Ironwood IPO Raises Plenty Of Cash And Plenty Of Questions For Biotech Investors

The much-anticipated debut of the constipation-drug developer hits $188 million, but a venture owner had to buy nearly half the issue.

The biggest U.S. biotech IPO in a decade needed a lot of inside help. Ironwood Pharmaceuticals on Feb. 3 priced its initial public offering of 16.7 million shares at $11.25 a share, significantly below its target range of $14 to $16 a share.

Still, the Boston-area biotech walked away with nearly $188 million, a rare IPO windfall for a venture-backed U.S. company with no commercial product. But nearly half of the offer went to Morgan Stanley, one of Ironwood's top private investors and one of its bankers on the deal.

Another signal that the whopping proceeds aren't necessarily a bellwether for robust IPO climate is that Ironwood had to take a big discount at the last minute. Its underwriters aggressively raised their target price on Jan. 20 to $14 to $16 per share, but to get the deal done they backed off by 25 percent. That "haircut" shows that public investors pushed back hard on the company's attempts to hit a grand slam instead of just a home run (Also see "Ironwood Swings For The IPO Fences" - Pink Sheet, 20 Jan, 2010.).

"It was good to see Ironwood complete its offering, although we would have hoped for something more along the lines of what it was shooting for," said Latham & Watkins partner Alan Mendelson, who counsels both biotechs and underwriters on public offerings but has no ties to Ironwood.

According to Elsevier's Strategic Transactions Database, the last pre-commercial U.S. biotech to approach Ironwood's IPO total was Eyetech in 2004. The ophthalmology firm raised nearly $150 million. To top Ironwood's $188 million, you have to go back to the bubble year of 2000 when asthma developer Tanox netted $226 million.

According to a document released Feb. 2, Ironwood had to lean on an existing investor to help seal the deal. The company reported that about half of the 16.7 million Class A shares on offer were set aside for a directed share program (DSP), frequently known as a "friends and family" portion. In Ironwood's case, the "friends and family" in question were mainly Morgan Stanley Investment Management, which owned nearly 7 percent of Ironwood before the IPO. Morgan Stanley bought 8.3 million shares of the 8.9 million set aside in the DSP.

What's more, Ironwood gave its underwriters a discount and a 4.4 percent commission on the directed share program sales, an about face from its earlier position that there would be no such discount or commission.

"There were unorthodox methods used to place shares," said Cabot Brown, of San Francisco boutique bank Seven Hills, which had no connection to the deal. "This was half a public offering."

Ironwood and Morgan Stanley representatives did not respond by press time to requests for comment.

A Dual Class Structure May Have Been A Sticking Point

One twist that might have damped enthusiasm is Ironwood's dual class stock structure. The firm is selling 16.7 million Class A shares to the public, but its Class B shares give owners - company execs, founders, employees and preferred pre-IPO stockholders - ten votes per share and "significant influence" over certain corporate matters, as the firm cautioned in its regulatory filings. There will be 78 million Class B shares outstanding.

Expectations around the IPO ran high because Ironwood seemed the best possible candidate for a pre-commercial drug firm. Its lead product linaclotide, for severe constipation including cases caused by irritable bowel syndrome, has completed two Phase III studies and has a muscular development partner in Forest Laboratories. Linaclotide is up against only one marketed product, Amitiza , with other anti-constipation competitors in the pipeline including one from Theravance.

Linaclotide triggers the guanylate cyclase C receptor in the gut, which increases fluid and sodium flow. It was discovered in-house. Until 2008 Ironwood was known as Microbia and was founded in 1998.

Several more biotechs are registered to go public, but Ironwood's rich debut may be hard to match. One follower, Anthera Pharmaceuticals, announced Feb. 3 it aims to sell 4.6 million shares at $13 to $15 a share, which at the midpoint would bring in slightly less than its original $70 million target.

Others with S-1s in the pipeline include ophthalmic drug-device firm Alimera Sciences of Alpharetta, Ga. ($80 million), antibiotic developer Trius Therapeutics of San Diego ($86 million), oncology platform firm Aveo Pharmaceuticals of Cambridge, Ma. ($86 million), regenerative medicine firms Tengion of East Norriton, Pa. ($40 million) and Aldagen of Durham, N.C. ($81 million), and Anthera of Hayward, Ca. ($70 million).

It remains to be seen how Ironwood shares perform on the open market. They closed Feb. 3, the first day of trading, up 40 cents to $11.65. Omeros of Seattle, the only other U.S. biotech to brave recent icy IPO waters, debuted at $10 a share in October but immediately tumbled out of the gate. It opened on Feb. 3 at $6.38 a share.

Ironwood's underwriters were J.P. Morgan, Morgan Stanley, Credit Suisse, BofA Merrill Lynch and Wedbush PacGrow LifeSciences.

- Alex Lash ([email protected])