Synergy Pharmaceuticals Inc fka SGYPQ

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Synergy Pharmaceuticals: Our Next Investment
Feb. 9.17 | About: Synergy Pharmaceuticals, (SGYP)
Bhavneesh Sharma, MBA
Bhavneesh Sharma, MBA
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Vasuda Healthcare Analytics
Summary

Synergy Pharmaceuticals' common stock has pulled back after FDA approval of Plecanatide for chronic idiopathic constipation.

NDA filing for Plecanatide for irritable bowel syndrome (constipation predominant), IBS-C is expected later in Q1, 2017.

Our first price target is $11.50/common share based on enterprise DCF method (peak $1.7B risk-adjusted revenue from Plecanantide in CIC).

We are buyers of Synergy Pharmaceuticals' (NASDAQ: SGYP) common stock after the pullback seen after FDA approval of Plecanatide for chronic idiopathic constipation (CIC). NDA filing for Plecanatide for irritable bowel syndrome (constipation predominant), IBS-C, is expected later in Q1, 2017.

(Synergy Pharmaceuticals: common stock price chart, from Bloomberg.com)

CIC is expected to affect about 33 million Americans and 14% of the global population (source: 10-Q). The total target market size is about 45 million adult Americans with CIC and IBS-C (source).

Synergy Pharmaceuticals' Plecanatide has shown similar clinical efficacy as rival Ironwood Pharmaceuticals' (NASDAQ:IRWD) Linzess with less side effects like diarrhea and discontinuation rate. Linzess sales were $625 million (2015) and could exceed $1 billion by 2020.

(Efficacy data of Plecanatide in two pivotal phase 3 trials in CIC, source)

Potential competition (source: 10-Q):

Existing therapies: Lubiprostone, Linaclotide, Prucalopride.

In-development therapies: Elobixibat by Albireo Pharma (NASDAQ:ALBO), in phase 3 development in Japan and Asia).

Dolcanatide, the company's second uroguanylin analog is planned to be advanced to a phase 2 trial in mild-to-moderate ulcerative colitis.

Ironwood Pharmaceuticals and Allergan (NYSE:AGN) recently announced that FDA has approved a lower dose (72 mcg/day) of Linzess for the treatment of chronic idiopathic constipation. The news release mentioned that the lower dose also met the statistically significant end-point vs. placebo in the 2 phase 3 trials done earlier. Also, the incidence of diarrhea and diarrhea-related discontinuations was lower in the 72 mcg dose arm (vs. higher 145 mcg/day arm). On searching the medical literature or the company SEC filings, we did not find the details of the efficacy data (like responder rate) or adverse effect profile details (like incidence of diarrhea or diarrhea-related discontinuations). We expect the responder rate in Linzessa 72 mcg/day arm to be lower than Plecanatide 3 mg/day (Plecanatide 3 mg/day showed almost similar responder rate as 145 mcg/day of Linzessa). We still like Synergy Pharmaceuticals.

IBS-C: Positive results from the first phase 3 trial were announced in late 2016. Overall responder rate was 21.5% and 24% in 3 mg and 6 mg dose groups, respectively. The most common adverse effect was diarrhea, which occurred in 3.2% of patients in 3 mg arm and 3.7% patients in 6 mg arm. vs. 1.3% in placebo arm.

Financials and valuation: Synergy Pharmaceuticals raised capital through a recent secondary equity offering of 20.32 million shares at $6.15 each. The company has $205 million of cash reserves (after recent offering) and $76.1M of long-term debt. Expected cash burn is about $30M cash burn per quarter.

At $4500/patient/year cost for Plecanatide (similar to Linzess 145 mcg/d), target U.S. market size for CIC in the U.S.=33M; we modeled peak $1.72B in U.S. revenue in 2026 (at patent expiry). In comparison, peak sales estimate for Linaclotide is $1-2 billion in 2020.

Using enterprise DCF method (discount rate=15% for first 5 years, then 12% and 10% at peak), we calculated risk-adjusted NPV of future revenue from this indication= $2.56B. After adjusting for non-operating assets (including recent offering) and liabilities and using diluted share count, we calculated fair value per common share= $11.50 (our first price target). The company is also an attractive acquisition candidate (potential bidders include Takeda (OTCPK:TKPHF), Allergan, etc.). Subscribers to our premium research service can download the DCF valuation model.

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Disclosure:

This article represents my own opinion and is not a substitute for professional investment advice. It does not represent solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment.

Disclosure: I am/we are long SGYP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

http://seekingalpha.com/article/4044375-synergy-pharmaceuticals-next-investment?page=2