Synergy Pharmaceuticals: A Hidden Gem In The BioPharma Sector
Aug. 16, 2017 5:48 AM ET|
About: Synergy Pharmaceuticals, Inc. (SGYP)
Millenial Investment Research
Long/short equity, Growth, biotech, airlines
(39 followers)
Summary
A steady increase in the new-to-brand prescription market share since the launch of Trulance.
Synergy Pharmaceuticals has the potential to be major player in the GI market, but the company may want to raise additional working capital.
An undervalued stock at the current price.
Introduction
I track companies that are relatively cheap and would fall in a sector that are performing well above the S&P index. Another factor that I consider would be the potential for future growth. Take, for example, Synergy Pharmaceuticals Inc. (NASDAQ:SGYP). For those of you who have never heard of Synergy, it is a biopharmaceutical company focused on the development and commercialization of novel gastrointestinal (GI) therapies.
Due Diligence
SGYP Stock Performance YTD
Synergy was a pure developmental-stage company until Q1 of this year, and it started to realize revenue in Q2 with the release of Trulance, its first commercial product for the treatment of CIC. According to studies, 1 out every 7 person has symptoms of constipation, with an estimated 33 million people in US alone thought to be suffering from CIC (according to SGYP and Medscape). Synergy is targeting this market with the introduction of Trulance, and the company's financial statements indicate it is off to a very good start.
SGYP month to month
Trulance prescribers have increased an average of 140% month-over-month since launch (Source: Synergy Pharmaceuticals Earnings Release Statements)
A full quarter into the release of Trulance, the refill rate currently sits at an impressive 30%, contributing to an overall weekly growth rate of about 15%. While we don't have enough sales data to substantiate future growth, it is obvious that Synergy is deemed to record double-digit performance growth over the next couple of quarters. It is also reported that Trulance is a far superior product with fewer side-effects when compared to its peers. So why the decline in price per share over the last several months?
The stock was subjected to a “sell the news” market phenomena when its only commercial product, Trulance, was approved by the FDA back in January. The market was excited initially, but that excitement faded off into concern when the potential marketing costs an early-stage company like Synergy will have to deal with are taken into account. To no one's surprise, the company almost immediately announced a secondary offering of 20 million shares at $6.15 a piece, raising about $120 million and bringing the total outstanding to the current 225 million shares.
Since then, Synergy has been on a steady decline for a variety of reasons, ranging from huge marketing and promotional expenditure the company has incurred (approximately $23.1 million in Q2) for the commercial launch of Trulance, to elevated concerns of its current cash position and capital requirements, the latest being the addition to the Express Scripts (NASDAQ:ESRX) 2018 exclusion list. From a market cap of roughly $1.2 billion back in January, it lost approximately 45%, currently at around $670.25 million as of this writing. So much for a company which has a superior product when compared to its peers.
The financial performance from the last quarter was also factored into the fall. Synergy reported an EPS loss of 33 cents versus an expected 25 cents loss. While the net sales of $2.3 million favored the Street's estimates of $2.1 million, the market appeared to be overly concerned about the jump in expenditure ($73.9 million in Q2 vs. $66.6 million in Q1 2017), thereby causing concerns about the cash on hand ($82 million at the end of Q2) position. The current cash position will force the company to look into alternative ways of financing in the near future, which will be addressed later in this article.
Performance and future growth
SGYP Growth
Trulance has had a 182% monthly average increase in sales since it was introduced in March (Source: Synergy Pharmaceuticals Earnings Release Statements), and more than 12,600 prescriptions had been filled as of the end of last quarter. The product continues to gain traction in the overall new-to-brand prescription (NBRx) market. There exists a very good conversion rate among patients that are new to a branded prescription treatment and among those that converted from other branded prescription treatments, currently at 45%.
The company has also secured a 2018 managed care contract with CVS Caremark (NYSE:CVS), which manages approximately 50 million people in the U.S., that will place Trulance on formulary without restriction (non-preferred) for its Commercial Template Clients or Employer Groups, representing approximately 24 million lives. Per the earnings statements, Synergy remains in contract discussions with CVS Caremark for the coverage of the remaining people.
Medicare Part D and Medicaid discussions are ongoing, and the company expects several major accounts to include Trulance on formulary in 2018.
Upcoming approval for the treatment of IBS-C indication (PDUFA by January 24, 2018) would be another growth factor for Synergy. The approval would extend Trulance’s potential customer base by another 35%.
What's next
NBRx Market Share
SGYP Market Share
(Source: QuintilesIMS: Synergy Presentation)
Synergy’s Trulance launch is going very well at this point, as evident from its latest quarterly statements. The company is working to secure contracts with other pharmacy benefit managers (PBMs) and payers for 2018 coverage to ensure broad access to Trulance. This is undoubtedly a sales catalyst and will contribute to the bottom line in the coming quarters. As the company expands the sales revenue, the potential for raising additional capital will also be substantial, which I will discuss next.
Synergy has minimal or no debt at this point. The company has $82 million of cash and cash equivalents at the end of Q2, and based off its current cash burn ($63.6 million in Q1 and $57.3 million in Q2), that should last about a quarter and then a month or two. It is obvious from its current capital requirements that the company would have to tap into the secondary market again or raise debts for additional working capital. A secondary offering is highly unlikely at this point, based off the stock price, and it's safe to assume that the company would have finalized some sort of debt structure north of $125-150 million. This will give it a financial cushion of approximately $200 million, given that Trulance for IBS-C is expected to be approved towards the end of 2017. We’ll know more in the company's much-anticipated conference call on September 7th to discuss its financial strategy and business going forward.
These capital requirement concerns are already factored fully into the current stock price, and it's obvious that any sort of clarity into a future arrangement would take the stock price upwards. Analysts from several major funds are also favoring Synergy Pharmaceuticals. The 7 analysts offering 12-month price targets for the company have maintained a median target of $11.00, with a high estimate of $18.00 and a low estimate of $3.70. There has been substantial MF activity in this stock in the past couple of trading sessions as well. (Source: Nasdaq)
Conclusion
The company could potentially be a major player in the treatment of GI diseases and disorders. It is banking on Trulance, which claims to have fewer side effects over competitors Linzess and Amitiza. I’m not overly optimistic about Synergy at this point given its current situation, but partnering with a major player to market Trulance worldwide would undoubtedly be an uptick catalyst for the stock price.
As with any small-cap biopharma stock, volatility is a factor that could sway away value investors towards more stable names like Ironwood Pharmaceuticals (NASDAQ:IRWD) or Allergan (NYSE:AGN). Being a smaller firm than its peers, Synergy does lack the complete value chain activities required to cultivate the relationships with the healthcare providers needed to promote and sell its products. It is often for this reason that investors tend to expect a partnership with a larger player or a buyout early in the commercialization process.
I expect Synergy to be volatile in the near term, but a medium- to long-term play is going to be highly rewarding.
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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