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Is Ironwood Pharmaceuticals Stock a Buy?

Ironwood Pharmaceuticals (NASDAQ: IRWD) is coming off a strong year in 2019 when its share price rose more than 53%, well above the 18% investors would have earned by holding the Health Care Select Sector SPDR Fund.

And at a market cap of $2 billion, there's still plenty of opportunity for more growth, especially as Ironwood's Linzess drug continues to rise in popularity. There's lots of potential for Ironwood's stock, so let's take a look at whether it's a buy today.

The company has recorded a profit for two straight quarters

Ironwood has earnings coming up on Feb. 13, and for the past two quarters, it's been able to stay out of the red. That's a welcome sight for investors, because typically pharmaceutical stocks and other high-growth companies are growing rapidly but their bottom lines are not very strong. Ironwood recorded a profit only three times over the past 10 quarters, and the fact that it's done so on consecutive periods could be a sign that the stock is becoming a much safer buy.

The company is also cash flow positive, and it generated $32 million in free cash flow last quarter. If it can continue staying in the black and producing positive cash flow, Ironwood could attract a lot of value-oriented investors.

Image source: Getty Images

Not only has an increase in sales helped cover the company's overhead and operating expenses, but those costs have also come down. In the company's most recent earnings report, released back in October, Ironwood posted an impressive operating profit of $66 million on $131 million in revenue during the third quarter. Unfortunately, a $31 million loss on the extinguishment of debt weighed down the results, sending Ironwood's bottom line down to just $21 million. But with costs looking to be buttoned down and room for more revenue to trickle through to the bottom line, Ironwood is in a great position to benefit from more growth.

Linzess is what will make or break the stock

For many pharmaceutical stocks, there's likely one product that's driving the company's growth. With Ironwood, it's Linzess. The drug treats people who have irritable bowel syndrome with constipation as well as chronic idiopathic constipation.

In Q3, the company reported strong demand for Linzess, with demand rising 15% from the prior year. The company has a collaboration agreement with Allergan for Linzess in the U.S., and the companies share equally in those profits. The company has arrangements outside the U.S. market in Japan and China, but those are still in their early stages.

Through the first nine months of 2019, Ironwood's collaboration revenue from Linzess in the U.S. totaled $224 million, making up 82% of its top line. Total net sales for Linzess reached more than $572 million during this time. The company previously forecast that sales from the Linzess brand in the U.S. would top $1 billion by 2020 and that at its peak it could generate more than $2 billion in net sales.

Should investors buy the stock today?

Heading into earnings, Ironwood is trading at a forward price-to-earnings ratio of less than 20 and its price/earnings-to-growth ratio is a tiny 0.33.

With the company showing good growth and cutting down its costs, it looks like the right pieces may be in place and the stock could be an excellent long-term buy. There's some risk involved, as there will be with any pharmaceutical stock that's dependent on the success of a drug, but Ironwood is a calculated risk that investors may feel comfortable taking. If the company has a strong finish to 2019 with another good quarter, it could be what the stock needs to take off in 2020.

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David Jagielski 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.


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