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Turnaround Letter
Out-of-Favor Stocks with Real Value

May 24, 2023

Today, we are moving shares of Ironwood Pharmaceuticals (IRWD) from Buy to Sell.

The company is acquiring Switzerland-based Vectiv Bio Holding AG (VECT) for about $1.2 billion in an all-cash transaction. Net of cash held by Vectiv, the net price is about $1 billion. Both boards of directors have approved the deal, and a majority of Vectiv’s shareholders are likely to approve the transaction, given the 80% premium over the shares’ average price for the past 90 days. Ironwood will fund the deal with cash on hand and a new revolving credit facility.

Vectiv is a clinical stage company (no revenues, only products under development) focusing on rare gastro-intestinal diseases. Ironwood estimates that its apraglutide treatment has the potential to generate $1 billion in peak revenues if it achieves full commercial success.

The deal makes sense for Ironwood from a strategic perspective: It provides new growth opportunities in a field very closely related to its eventually-expiring Linzess franchise, it can readily afford the cash outlays given its large $740 million in cash on hand, and it is backed by the interim stability of the Linzess cash flows.

But the deal sharply violates our thesis that Ironwood is a cash flow machine that could return its vast cash hoard and cash flows to shareholders. Rather, Ironwood is now a speculative (albeit well-funded) biotech company. The valuation has moved up to 12.5x estimated 2024 EV/EBITDA on higher net debt and lower EBITDA due to taking on Vectiv’s research and development costs.

We are partly intrigued by this deal. If successful, Vectiv’s treatment could launch Ironwood shares into the stratosphere, and probably itself be acquired by a major pharma company seeking a “growth franchise.” We’re impressed with the methodical cash build-up and cost controls at Ironwood, along with the continued presence of Alex Denner, a highly regarded biotech activist, on its board of directors.

However, that partial intrigue is fully outside of our turnaround mandate.

Nuance-minded investors may want to wait for the other value-minded shareholders, whose selling is pulling the shares lower, to fully exit. The shares may subsequently move higher as speculation-oriented growth/biotech investors move in.

The shares have generated an approximately 10% loss since our initial recommendation in late December 2020 at 12.02.

Disclosure: The chief analyst personally owns shares of all Cabot Turnaround Letter recommended names, including those mentioned in this note.

Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.