March 5, 2012 | last updated June 1, 2012 12:56 pm

Four CT firms poised to make IPO leap

Several recent high-profile initial public offerings are raising optimism that 2012 could be a better year for companies looking to raise cash to expand their operations and grow jobs.

But what that sentiment could mean for Connecticut businesses looking to make the IPO leap this year remains uncertain.

The volatile IPO market in recent years put the brakes on many Connecticut companies hoping to go public.

Since 2008, only 11 in-state firms have made the private-to-public transition, with the largest deal — First Connecticut Bancorp's IPO in 2011 — valued at about $171 million.

At the end of February, four Connecticut-based companies had registered with the U.S. Securities and Exchange Commission for IPOs, according to research firm S&P Capital IQ.

The two most recent IPO announcements were New Haven antibiotics developer Rib-X Pharmaceuticals and Ridgefield's Northern Tier Energy, which are looking to raise $80 million and $200 million respectively, according to S&P Capital IQ.

Norwalk online travel search firm Kayak Software and downstream energy company Ridgebury Tankers of Ridgefield filed paperwork to go public in 2010, but neither company has gone through with the offering.

All four companies declined to comment on their current IPO status, but their chances of following through on their public offerings are likely greater in 2012 than they have been in recent years.

"In general, the IPO market is incrementally heating up," said Joe DeMartino, president of the Angel Investor Forum.

DeMartino said a few Connecticut companies have done well with IPOs in recent years including New Haven's Higher One, which raised $108 million in 2010 and Orange communications software and services vendor Tangoe Inc., which raised $87 million in that same year.

Still, the market remains soft and investors are skittish about making bets on companies that don't yet have proven track records.

Companies that are going to have success, DeMartino says, must be able to exhibit fast and steady growth and solid revenue and earnings over a long period of time.

"They have to have an infrastructure that is company centric as opposed to product centric," DeMartino said.

The two most recognizable Connecticut firms aiming to go public are Rib-X Pharmaceuticals and Kayak.

Rib-X Pharmaceuticals is looking to raise $80 million as it continues to develop its antibiotic drugs including delafloxacin, which is used to treat skin infections resistant to conventional anti-bacterial drugs.

In 2011, Rib-X, which was founded about decade ago by Yale University colleagues Peter Moore, William Jorgensen and Thomas Steitz, brought in $20 million in financing from a group of investors led by Warburg Pincus, to support a phase 2b study of its drug.

Connecticut Innovations Inc., the state's quasi-public technology investment arm, also has a stake in Rib-X.

Like most pharmaceutical start-up firms, however, Rib-X has never been profitable and has no products approved for commercial sales. The company has an accumulated deficit of $238.3 million including a net loss of $47.5 million through the first nine months of the 2011, regulatory filings show.

Drug companies, particular start-ups, are capital intensive in their early years and require significant funds to develop their ideas into commercialized treatments. There's also a lengthy and costly regulatory approval process. Obtaining financing is typically seen as the largest barrier to entry into the pharmaceutical industry.

Meanwhile, Kayak, a national brand firm started by the co-founders of Expedia, Travelocity and Orbitz, is looking to raise $50 million to grow its online travel Web site.

According to its prospectus, the company has 154 employees and generated $171 million in revenues through the first nine months of 2011, a 33 percent increase over the same time period in 2010.

During that time the company, whose online search functions are free to users, processed 679 million user queries for travel information, and its mobile applications have been downloaded over 10 million times since 2009.

The company makes money by sending referrals to travel suppliers and online travel agencies and from a variety of advertising placements on their websites and mobile apps.

Kathleen Smith, a principal of IPO investment adviser Renaissance Capital in Greenwich, said over half of the 125 public offerings in 2011 traded below their IPO price, which continues to make investors skittish.

As a result, investors are demanding large discounts from the 2012 class of IPO issuers, she said.

So far this year, half of the 18 IPOs were priced below the expected price range.

By demanding discounts, however, IPO investors are achieving better returns of about 17 percent, more than double the 8 percent return on the S&P 500, Smith said.

Recent IPO announcements by Facebook, which plans to raise $5 billion, and other technology firms has energized the market to some extent.

"These positive IPO returns will set the stage for a more favorable investor reception to the historically large backlog of companies who have registered to go public, which includes 211 issuers hoping to raise $53 billion," Smith said.

In terms of the economic impact IPOs have on the local economy, it's a mixed bag. As a small state, Connecticut is not an IPO mecca. A lack of technology startups, the sweet spot of many IPO investors, hurts Connecticut's position.

DeMartino said he doesn't think it is critically important for the state to have a lot of companies that go public, although funds raised through an IPO can lead to job growth and investment that spur economic activity.

It can also supply much needed revenue to the state's coffers. California officials, for example, estimate that Facebook's IPO could bring in as much as $2.5 billion in tax revenue over the next five years, mainly from income-tax revenue generated through stock sales.

Regardless, DeMartino said it's more important for the state to provide the resources to foster new company creation because that could have a wider economic impact.

The Angel Investor Forum largely deals with start-up companies that are at least five years away from a possible IPO, DeMartino said. And it's more likely that successful startups end up in a strategic sale or stay private rather than going public, he added.

Matthew Nemerson, president of the Connecticut Technology Council, said the state is headed in the right direction of creating the ecosystem needed to spur more entrepreneurial activity.

The state is looking for professionals to help launch a new $4.8 million "Innovation Ecosystem" program that aims to help young companies start and grow in Connecticut by establishing venture competitions, mentor networks, and talent matching services as well as training and commercialization assistance.

The goal, Nemerson says, is also to better link Connecticut's assets — including its universities and businesses — to spur innovation including getting patents sitting on the shelves of large corporations into the hands of researchers and entrepreneurs who can turn them into businesses.

"There will be big successful IPOs in the works," Nemerson said, "but you have to have the A-list of entrepreneurs and companies in your state to benefit from that."


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