in market research is the majority of the patients do not really identify with abdominal pain, which has really restricted our ability to activate patients, and we're really getting the tip of the iceberg when you call it abdominal pain.

What discomfort and bloating does, it really broadens that patient population that we can now move into and really further differentiate the brand from other competitors and emerging competitors. So I think it strengthens the clinical profile.

It allows us to speak more effectively to patients in need, and I think it'll help us also to broaden physicians' view of who the appropriate patient is..

And Tom, the abdominal pain is, most of the time, would you say that is the rationale for not getting a good persistent rate?.

Yes, I think the persistent, as you know, the persistent rate is quite strong with this brand. Adherence with LINZESS is higher than any brand in this category or alternative. So the adherence is good.

The piece that we're seeing that's really driving adherence is being able to keep patients on long enough where they really experience the benefit of a reduction in pain, bloating and discomfort, and that generally takes 6 to 8 weeks. Where we lose patients is in the first 30 days.

If we can get them beyond 30 days, their adherence increases by 40% to 50%, which is the reason why we initiated this 90-day program in which patients can get a 90-day supply at the same co-pay as a 30-day supply. And what we are seeing is, those patients that started on 90 have a much stronger adherence over time.

And we believe it's due to the fact that they just feel better and when you -- as you're on longer and you stop the drug, those symptoms come back and the patient actually feels worse than they did before.

So I think our secret moving forward is, one, making sure patients recognize the full benefit of the drug; help them really realize the benefit of the drug so they treat -- they take an adequate treatment trial; and certainly make sure that they have broad payer access, which is obviously going to help enable us to pull the business through..

Okay. And just second question, I think this was mentioned in the prepared remarks. I didn't catch all of it, so I apologize.

But how does debt reduction rank as a strategic priority versus just maximizing the operational efficiency over the profitability?.

So Geoff, thanks for that question. I will take that and then, I think, maybe, Gina, you can add an additional comment.

So as I said, the first priority is going to be to make sure we're maximizing LINZESS growth, the pipeline, make sure we're accelerating that and delivering that as well as we can and then certainly, improving our operational efficiency. Those are the first three priorities.

I would say basically the next thing on the list is, as you highlighted, we have an opportunity to refinance our debt, which I think we will, which will also generate positive impact on the bottom line. So that's the clear order of our use of capital right now..

Your next question comes from the line of Boris Peaker from Cowen and Company..

Just in terms of long-term guidance, at one point, we were discussing $1 billion in sales sometime in early 2020s.

Can you just comment on that? Do you still have this guidance in mind? And if so, what you see as the time line to getting to that?.

This is Mark. Could you just repeat that full question? Because the first half was cut off, so just want to make sure we get the....

Sure. Yes, yes. In the past you discussed LINZESS $1 billion in sales as a target and maybe sometime in early 2020s, whether it's '22, '23. I'm just curious if that $1 billion in LINZESS is still kind of a guidance. That still remains out there.

And if so, what year do you anticipate to reach that? And what are kind of the key assumptions behind it in getting there?.

Thanks for that question. So our ambition is still clearly to -- and we believe this brand can be $1 billion brand, and we are committed to driving that growth. I think the assumptions or the, let's say, the factors that are sort of determine when that occurs, obviously, the key is the volume growth.

And I think the most important thing that we have in the near term is the abdominal symptoms claim and how much we can really accelerate penetration into patients that are -- have continuing symptoms and unmet need in the area.

And then the balance is how we can effectively we can stabilize price, and that's really a critical priority for us right now. And we're working with Allergan to refine our targeting, think about our overall strategy for maintaining good access but at a reasonable price. And then also looking for more innovative new ways of contracting with payers.

And if we can continue to drive growth at the level that we have now and then start to have a more positive impact on price erosion, I think that we can see accelerated growth. And we've given the guidance for 2019.

It's, I think, in the current -- there's lots of uncertainty across health care, it's hard to put too much guidance beyond the current year, but we remain very positive..

And just a follow-up on the long term. You mentioned a patent settlement till -- exclusivity until 2030.

I'm just -- for LINZESS, and I'm just curious, does that essentially include all formulation or just the existing formulation and the delayed-release formulation will be the outside of that?.

Yes. So the patent cases that we've had to date and settled have been specific to the current formulation.

And importantly, the current -- the substance of matter, we have yes, and now -- of course, the composition of matter covers both or all forms of linaclotide and -- but the cases we're talking about so far have been specific to the IR formulation that's on the market.

