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One out of four IPOs prices this week, others postpone
Workers' compensation risk insurer Patriot Risk Management (PMG) pushed its IPO out to next week before cutting the deal size, while investment bank Imperial Capital (ICG) indefinitely postponed its $113 million deal. Patriot Risk revised its terms this morning and cut the deal size from $187 million; instead of offering 17 million shares of the NYSE at $10-$12, it now plans to list 20.2 million shares at $8 per share. FBR Capital Markets, Macquarie Securities and Oppenheimer are the lead underwriters on the deal.
FriendFinder Networks (FFN), an online adult social networking company, joined the growing list of postponements this morning and announced plans to shelve its deal only two days after filing an amendment that switched its proposed listing from the NYSE to the NYSE Amex. The company had hoped to raise $220 million.
Ironwood Pharmaceuticals (IRWD) was the only company to successfully complete its IPO and raised $187 million by offering 6.7 million shares on the NASDAQ at $11.25, 25% below the midpoint of its proposed range of $14-$16. It was the biggest biotech company to go public in two years. Despite the buzz surrounding its debut, Ironwood saw its stock rise modestly in its first day of trading, closing 40 cents above its listing price. Its rich valuation and dependence on a single drug still in clinical trials may have deterred investors, along with this week's general setbacks in the markets.
Including Patriot Risk, next week is slated to see six deals on the IPO calendar; they span a wide range of industries and should shed some light on the direction the IPO market is headed. Graham Packaging (GRM), Piedmont Realty Trust (PDM), and JinkoSolar Holdings (JKS) are expected to begin trading on the NYSE on Wednesday, Feb. 10. Graham Packaging is a leading supplier of plastic consumer products, Piedmont is an office REIT and JinkoSolar is a China-based solar company. Generac Holdings (GNRC), a PE-backed manufacturer of standby generators, and Quinstreet (QNST), an Internet marketing company that offers lead generation to over 2,600 clients, are scheduled to trade on the NYSE and the NASDAQ (respectively) the following Thursday, Feb. 10.
Disclosure: No positions
Ironwood Pharmaceuticals & Imperial Capital test the IPO waters this week
Ironwood Pharmaceuticals & Imperial Capital
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 (IRWD) and Imperial Capital (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 (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 (TFDI), FriendFinder Networks (FFN) and Patriot Risk Management (PMG).
Disclosure: No positions
Four of seven planned IPOs last week complete deals
The following companies postponed their offerings: Terreno Realty (TRNO), a newly formed industrial REIT targeting six coastal US markets, shelved its deal after cutting its proposed size by 33%. Following the terms revision, the San Francisco-based REIT had planned to raise $200 million. FriendFinder Networks (FFN), an online adult social networking company, had planned to raise $220 million by offering 20 million shares at $10-$12; it rescheduled its offering for this week. Finally, Daqo New Energy (DQ), one of five Chinese ADRs scheduled to price last week, postponed its IPO after cutting its deal size by 22% to $68 million.
The remaining four Chinese companies, China Hydroelectric (CHC), China Electric Motors (CELM), Andatee Marine China Fuel (AMCF) and Century 21 (CTC) completed their deals.
China Hydroelectric (CHC) is a small hydropower plant operator based in Beijing. It raised $96 million by offering 6 million units at $16 (each unit contains one ADS representing three ordinary shares and one warrant to purchase three ordinary shares for $15) after increasing its proposed deal size three times. The stock fell 6% in its debut and an additional 11% in the aftermarket.
China Electric Motor (CELM), which produces micro-motor products for household appliances, raised $24 million by offering 5 million ADSs at $4.50, the low end of its revised range ($4.50-$5). It had slashed its range twice prior to the offering, first expecting to price between $6-$7 and then between $5.50-$6.50. Its stock slipped 1% in its first day of trading but has improved slightly since. In another small deal, Andatee Marine China Fuel (AMCF), which produces and sells blended marine fuel oil for cargo and fishing vessels in China, raised $20 million by offering 3 million ADSs at $6.30. The stock fell over 8% in its debut but made a moderate recovery and is currently off 1%.
Finally, IFM Investments (CTC), which exclusively franchises the Century 21 brand in China, raised $87 million by offering 12.5 million ADSs at $7. The company had originally planned to offer 16.7 million ADSs, including 4.2 million ADSs from selling shareholders, at a price between $8.75 and $10.75, but it lowered the price range and removed the secondary selling in a Wednesday SEC amendment. Its stock gained almost 5% in its debut but fell 4% in aftermarket trading.
Recent postponements, price cuts and lackluster returns demonstrate investors may be cautious given lingering volatility in the markets and fundamental regulatory changes both in China and the U.S. However, we expect growth to return in upcoming months as the overall environment stabilizes, especially given the robustness of the IPO pipeline: a total of fourteen companies submitted initial filings with the SEC during the month of January and sixteen companies announced terms.
Disclosure: No positions