Synergy Pharma: A Call To Action
Nov. 15, 2017 2:18 PM ET|
76 comments|
About: Synergy Pharmaceuticals, Inc. (SGYP)
Avisol Capital Partners
Avisol Capital Partners
Long/short equity, newsletter provider, healthcare, biotech
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The Total Pharma Tracker
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Summary
Synergy went down 30% on a sudden dilutive offering.
Shareholders are unhappy, and rightly so.
However, we must set emotions aside and do the smart thing - bring average costs down.
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If we take out all the dross surrounding Synergy Pharma (SGYP), notably...
Its poor stock market performance post the previous approval,
Its poor stock market performance prior to the next approval,
Its market-inexperienced management,
Its blundering secondary offerings
Its lack of marketing prowess vis-a-vis the competition
Its insistence on, but inability to, go to market alone, etc.
... we see why we originally invested in this company. That original thesis was Trulance, a drug that is better than its competition in safety, and at least as good as the competition in efficacy. This is a killer thesis for investing in an early-stage company. However, everything went wrong along the way, and the late-lamented dilution was the final straw. This stock is now breaking apart.
What went wrong? For investors, the ideal scenario would have been an approval, followed by a buyout or at least a collaboration - but management decided to go it alone. By doing so, SGYP’s management took over the prospects of a huge debt burden. A lot of funds are required upfront to launch a drug, and it may be years before they break even. However, a buyout/collaboration is based on prospects, not just current situation, so that would have enabled shareholders to reap lesser rewards, but quicker. Naturally, shareholders are angry.
But if I stand in management’s shoes, I see they have been cornered by the need for cash. Cash burn is very high, as Stone Fox Capital so clearly explains in this article, and the $300mn debt financing came not only with a $9.5mn interest for the next year after the initial $100mn tranche, but it came with the condition that SGYP had to independently have a certain amount of money before the next tranche could be released. The company had no other means of getting that money besides a dilution. Besides, if you plan to make a secondary offering, then, from management’s perspective, there’s hardly any reason to tell that to shareholders early on. So that is the story behind the sudden dilution here. It really is nothing new. It is a continuation of the go-it-alone story - they need cash because they are un-partnered, and this is how they get it.
My basic point is: if you got into SGYP knowing they would a) not take a partner or sell out, and b) their cash burn, while high, is not unrealistic, then you can’t really blame management for what happened, even if you blame them for how it happened. You can especially blame them for those warrants, but when it comes to Jefferies, perhaps a strong deal sweetener was the only way to get them on board. We will never know. However, we do know that 18% of all biotech deals in 2015 came with warrants, while that was 25% in 2016. These are simply not good times for biotechs that need cash.
Another interesting little titbit from our daily scoop today is this major share offloading - “10% shareholder Paulson & Co. Inc. disposed 36% of their holding of SGYP, 8,750,000 shares, for $24,678,500.” That tells you another angle of what happened yesterday.
Investors can take two approaches here. One, which doesn’t have a high probability of success, is to work toward making management sell out the company once IBS-C is approved. That way, many of us can recover our investments and probably also make some profits. The stock is down 65% y-o-y, and a 50% premium from current prices isn’t unrealistic given Trulance’s potential. In fact, I'm probably being too pessimistic. But this is probably never going to happen.
The other approach is what we have been doing - doubling down, bringing our costs down. When you do that with a biotech that doesn’t have a product, you end up with the gambler’s risk of doubling down to zero. However, this is a small company with a major product - so there’s huge value here. The bottom line value of the drug - if you set aside all sorts of company issues - probably runs into a few billion dollars. I mean, I'm valuing it at Ironwood’s (IRWD) market cap. That, to me, is the bottom line - because Trulance is better than Linzess, and IRWD has very little else but a market cap north of $2bn. So, I strongly believe that despite the main cause of worry for SGYP - cash - the market will begin valuing it properly at some point. This may not happen today, but by doubling down, I'm reducing my risks, not increasing it, because I'm 100% certain this company with a great marketed product does not belong in the penny stock zone.
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.
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