And we remain very confident in our overall IP as has been evidenced by the positive settlements we've reached to date. And we're also very confident in the IP that we have around 7246..

I think the other piece to that, Mark, it's probably important to note is the delayed release. And there's clearly some innovative IP there as well. So as we look at 7246, we see there is certainly an extension in the patent.

These patent there and the IP looks very unique and novel, so I think we're confident that we can expand this, at least for 7246, beyond the pure substance of matter patent..

Absolutely. Thank you for clarifying, Tom..

And is a time line for that? Like when would the IP run out on -- for 7246?.

I think right now, we're estimating it's probably somewhere between the mid-2030s. And certainly, that's the guidance we've gotten so far and I think we've consistently given, if I'm not mistaken here. Correct me if I'm wrong. But I think, we like the IP.

Again, it was a very novel finding for us see this effect on pain, in the amplification of pain in the colon. And this is -- was kind of a unique way to separate the 2 mechanisms as far as its impact on symptom relief..

No, I was going to say so importantly, we believe we have a substantial period of time to get the product developed, approved and launched, well into the mid-'30s with IP protection. So it's -- yes, we're very excited about this opportunity, of course..

Your next question comes from the line of Ram Selvaraju from H.C. Wainwright..

This is Edward Marks on for Ram. Just one sort of clinical question and a follow up on VIBERZI.

So for the clinical question, just wondering when are the 3718 trials slated to complete enrollment? And then for 7246, what additional studies might be needed after the Phase II?.

Okay. Those are two great questions. Mike, could you take them..

Sure. So for the 3718 program, the persistent GERD program, those Phase III program are supposed to deliver and we get top line data in the second half of 2020.

And could you repeat the second question, the 7246 question?.

Yes.

What additional studies might be needed after the Phase II trial, should it read out positively?.

That's a good question. So the current 7246 trial, as we mentioned, is an IBS with diarrhea. And the rationale for that is for us to explore the efficacy in relieving abdominal pain, but also to give us data on the impact on bowel habits. As I noted earlier in the IBS-C Phase II program we did with 7246, there was no impact on bowel habits.

So with the data from 7246, in terms of what to do next, we clearly have a path, if those results prove positive to support what we already have from the Phase II IBS-C trial, then we could clearly expedite an IBS-D development program. And that's the current approach.

But that also give us the opportunity with that IBS-D data to then branch into other opportunities for GI pain and GI diseases. And that's where the real opportunity does to unlock the real potential for this non-opioid intestinal pain-relieving agent..

Thanks, Mike, for that. But I think also just to clarify, because if you're trying to think about the timing of this, I think the current assumption is that we will need to do a, let's say, at least one additional study like a Phase III type of study to get a approval in IBS-D..

Yes, correct. So the Phase II study will still -- and Phase III program, correct..

So we'll have to do a Phase III program. We will be looking for creative and innovative ways to leverage the wealth of data that we have already on linaclotide and also both Phase II studies that we have to see if there is a way to do that in a smart and fast way. But I think the safe assumption is that there will be a Phase III program required.

The other thing that, I think, could be very interesting, which should be -- is the possibly, as Mike just referred to, is that this product could be used in other types of lower GI abdominal pain.

And those, depending on them, might require proof of concept or might be something we could directly into a Phase III study in a different set of patients. So lots of possibilities for 7246 for IBS-D. We'll have to do a Phase III study to confirm the results of Phase II..

And then just a follow-up on the VIBERZI agreement. Looks like it was extended out to 2019. Just wondering if that was always the case or whether that was part of these new adjustments. And then just wondering how material some of these new adjustments are in terms of some of the compensation that Ironwood might be in line to receive..

So I'm going to ask Gina to talk about the VIBERZI agreement.

And I think the question I heard was, one, is this -- was this a -- already previously agreed? Or is this an extension of the agreement that we had? And then how material is the financial compensation?.

Sure. Thank you, Mark. Well, just a reminder, we're excited to continue to promote VIBERZI. And it is a product that we've been promoting now for several years, working very closely with Allergan. And we think there is significant synergies across LINZESS and VIBERZI for our sales force in the promotion of their product.

So it is a renewal and an extension of the agreement that was just recently completed. It does include a cap of approximately $4 million for the year, but there are additional milestones that may be received as well..

So the cap for the $4 million is for payment for the call. But there is possibility to make additional revenue if we hit certain milestones ..

Yes..

