Synergy Pharma: Will There Be A Buyout In 2018?
Jan. 3, 2018 7:41 AM ET|
38 comments|
About: Synergy Pharmaceuticals, Inc. (SGYP)
Avisol Capital Partners
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The Total Pharma Tracker
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Summary
Synergy has a good product and poor cash situation.
This makes it an ideal buyout cadidate.
We discuss a realistic buyout price, and some potential buyers.
This idea was discussed in more depth with members of my private investing community, The Total Pharma Tracker.
Synergy Pharma (SGYP) has a good product with high future potential but a current cash flow problem. As we were doing our valuation of the company, we noticed these two things quite clearly - that its product has a long shelf life of another 10+ years, its uptake is good and looks very promising, its competition is not at par as far as Trulance product profile is concerned. Contrastingly, we noticed that since Synergy management has tried to market the drug without a partner, it is facing terrible cash crunch coupled with significant burn rate.
SGYP Logo These two elements together - good product and poor finance - make for a strong buyout scenario. The trick here will be to survive long enough; every extra quarter of survival increases the company’s value, and that’s additional millions of dollars the company can command in a buyout scenario.
So, who is going to buy Synergy, and for how much?
First, the how much. SGYP recently saw some strong movement and is currently trading at around $2.4 and has a market cap of about $600mn. By our admittedly conservative valuation model, the stock should be worth $7.5 in the midterm. In the next 14 years, while Trulance’s patent still lasts, the drug, per our model, will make around $11bn in sales. Per our valuation, the drug will have an EBT (Earnings Before Tax) of $7bn. To be very, very conservative, we will adjust for tax at a very high rate, and adjust for all sorts of eventualities. We still don’t get anywhere below $4bn for the value of the drug while its patent lasts.
SGYP Trulance blister pack
Image source: company website
Lets say nobody will pay a 7x premium on the company’s current market cap, and we drastically reduce the current value to $2bn, right? This is the price I would be willing to accept right now, if I was selling. Even then, we have a 3x premium to current prices. So, per my very rough estimate (see the valuation for the numbers), this company could sell for at least $2bn - possibly more - if it is bought out within the next couple quarters. As I said, though, every quarter that goes by and shows stellar uptake for Trulance increases the value of the company. By how much? I don’t know, but a good few hundred million dollars is not a bad working estimate.
So, who is going to buy Synergy for $2-$3bn in 2018?
Allergan (AGN) immediately comes to mind. This is a $54bn behemoth that is sitting on a cash pile of above $10bn - and it owns the only serious competing drug whose dominance is being challenged by Trulance. To pick up Trulance would be good business sense. Or would it? Won’t the company be competing with itself if it bought out Trulance?
The other potential buyer is the owner of Amitiza. Now, Amitiza is owned by Sucampo (SCMP), licensed to Takeda (OTCPK:TKPYY), but Sucampo itself is being acquired by Mallinckrodt (MNK) for about $1.2bn. This is about 50% premium to what SCMP was trading at last month - and Sucampo is not a huge money maker either. So, any of these players - Takeda especially, and even Mallickrodt if it has cash remaining - can find Trulance interesting.
There is also quite a lot of big pharma interest in conspitation related diseases. For example, at least two had drugs that were withdrawn from the market due to safety issues - Novartis’ (NVS) Zelnorm (tegaserod/5-HT4 agonist) in 2007 and Johnson & Johnson’s (JNJ) Propulsid (cisapride/5-HT4 agonist) in 2000 – withdrawn due to adverse cardiovascular effects. Novartis does not retain much interest in the disease area. Neither does JNJ, apparently; although it has some interest in related diseases and earlier had developed Prucalopride, another related drug. Shire, which acquired rights to this drug, has a decent focus in related disease areas - and has $7bn in cash and has a problem requiring some self-rediscovery. Shire could be a good contender for Trulance as well. As you can see from here, those are more or less the major players (recent and recent past) in the disease area. Ferring, which looks interesting, is privately held. Movetis is/was a subsidiary of JNJ.
The bottom line of the discussion is that, there are not a lot of players in the broad field of constipation (chronic, idiopathic, others). However, even without a buyout, a proper partnership can also work wonders for SGYP’s cash problem.
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.
