Synergy Pharmaceuticals Inc fka SGYPQ

[Snackman]

Earlier this week, Synergy Pharmaceuticals (SGYP) addressed the biggest overhang on its stock; a funding overhang. We discuss the impacts of this transaction in today's Spotlight feature.

This small biopharma secured a debt deal with CRG LP to provide some $300 million in debt financing on Tuesday. The first tranche of $100 million was funded on closing, the second $100 million installment will be provided on or before the end of February 2018 and two $50 million tranches on or before the end of March 2019.

The loans matured at the end of the first half of 2025. Payments under the loan will be interest only and paid quarterly for the initial five-year period. This will followed by a dozen quarterly installments of principal and interest during the final three years of the term. This could convert to an eight-year interest only period if certain milestones are achieved.

The interest on the debt was 9.5%. This compares favorably to other similar deals I have seen on some of the biotech companies I have held in similar situations. Relypsa (RLYP) obtain half the financing and at 11.5% before it was bought out several months later. Merrimack (MACK) paid 12% last year.

The debt deal does a couple of important things for Synergy Pharmaceuticals. It obviously removes the funding overhang that has cut the stock more than in half since Trulance was approved in January. It gets the company to 2019 where its CFO has stated the firm will be cash flow positive. Most importantly, it keeps the company in play as an acquisition target. Synergy did not have to issue convertible debt or sell any global rights to Trulance in this deal. Therefore, in no way did it diminish its appeal as an acquisition or hinder its ability to negotiate a purchase on favorable terms.

I don't see a buyout as a likely possibility over the next six months. I believe the company would like to get into early 2018 before considering any serious offers. Trulance should be approved for IBS-C expanding the potential market for the compound by roughly a third. New insurance coverage contracts should also kick in on January first. Both should help Trulance sales nicely enhancing Synergy's negotiating position.

Oppenheimer and Canaccord Genuity both reiterated Buy ratings on the stock after the announcement of the debt deal with the latter also posting a $13 price target on the stock. Canaccord's analyst adding this take on the financing deal:

Based on cash flow analysis, we expect the debt financing to sustain the company through 2019, which is highly encouraging. We believe the non-dilutive method of financing is a prudent measure to sustain company financial health without causing pressure on the share price

My own view is the company is bought out for $8.00 to $11.00 a share over the next 18 months, providing serious upside potential from current trading levels.

I have a full position in Synergy already but am adding exposure using a Buy-Write strategy to mitigate some risk and pick up some premium income as well. Buying the stock for ~$3.00 a share and looking to get 50 cents for the April $4 calls might be a nice risk/reward play at current levels, and one I plan to pursue. I offer it up for others that might be in a similar situation on Synergy.

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