Ironwood Pharmaceuticals, Imperial Capital Test the IPO Waters

Includes: ICG, IRWD
by: Renaissance Capital IPO Research

Though last week was slated to see a high level of IPO issuance with a total of seven deals scheduled to price, three postponements indicate investors continue to be selective in the IPO market after last year's disappointing returns. Ironwood Pharmaceuticals (NASDAQ:IRWD) and Imperial Capital (NYSE:ICG) will test investors' appetites this week with both deals scheduled to price this Tuesday.

Ironwood plans to raise $250 million by offering 16.7 million shares (0% insider) on the NASDAQ at a range of $14-$16 with J.P. Morgan, Morgan Stanley and Credit Suisse as the lead underwriters on the deal. In a smaller IPO, Imperial plans to raise almost $107 million by offering 6.7 million shares (0% insider) on the NYSE at a range of $15-$17 with BofA Merrill Lynch, JMP Securities and Imperial Capital as the lead underwriters on the deal.

Ironwood: Biotech's Biggest IPO in Two Years

Several signs indicate that Ironwood, which is based in Cambridge, could do better: firstly, it is closer to commercialization, as its flagship product has already bypassed several key clinical trials and expects FDA approval by 2011. Linaclotide was developed for those who suffer from irritable bowel syndrome with constipation (IBS-C) and chronic constipation (CC), two ailments that affect roughly 10 million Americans and currently lack effective treatments (Zelnorm, an IBS-C drug, was withdrawn in March of 2007 due to unfavorable side effects). Ironwood hopes to use IPO proceeds, coupled with its current partnership with Forest Laboratories, to offset R&D expenses. Many await the opportunity to scrutinize Ironwood's IPO performance, which will be indicative of biotech investor sentiment; with several other biotechs in the pipeline, this deal could be the catalyst for companies planning to go public such as Aveo Pharmaceuticals (NASDAQ:AVEO) and Tengion (TNGN)).

Key Issues

Essentially all of Ironwood's revenue year-to-date have been generated by collaboration payments with Forest Laboratories. Its proposed valuation is therefore dependent on the assumption that Ironwood will not only get approval for linaclotide but can also ramp up sales in upcoming years. Coupled with the fact that Ironwood will face the challenge of convincing payors of the value proposition of the drug, we believe investors will remain optimistic but cautious despite the company's potential growth, experienced management and VC backing.

Strong Fundamentals for Imperial Capital

Founded in 1997 and headquartered in Los Angeles, this full-service boutique investment bank offers sales and trading services to over 1,200 institutional clients and provides a wide range of advisory, capital markets and restructuring services to traditionally underserved middle-market clients. Despite its small size and competition from larger banks, Imperial Capital has been able to maintain profitability throughout the economic downturn due to its diversified and highly integrated business model. For the nine months ended Sept. 30, 2009, Imperial grew its top line by 34% to $86 million due to growth in its institutional sales and trading segment and high levels of activity in its restructuring group.

In-Line Valuation

Although Imperial's track record of profitable growth and strong post-IPO balance sheet are strong selling points for the deal, we note that the stock's proposed valuation is in line with its larger investment banking peers. This lack of a clear discount has potential to act as a headwind given recent price sensitivity displayed by investors. Additionally, investment banks at large have underperformed the market in recent months, possibly in reaction to potential regulatory changes the industry faces.

The Bottom Line

Ironwood Pharmaceuticals has the potential to realize its aggressive growth expectations and transform linaclotide into a widely used drug used by millions worldwide. Imperial Capital has proven its ability to weather volatility over various market and economic cycles and has been profitable every year since 1999. However, given the rich valuations of both stocks and hesitation exhibited by investors in recent months, these positive points do not fully guarantee success stories for these companies.

Three other companies are slated to price this week: Film Department Holdings (NASDAQ:TFDI), FriendFinder Networks (FFN) and Patriot Risk Management (PMG).

Disclosure: No positions