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IPO On Tap, Ironwood Aims for Big Pharma

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But will it work for investors?

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"The next great pharmaceutical company" -- that's a big claim for any company, but especially one that has yet to become public and only has one drug in its late-stage pipeline during a time when Big Pharma seems shakier than ever.

(See, AstraZeneca, Eli Lilly Foreboding for Sector.)

Ironwood Pharmaceuticals is set to have an initial public offering this week on the NASDAQ with the ticker IRWD. In its SEC filing, the company says it plans to build the next great pharmaceutical company that will "thrive and endure well beyond our lifetimes." This seems like a tall order for any company to claim, but especially at a time when many large pharmaceutical companies are struggling with the pressures of dwindling pipelines and are facing ever-mounting cost pressures due to generics and government policy.

Could Ironwood be the next Pfizer (PFE) or GlaxoSmithKline (GSK)? It seems almost impossible that this company, which has one late-stage drug and only one other drug in human testing stage, could become the behemoth that these Big Pharma companies are, especially since these companies are having enough trouble trying to meet investor expectations.

Last week AstraZeneca (AZN) announced it was cutting 8,000 jobs, while Glaxo is expected to announce 4,000 jobs cuts this week. Analysts have low expectations for Pfizer's earnings announcement this week; many see the takeover of Wyeth as the combination of two struggling companies to make an even larger struggling company.

It seems almost preposterous that Ironwood is so optimistic about its future when these long-established companies are slashing jobs and struggling to keep market share. Yet, Ironwood executives are optimistic enough to offer shares in their initial public offering at a 15% to 31% premium to its fair value rate of $12.18 per share. Ironwood stock is expected to hit the open market on Feb. 5 at a price of $14 to $16 per share for a total sale of 16.7 million shares, as well as 2.5 million shares allotted for underwriters JPMorgan (JPM), Morgan Stanley (MS), and Credit Suisse (CS). In one of the largest medical IPOs of the past decade, Ironwood expects to raise $272.4 million for the purpose of research and development, as well as general corporate expenses.

Ironwood is basing all of this optimism on its phase 3 drug linaclotide being developed for the treatment of irritable bowel syndrome and chronic constipation. To date, the company has had no revenue from commercial sales of any drugs -- the $27.5 million it brought in during the first nine months of 2009 in revenues came entirely from partners on its drugs in development. During the same period, it lost $47.3 million.

Ironwood plans to seek approval from the FDA for linaclotide in the first half of 2011. The company's partners on the drug include Forest Laboratories (FRX) in the US, Almirall in Europe, and Astellas Pharma in Asia. Sucampo Pharmaceuticals (SCMP) currently makes Amitiza for the same condition and several over-the-counter medications exist to treat the problem. Amitiza pulled in $9.4 million in the third quarter of 2009.Yet, this isn't Ironwood's only competition; several other competitors have treatments in the works -- Theravance (THRX) has the latest-stage drug.

"Almost all venture investors are anxiously waiting to see if the IPO is successful as it will signal whether or not there is a public appetite for later-stage deals," wrote Miller Tabak analyst Les Funtleyder in his daily morning commentary. "By our reckoning, this is more of a specialty pharma deal than a pure biotech deal but there will be read-throughs to the broader biotech market."

Ironwood is among four companies to have IPOs sent for this week. FriendFinder Network, Imperial Capital Group, and Patriot Risk Management are the three others. This year has seen a relatively poor start to the IPO season with three mostly unsuccessful offerings so far.

"If there is broad participation than we will assume the capital markets are open. The fact that it is early in the year may make investors more likely to participate [in the Ironwood IPO], but we do not see a groundswell of interest in risky assets at this point," adds Funtleyder.
No positions in stocks mentioned.

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