Your next question comes from the line of Patrick Trucchio from Berenberg Capital..

Mark, in your prepared remarks, you alluded to additional unmet need in areas of GI disease? Can you please elaborate on this commentary including, first, which areas would Ironwood be interested in moving into? And secondly, does Ironwood have the ability to enter these areas organically? Or should we anticipate some business development this year or next? And if so, which stage of development of assets would Ironwood be most interested in? And then I have a follow-up on LINZESS..

Okay. So I'm going to let Mike comment on where he sees some of the key unmet need in the GI area and where some of the exciting science is. In terms of how we would potentially move forward, I mean, the first thing, to be clear, is to continue to maximize LINZESS to really accelerate our current in-house pipeline.

Because these are two very significant opportunities that I think are going to be very competitive versus any opportunities externally. And then, we've got to make sure that we're delivering on our commitment to profit and cash generation.

At that point, if we see we're going to look at what the best use of capital for shareholders, and with, as I said, we're looking at all options. But if there are assets that are exciting, have a good chance to meet the key needs, and that are the -- is it good value we can make a big difference on, we would consider them.

We would have to look at going externally to get additional products. We've been clear what we have in our pipeline. I think we would be -- if we were to do anything in this area, it would certainly be in -- looking for a later-stage or in-development opportunities, rather than at this point going into, so let's say, preclinical assets.

But I want to be sure. We've got a lot on our plate right now with LINZESS, with the development program and making sure that we're really delivering on the commitment of cash generation and profit. And then once we get that well in hand, then we'll move to the other exciting possibilities.

Mike, do you want to comment on couple of areas that would be of interest us?.

So yes, I think the question had basically 2 components, which I fully support actually. And one of the reasons I was attracted to Ironwood is this aspect of, as a GI health care company, we have the opportunity to focus on the gut, but not only from a disease area perspective, but from a delivery system to treat various diseases.

So if you look at what's happening in GI science, we clearly have the technology today to deliver drugs using the gut lumen for a lot of potential disease opportunities. And then I don't just mean sort of targeted delivery like we have done with 7246, which is innovative and fantastic, but looking at other ways to target inflammation in the GI lumen.

So oral approaches and peptide approaches are really at the cutting edge of some things we can do using the gut as a GI delivery system. And the second part of that question was GI diseases.

As we -- Ironwood's history and experience has been a lot within the functional space with IBS, but the patient need extends much broader than just IBS with constipation and diarrhea.

And there is a very significant medical need for upper GI disorders and pain syndromes, including things like functional dyspepsia and gastroparesis, very related and high morbid conditions for patients in general. And then gut inflammation in particular.

There is a lot -- and anybody knows about the competitive landscape within inflammatory bowel disease. But there are number of other inflammatory conditions that have been -- within the gut lumen that really aren't well treated or well touched today even by us in the industry. So I think we have an opportunity there.

And then there's another gamut of disorders which are gut focused. And many people may know about eosinophilic esophagitis, which is clearly a disorder of the esophagus but an upper GI tract.

But that condition and whether it's related in pathology to food allergy or other things really extends to every aspect of the gut and, in aggregate, is a huge medical need for patients. And all of it is driven by the gut, by the GI tract. So I think there is a huge opportunity, and that's one of the main reasons I am attracted to this venture here.

Because we really are focusing to become a leading GI health care company..

Patrick, did we just -- did that answer your question?.

Yes. That's helpful, yes. And then just to follow-up on LINZESS. Just in terms of stabilizing pricing pressure on LINZESS.

Should we expect the Phase IIIb data readout in additional symptoms to help in stabilizing price in the context of new competition this year on the market, new competition next year? And then the following year, we'll have generic Amitiza on the market..

I mean, I think for me, because I think the short answer is, yes, it will help some. I think there is no silver bullet here, right. That we're seeing across the health care system a continuous focus on price.

But to the extent that this further differentiates us versus the current competitors and any new competitors, I think, that puts us in a better position as we basically have negotiations with the various payers.

And I would highlight that -- and I think we have been able to, as a Tom highlighted in his talk and even strengthened our lead in the market versus existing competitors, where really are the dominant player. And any new competitors, if you look at them, they basically don't offer any advantages over LINZESS and will have narrower indications.

And so having a product that will have claimed for pain as well as then bloating and other abdominal symptoms, I think, is a real differentiator. It's not a silver bullet, but I think it certainly will help us in protecting the value of the brand..

