Synergy Pharmaceuticals Inc fka SGYPQ

[Snackman]

Can Synergy Pharmaceuticals Succeed On Its Own?
Apr. 24, 2017 3:26 PM ET

About: Synergy Pharmaceuticals, Inc. (SGYP)

ONeil Trader
Growth, momentum, small-cap, mid-cap

Premium
Growth Stock Forum

(3,700 followers)
Summary

Synergy is down more than 40% since Trulance's approval - the lack of a buyout may be the main culprit.

Synergy does not have to be bought for Trulance to succeed - the company seems well prepared.

Trulance's label offers clear advantages over competing products.
Synergy remains an attractive takeover target.

Synergy Pharmaceuticals (NASDAQ:SGYP) is down more than 40% since Trulance received FDA approval in January. There was no bad news except maybe the lack of news - I suspect that some investors and traders expected a buyout to occur in short order and a buyout did not happen and may not happen in the near-term or even in the medium-term. I was patient and waited for the stock to correct to a level where I was comfortable owning it without a buyout and that happened when Synergy hit $5. But the stock did not stop there and is trading close to $4 as of this writing. The small position I bought around $5 was just the beginning and added to my position just above $4 per share and intend to accumulate more in the following weeks. In this article, I take a look at recent developments and Synergy's chances of successfully executing Trulance's launch on its own.

Synergy doesn't need to be bought for Trulance to succeed
While the majority of investors think Trulance would be better off in the hands of a larger pharma company (I do too), it doesn't mean Synergy won't be successful on its own. After all, bigger isn't always better. Trulance's clinical profile should resonate among physicians and patients. The low diarrhea rates are one of the main traits that make Trulance a really attractive product relative to its branded competitors and OTC products. Allergan/Ironwood bulls are arguing that Linzess and Trulance labels are similar, but 16-20% diarrhea rates compared to around 3-5% for Trulance are anything but similar - Linzess' diarrhea rates are at least three times higher (the ranges are based on both CIC and IBS-C trials). This means that almost every fifth patient develops diarrhea on Linzess compared to every 20th (or 30th) Trulance patient. The difference should not be taken lightly. Even severe diarrhea occurred 3x less with Trulance (0.6%) than with Linzess (2%). Put yourself in that position - if you had a choice, which drug would you take?

Additionally, Trulance's label only has diarrhea among adverse events while Linzess also has abdominal pain, flatulence, upper respiratory tract infection and sinusitis. Takeda's Amitiza has even more adverse events than Linzess with nausea occurring in 17-29% of patients.

When patients take Trulance, their stool consistency goes right back to the normal based on the Bristol Stool Scale. The chart below shows that by taking Trulance, patients avoid the wild fluctuations in stool consistency.

Source: Synergy presentation
Trulance can also be taken any time of day, with or without food while Linzess needs to be taken on an empty stomach at least 30 minutes prior to the first meal of the day. Takeda's Amitiza needs to be taken twice a day with food and water.

There was also loud talk about Linzess' lower dose (72mcg) and its impact on diarrhea rates, which Ironwood and Allergan kept a secret for a long time for "competitive reasons." That "competitive reason" turned out to be the lack of lower diarrhea rates for the lower 72mcg dose (19% in the CIC trial, which is within the range of the two higher doses). I think there is no doubt about Trulance's place in the market and it's not number two (no pun intended).

Based on significantly lower diarrhea rates, stool consistency and convenience, I believe Trulance is a best-in-class product.
Based on the information Synergy provided about the launch efforts, it seems that the company is well prepared:
• The company has done extensive research with more than 2,700 healthcare providers and over 5,300 patients.
• Multiple advisory boards with national and regional GI KOLs and payers were conducted.
• The market access team had meetings with payers representing more than 230 million covered lives in the U.S.
• Synergy initiated pre-launch multi-media and digital campaigns to drive awareness and disease education, focusing on unmet needs of CIC patients.

• Co-pay card programs and other patient assistance programs are in place which should help ease the initial access hurdles for patients.

One of the things that wasn't received well is the utilization of a hybrid sales force to reach key prescribers. Regional GI account managers are in-house but Synergy is using a contract sales force. The difference here is that, unlike most contract sales arrangements, these reps are completely committed to Synergy but were hired by a contract sales organization. The company didn't disclose the number of reps but they will initially target high-volume prescribers since less than 20% of prescribers in the U.S. account for over 70% of the branded constipation prescription market. Synergy will focus on both gastroenterologists and primary care physicians and the company claims it has attracted highly experienced reps and regional managers with over 90% coming from other peer GI and PCP companies.

It should be noted that there are some significant hurdles early in the launch:
• Lack of awareness which means a considerable effort is needed to increase it.

• Coverage is very limited early in the launch and should remain patchy until early 2018 which is the time most commercial payers will put Trulance on their formularies. The company has programs to alleviate these concerns but the initial effect will be low revenues per script or script rejections at pharmacies.

• Aggressive sampling should negatively affect near-term revenues as most patients will get a 7-day supply for free.
• Competitive pressure. Takeda and Allergan have considerable commercial firepower compared to Trulance, but the positive here is that they are spreading the word and raising awareness about the high unmet need and the emerging treatment options and physicians and patients are bound to eventually find out the advantages Trulance offers.

