$SGYP..Canaccord initial report May 22:
Let the data flow; initiate with a BUY rating and $11 price target
Investment recommendation
We are initiating coverage on Synergy with a BUY rating and an $11 target. We have
never been shy about taking swings in front of binary outcomes, and this one qualifies
as one of the biggest we've seen in a while. With four Phase 3 trials maturing over the
next 12 months in chronic idiopathic constipation (CIC) and constipation-predominant
irritable bowel syndrome (IBS-C), with what we believe is a high likelihood of success
and a large market that Actavis/Ironwood is still developing with Linzess -- all in the
context of a reasonable valuation -- we find Synergy an attractive investment opportunity.
If successful in Phase 3, we also think Synergy would make an attractive takeout
candidate since it owns full worldwide rights on plecanatide.
Investment highlights
Plecanatide is a molecule very similar to Linzess, which was discovered by Ironwood,
developed by Forest, and acquired by Actavis. It has been on the market since 2012,
is still growing over 80% year-over-year in TRx volume, and is on a $400M annualized
run-rate. We think Linzess has $2B peak potential, and perhaps plecanatide has as
much -- depending on the strength of the data and who ultimately ends up marketing it.
Plecanatide is on the brink of having four large Phase 3 trials readout and, if successful,
would have the same two indications as Linzess -- CIC and IBS-C. It would compete headto-
head with Linzess, but we feel the market is more than large enough to support two
products. The Phase 3s will reveal whether the efficacy is at least as equivalent and
whether it truly has less of the diarrhea side effect -- the primary differentiating goal.
Constipation. The first Phase 3 CIC trial should report data in June, with the second
in Q3. The goal would then be to file an NDA by year-end on CIC alone and follow later
with an sNDA for IBS-C. In Phase 2, it showed a 19% response rate for the 3mg dose
compared to placebo at 10.7%. A higher dose of 6mg is being used in Phase 3 along
with 3mg; if the magnitude of placebo separation is replicated, the trial should hit its
primary endpoint.
IBS-C. The first Phase 3 IBS-C trial should report data in Q4, and the second should have
data in Q1 2016. An sNDA would then be submitted later in 2016. In Phase 2 the 3mg
dose had a 42% response rate, the 9mg dose had a 40% response rate vs placebo at
25%. Again, both 3mg and 6mg doses are being studied in Phase 3.
Valuation/risks. We use a discounted P/E approach to valuation with a 20x P/E off
our 2023 EPS of $2.52 discounted back for seven years at 25%. This yields our $11
price target.
We would argue for a lower discount rate if the Phase 3 trials are completed
successfully. The most obvious risk would be failure to hit primary endpoints in Phase
3 and/or failure to gain FDA approval. Since plecanatide requires a large primary care
marketing effort, we also assume Synergy needs to find a partner and/or sell the
company.
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