I think it's also important to keep in perspective what happened in 2018. When you think about the very broad consolidation of health plans, which force us to default the discounts to a broader group, which clearly affected this year's impact and gross to net.

I think the expansion of our utilization in Medicare Part D, which traditionally have lower discounts will, I think, stabilize. And I think this is one of the areas where the abdominal symptom claim could actually increase our growth on the commercial side of the business.

Because these people that tend to have these symptoms tend to be younger people. So I do think that -- I think we're going to continue to see strong growth across commercial and Part D.

I think the other piece is the strength of the brand right now and almost the dominance that we're seeing in this market with the separation, that we're seeing in market share, puts us in a different position as we think about our contracting options moving forward.

We've really pushed hard to make sure that we had very strong unrestricted access, in some case exclusive positions in formulary. As the market leader and a strong brand in the market, that may not be as critical moving forward because of our position in the market.

So we'll critically assess each and every contract to say where do we need to be on the formulary with regard to access. And I think as I look at the emerging competitors, again, we continue to strengthen the brand and broaden the clinical utility of the brand with our life cycle programs.

As I look at the emerging competitors, these are very different drugs. They have limited indications. They have more restrictive labeling. And I do believe, based on our market research, they're going to be using a different patient population than largely we see the use of LINZESS.

So I think, again, I think we want to continue to treat this as a marketing-leading growth brand with regard to our investment and growth. But I think we're in a position now to be more critical with regard to how we make decisions on our contracting strategy..

Your next question comes from the line of Timothy Chiang from BTIG..

I think last year, you guys benefited quite a bit from sales from Astellas. I think it was about 20% of your total revenues. I mean do you guys expect a similar sort of percentage contribution from the Astellas arrangement this year?..

Yes, I'll let Gina comment on that..

You're right. We were able to recognize approximately $70 million of API sales to Astellas in 2018, and it does have a relatively healthy margin of just over 50% as well. So it was a nice drop down to the bottom line. For 2019, we've guided to total revenue of $370 million to $390 million.

And we've also provided a little bit more color with that, and we've said that the API sales included in that is expected to be flat to down for 2019..

And maybe just -- I mean, how much additional color can you provide on your arrangement in China? I mean, obviously, that's a big target population. But obviously, probably pricing isn't going to be as robust.

I mean, how long will it take for AstraZeneca to turn this into a meaningful contributor for you guys?.

So I think you've touched upon a couple of the key points to help frame what the opportunity is in China. So it is a large number of patients. Maybe we think about 16 million patients that AstraZeneca will be reaching -- could potentially reach. I think key is getting reimbursement, which AstraZeneca has got a fantastic track record.

But it's unlikely to happen this year. But China has accelerated. They're moving now to an annual reimbursement process, so we're hopeful for 2020. And then there has to be a rollout through those provinces because you get sort of a national listing, but then you have to also get province level, which AstraZeneca is really exceptional at.

And so after that reimbursement, which we hopefully will be in 2020, I think you could expect to see an uptake in the penetration similar to what the -- our expectations would be what we've seen within the U.S. Now -- and then the last point to try to scale the opportunity, as you say, the pricing is not going to be as robust as it was in the U.S.

I think generally, I guide people to think about pricing in China like Europe. And so that's probably more the level of pricing we'll see.

But that -- when you take 16 million patients, when you take really good access, which I think we expect as the first really new solution for IBS-C and constipation in China, we should see, and we have a great penetration like we've been able to do elsewhere which, again, AstraZeneca is one of the leaders in China, it should be still a very sizable, I think, will be a very sizable product and with some speed.

But the key is to get reimbursement..

I mean, Mark, how much of the market in China do you expect will be just self-pay..

For a product like this, I think, there will be some self-pay. But the majority is going to be reimbursement..

Okay. And just maybe one last question. It's really just on the adjusted EBITDA from continuing operations guidance. You guys provided over $65 million. Obviously, how do you get to that figure of -- at this point? I mean, obviously, you're pretty far from that figure.

And I know that the numbers you reported this quarter were somewhat commingled with Cyclerion and, obviously, you'll get some benefits from the separation of Cyclerion.

But obviously, do you guys expect to provide some operating expense guidance next quarter or the quarter after?.

Gina, would you take that?.

Sure. So maybe just to back up and start with why we decided to provide this metric. We really thought hard about what metric was the most appropriate for us. And this is our first time in over 20 years to start generating a profit. So Ironwood's been here and in existence for just over 20 years and at this point, has been running at a loss.