When we put all of this into context, it is hard to expect Trulance to burst out of the gate. I usually warn about the potential for the drug launch to underperform expectations (and most of them do - around two-thirds according to market research done by McKinsey) and this launch is no different. That said, expectations for 2017 might be low enough for Synergy to match them, but I would be satisfied to see $25-30 million in sales this year which is my conservative (or what I believe is a realistic estimate for the year). The Street consensus is $31 million as of this writing. Both mine and the Street's are ballpark assumptions and estimates will probably need to be revised based on early launch metrics Synergy will provide.
In my previous article, I looked at Linzess' net sales in the first few years of the launch and provided my own estimates for Trulance - the table is shown below and is adjusted based on the launch occurring in April instead of early 2017 (I reduced the estimates by approximately 25% due to Synergy having only nine months of net sales in 2017). My expectations for Trulance are lower compared to Linzess because Linzess was approved for both CIC and IBS-C while Trulance only has CIC in its label for now. The other reason is Allergan being much stronger commercially with more feet on the ground and more capital allocated to sales and marketing. 2018 should be a breakout year for Trulance because of the substantially improved coverage, the approval in IBS-C in Q1 and the launch in that indication and the company being in a stronger financial position with growing net sales which it can plow back to sales and marketing to accelerate prescription growth. I continue to believe that Trulance has blockbuster potential, even in Synergy's hands.

Source: Ironwood earnings reports, author's estimates and calculations
Below is a chart showing how Linzess did in first eight quarters on the market. The uptake has been fairly rapid and if Trulance can generate half of what Linzess did in the first eight quarters, I would call the launch really successful.

Source: Ironwood earnings reports
Financial position strengthened with the equity offering
Synergy raised $121 million in net proceeds in early February, and the pro-forma cash position at the end of 2016 was $204 million. The company did not provide cash burn guidance for the year, but I assume it will be at least $40 million a quarter which means it has enough for at least 12 months or longer, assuming Trulance starts contributing in a more meaningful way in the meantime.

My previous price target on Synergy was $11.50 and I am adjusting it down to $9 per share based on an increased share count. It is worth mentioning again that CEO Jacob is incentivized to sell the company for at least $2 billion, which translates into at least $8-9 per share depending on how much cash Synergy has left at the time of the potential transaction. The $2 billion EV incentive was added at the end of 2016 and the previous incentives were:
- 2.5% bonus on $400 million EV - at least $10 million.
- 3.5% bonus on $1 billion-plus EV - at least $35 million.
- 4.5% bonus on $2 billion-plus EV - at least $90 million.
It is clear where the most money can be made. There are additional incentives based on joint-venture, merger and/or out-license agreements, which can be seen in the 2014 annual report.

Don't forget dolcanatide
In addition to Trulance, Synergy has another pipeline candidate, dolcanatide. The company is treating dolcanatide as a potential life-cycle growth opportunity for Trulance. Over the last three years, Synergy announced positive early stage data in ulcerative colitis and in opioid-induced constipation (NYSE:OIC). The ulcerative colitis phase 1b study showed "clear signals of improvement in dolcanatide-treated patients compared with placebo-treated patients" and that dolcanatide was well tolerated, but this was all the company shared so far.

The OIC study included 289 patients and the study met the primary endpoint of statistically significant improvement in mean change from baseline in the number of spontaneous bowel movements ((SBMs)) during week 4 of treatment period. The mean change from baseline in SBMs for the 3mg and 6mg doses of dolcanatide was 3.2 (p=0.009) and 3.4 (p=0.005) while the placebo group had a 1.8 mean change. Both doses showed a statistically significant improvement in key secondary endpoints as well - analysis of complete spontaneous bowel movement frequency (increase from baseline of 2.54, 2.39 and 1.36 for 3mg, 6mg and placebo dose groups, respectively). Dolcanatide was well-tolerated in this trial as well with the most common adverse event being diarrhea (5.4% and 9.7% for the 3mg and 6mg dose groups respectively).

But no progress with dolcanatide was made since the early 2016 ulcerative colitis data announcement. The problem here is likely funding and I doubt dolcanatide will go forward in the near-term. The development will likely start moving forward once the company is cash flow positive or when Synergy is acquired. I think dolcanatide could be a talking point during potential negotiations with acquirers and that it could add value to the transaction.

Conclusion
Not much has changed since Trulance was approved in January and yet, the stock is down from around $7 to almost $4. The fact there are no changes could be the source of investor disappointment as many were probably expecting the company to be acquired. I believe that this has created an attractive buying opportunity and I intend to continue to accumulate in the following weeks/months. The main risk to the thesis is Trulance's uptake in the following months but it is also a catalyst if the launch exceeds expectations (or even meets expectations at this point given the share price correction).

Trulance remains a very attractive asset in a very large addressable market that is growing at a rapid pace. I believe that Synergy remains an attractive takeover target and that the equity offering has strengthened the company's position at the negotiating table since it is not cash constrained anymore.

Author's note: Growth Stock Forum subscribers had an early look at this article, and have access to regular exclusive updates on every stock I am covering. Readers are invited to take a two-week free trial in the Seeking Alpha Marketplace.

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.

Additional disclosure: This article reflects the author's personal opinion and should not be regarded as a buy or sell recommendation or investment advice in any way.

https://seekingalpha.com/article/4064689-can-synergy-pharmaceuticals-succeed?auth_param=1dumqj:1cfskba:f188d0ef902daa4e0a23d90d5315b489&uprof=38&dr=1