U.S. IPO Week Ahead: IPO Market Discovers Whether Unicorns Can Fly With Tech Firm Twilio

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Includes: GEMP, SELB, TCMD, TWLO
by: Renaissance Capital IPO Research

All eyes are on communications tech IPO Twilio (NYSE:TWLO). The reception of its offering will send a message to other tech unicorns that have been called out for sky-high valuations.

It is the first Silicon Valley "unicorn" to go public since Square ((NYSE:SQ); +1%) in November and Pure Storage ((NYSE:PSTG); -41%) in October. Twilio will show how IPO investors value unprofitable software providers with explosive growth. After recent stumbles from mature companies with cyclical models (Atkore, PSAV), it represents a secular growth story in app development. More broadly, its IPO is one step in the process of marking down private market valuations meeting the realities of the public market. We do not expect the floodgates to open immediately, but it could still serve as a turning point for 2016 tech IPO activity.

Renaissance Capital's IPO Calendar - Week of 6/20/2016
Issuer
Business
Symbol
Exchange
Deal Size
$mil
Price Range
Shares Filed
Lead Managers
Twilio
San Francisco, CA
TWLO
NYSE
$130 $12 - $14
10,000,000
Goldman Sachs
J.P. Morgan
Provides APIs that enable developers to embed voice, messaging and video.
Selecta Biosciences
Watertown, MA
SELB
Nasdaq
$64 $14 - $16
4,250,000
UBS Investment Bank
Stifel
Developing nanoparticles that modulate the immune system to enhance biologics.
Tactile Systems Technology
Minneapolis, MN
TCMD
Nasdaq
$60 $14 - $16
4,000,000
Piper Jaffray
William Blair
Sells at-home compression therapy devices for vascular swelling.
Gemphire Therapeutics
Northville, MI
GEMP
Nasdaq
$45 $11 - $13
3,750,000
Jefferies
RBC Capital Markets
Developing a novel nonstatin therapy to treat high cholesterol.
Click to enlarge

Twilio: the API IPO
Founder-led Twilio provides the #1 platform for adding voice, messaging and video to mobile apps. Its customers include Uber, WhatsApp, Zendesk, Coca-Cola and thousands of app developers. Sales grew 78% in the first quarter, faster than nearly every comparable SaaS provider. While it has a lower gross margin than peers and expects to remain unprofitable, Twilio was cash flow positive in the first quarter. A key risk is that it demonstrate the unique value of its platform as more competitors enter the fast-growing space. The deal appears structured to work well initially, with a relatively small float, insider buying and a valuation discount to peers.

One profitable and growing medical device company and two biotechs with insider buying are also on the IPO calendar, showing that the healthcare sector is as healthy as ever, accounting for 21 of the 38 IPOs this year (55%).

Invisible Touch: A medical device with growth and profitability
Tactile Systems Technology (Pending:TCMD), which markets pneumatic compression devices for lymphadema, plans to raise $60 million. Unlike the year's other four medical device IPOs, Tactile boasts meaningful sales, growth and profitability. Valued below its peers, it must continue to grow sales of its core Flexitouch system while keeping marketing spend in check as it navigates expiring patents and a negative reimbursement ruling from Medicare.

Two biotechs: Gemphire hopes for a hidden gem as Selecta asks investors to think nano
Selecta Biosciences (NASDAQ:SELB) aims to raise $64 million in order to develop its biodegradable nanoparticles, which it is currently developing as an adjunct therapy for gout. The company posted positive Phase 1b results, but has a large accumulated deficit and only one clinical candidate. The company is backed by Polaris Partners, Flagship Ventures and OrbiMed, and insiders are investing $40 million on the IPO (63%).

Gemphire Therapeutics (Pending:GEMP) plans a $45 million IPO at a market cap of $125 million. Led by the former CEO of ProNAi Therapeutics ((NASDAQ:DNAI); -88%), Gemphire is developing a drug first discovered in 1998, which it believes can be an effective treatment with statins for high cholesterol. Insiders are investing $10 million on the IPO (22%).

IPO Market Snapshot
The Renaissance IPO Indices are market cap weighted baskets of newly public companies. The Renaissance IPO Index is down 6% year-to-date, while the S&P 500 is up 2%. Renaissance Capital's IPO ETF (NYSE: IPO) tracks the index, and top ETF holdings include Alibaba (NYSE:BABA), Synchrony Financial (NYSE:SYF) and Citizens Financial Group (NYSE:CFG). The Renaissance International IPO Index is down 7% year-to-date, while ACWX is flat. Renaissance Capital's International IPO ETF (NYSE: IPOS) tracks the index, and top ETF holdings include NN Group and Recruit Holdings.