And it's really an exciting time for us to move to cash generation and profitability. So we feel really good about this metric and providing it. And we also feel very confident about achieving it in the greater than $65 million. And just to put a little bit of color around that. I've mentioned that we've been running at a loss.

And even just in 2018, we ran at a significant loss of several hundred million dollars. And if you think about what's different starting in Q2 versus just a few weeks ago, we know longer have the sGC business. We've completed that separation, obviously, with the completion of the Cyclerion separation on April 1.

And in addition, we've been able to terminate the lesinurad license arrangement. We announced that back in August. We completed that in early January, and that is complete. And then just a reminder that LINZESS is continuing to throw off strong profits. We had several hundred million dollars as our share last year of the profits alone.

And we're expecting to continue to invest and see solid margins, commercial margins. You saw that they were already up year-over-year in the first quarter of 2019. So I think, it's a pretty attainable number. And I think there are concrete events that have already occurred that would give us confidence to hit it..

[Operator Instructions]. And your next question comes from the line of Irina Koffler from Mizuho..

I apologize if this has been asked before, but can you comment on your 70% commercial margin target with Allergan. Is it possible that you'll be able to hit that target earlier than 2020? And just looking at your commercial spend this quarter, it's some like $5.5 million less than last year.

So if we look at that as a run rate, can we expect additional savings with the Allergan collaboration of $22 million, more than $22 million? Because I think -- I feel like that's what's going to drive your EBITDA target.

So maybe you can delve further into that?.

Thanks for your two questions. Let me make a couple of overall comments on that, and then I'll let Gina comment on more specifics. So in terms of the 70% target, I mean -- and Tom mentioned this, I mean, we certainly want to continue to maintain the very attractive commercial margin that we have for LINZESS.

And we've actually seen a bit of an improvement this year. So we're going to continue to spend our money wisely to generate a good return. But the clear focus for the brand profitably is to drive growth. And so from my perspective, whether, we're at 69% or 70%, that's -- those are very healthy levels.

What I'm going to be looking at is how long can we sustain the strong double-digit volume growth that we have seen? And can we do a better job of protecting the price so more of that drops to the bottom line. So that's how we're thinking about it.

The second thing I would say in terms of the spend for this quarter, you have fluctuations from quarter to quarter. We think we're spending at about the right level. So when we're looking at that as a signal for a major change in spending. We want to improve the margin to grow it, growing the brand at this point.

We're not going to miss any opportunities, but we do think basically, both from a consumer and from a physician promotion, we're largely sized at the right level. And so I think we're more looking to be consistent with past spending than make a major break from it.

Do you want to add anything, Gina?.

I don't really have too much to add except just to reiterate my earlier comment, and that I really don't think there is any need to pull back on investment in LINZESS in order to hit our EBITDA metric that we just provided.

I'd just go back to -- the business has already changed significantly with the separation from Cyclerion and the termination of lesinurad. So I think we are planning for full investment behind the brand and can still make our profitability metric..

Operator, are there any more questions?.

There are no further questions in queue at this time. I turn the call back over..

So I think we'll wrap it up then. So thanks to all of you for taking time to be with us this morning and to my colleagues. It is clearly an exciting time at Ironwood right now, as I said.

We've got several near-term opportunities to execute on our new GI-focused strategy and build an industry-leading business that is generating significant value for patients and shareholders.

I think we've been very clear and continue to be clear that -- and are already seeing positive signs of the execution of our strategy, which is clearly to focus on accelerating LINZESS growth, advancing our very promising late-stage GI development portfolio, where we've got 3718 for persistent GERD in Phase III and 7246 for abdominal pain or -- and initially in IBS-D in Phase II.

And then critically, first year, to deliver profits and really lay the foundation to grow profit and cash generation going forward.

As we've also highlighted, if we do a great job with these first priorities, there is unmet need in the GI area, and we already have interest from other companies wanting to work with us to really leverage the GI capabilities that we have.

But our priority for use of our capital is those -- is really LINZESS, our internal pipeline, and then being efficient as we can in terms of delivering profit and building on the success we're going to have this year in growing that profit and going forward.

And really looking at what is the optimal use, once we're generating that cash from a shareholder perspective. What use of that capital is going to give a best return. And so again, thanks everybody for joining the call. We're available the rest of the day.

If you have any additional questions, you all know how to get ahold of Meredith, and we'd love to continue the discussion. Thank you..

This concludes today's conference. You may now disconnect..