With the health care sector still on fire this year, Merrill Lynch brings another company to the forefront that it considers a buy. Ironwood Pharmaceuticals Inc. (NASDAQ: IRWD) is viewed favorably by the brokerage firm, with nearly 30% upside.

Merrill Lynch reinstated coverage of Ironwood with a Buy rating and a $19 price objective, which is derived from a probability-adjusted net present value (NPV) of the Linzess (linaclotide) opportunity. The firm believes that the company’s shares are attractively priced and that the existing business provides a floor to valuation while the advancing pipeline offers substantial upside potential.

Ironwood received FDA approval for Linzess for the treatment of constipation-dominant irritable bowel syndrome (IBS-C) and chronic idiopathic constipation (CIC) in 2012. U.S. Linzess scripts have outpaced competitor Amitiza in the first two years of launch, which the firm attributes to better efficacy and an improved safety profile. Physician feedback has been encouraging and indicates greater comfort in prescribing, as well as longer duration use with patients.

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Merrill Lynch believes that Linzess is still in the early stages of its U.S. launch and expects steady growth over the next few years as physician and patient familiarity continues to grow. The brokerage firm forecasts peak sales of roughly $1.5 billion in the United States.

The company is transitioning from a story focused on Linzess to one with several products in the pipeline targeting the gastrointestinal market. Several trials are underway to broaden the targeted patient population for linaclotide, including evaluating an opioid-induced constipation indication, a lower 72 mcg dose, use in the pediatric population, and a colonic release form.

Two new pipeline assets, IW-3718 for refractory gastroesophageal reflux disease (GERD) and IW-9179 for gastroparesis, are in Phase 2 studies. These assets are not reflected in Merrill Lynch’s or the street’s valuation and represent sources of upside potential as clinical results are released in 2015 and 2016.

The brokerage firm described its investment thesis as:

Our Buy thesis on Ironwood is based on our belief that the US launch of Linzess for the treatment of IBS-C and CIC will continue to track well and will achieve peak sales of $1.5 billion. On top of this existing business, the advancing pipeline offers substantial upside potential.

Shares of Ironwood were down 1.7% at $14.85 Monday afternoon, in a 52-week trading range of $9.90 to $17.11. The stock has a consensus analyst price target of $16.19.

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