Despite having a successful drug on the market and making a major acquisition recently, share prices of Ironwood Pharmaceuticals (NASDAQ: IRWD) are down by 7% this year so far. Wall Street analysts take a gloomy view of its future, with average estimates calling for less than 5% sales growth in both 2023 and 2024. Management's revenue guidance largely agrees.
But there's hope for a turnaround just over the horizon. Let's explore how that could work and then judge whether the stock is worth buying based on the findings.
Why Ironwood Pharma is struggling
Ironwood is a biotech that's stuck in an awkward spot. It's experiencing plateauing growth from its medicines in the market while also being unable to tap into near-term opportunities to commercialize new medicines and give growth a boost.
Its drug for irritable bowel syndrome (IBS), called Linzess, does drive some revenue and earnings growth, but the pace of that growth is slowing. In the first quarter, its sales of the drug in the U.S. rose by 8% year over year, reaching $250 million. That isn't too surprising, given that the company and its collaboration partner AbbVie first launched it in 2012. But the terms of the collaboration call for a revenue split, so in the first quarter, Ironwood's top line was actually only $104 million. Linzess may yet generate additional sales, as the biotech is seeking an expanded usage indication for functional constipation cases involving children and adolescents. It should hear back from regulators by June 14. But time is ticking for Linzess. In 2029, it'll lose its exclusivity protections, and generic competitors will start to quickly devour market share.
Otherwise, Ironwood's pipeline is quite thin, and it only has two therapies in development -- one treats primary biliary cholangitis (PBC), and the other treats interstitial cystitis/bladder pain syndrome (IC/BPS). Both are in the early to mid-stages of the clinical trials process, so they could take years to bring to the market, assuming they ever get approved.
So Ironwood isn't exactly a must-buy stock, as its ability to expand is quite limited at the moment. But management made a big move recently that might change its fortunes.
An acquisition could mark the start of a turnaround
On May 22, Ironwood reported that it would acquire VectivBio (NASDAQ: VECT) for $1 billion in cash, which it planned to generate with the help of borrowing from a newly initiated $500 million revolving credit facility. The deal is expected to close in the second half of this year. Vectiv is a smart pickup, as its lead candidate is in phase 3, and it aims to treat short bowel syndrome with intestinal failure (SBS-IF). If that program gets commercialized in 2025, it could generate as much as $1 billion in annual sales at its peak volume. And the acquisition could start to boost its earnings per share (EPS) as early as 2026 if that happens.
Vectiv also has a program near the end of phase 2 for acute graft versus host disease (GvHD), as well as a few preclinical programs for metabolic diseases. Those will be welcome additions to Ironwood's pipeline if only to increase the chances of it being able to commercialize something within the next five years. If everything goes according to plan and multiple medicines get approved for sale, management thinks that the company could be bringing in as much as $1 billion by the end of 2028 and $1.5 billion per year by the late 2030s. Compared to 2022's haul of $410.6 million, that sure seems like a lot of growth.
But investors should probably hold off before buying shares of this stock.
While its price-to-earnings multiple of 11 means that its shares are relatively cheap, even with management's long-term growth projection in mind, it won't be growing very quickly. If the company grows to reach its target of $1.5 billion in annual revenue by 2038, 15 years from now, its compound annual growth rate will be roughly 9%, which is unimpressive. Of course, there's always the possibility that it'll acquire more competitors between now and then, but it doesn't make much sense to buy the stock in hopes of that happening before it has even closed on the current purchase.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
