Synergy Pharmaceuticals Inc fka SGYPQ

[Opti Mist]

more negative opinion https://seekingalpha.com/article/4135600-synergy-pharmaceuticals-continued-challenges-difficult-2017?auth_param=38sjt:1d4vch0:ac99510e31315c68a2feac174d2ad7b4&uprof=45

Synergy Pharmaceuticals - Continued Challenges After Difficult 2017
Jan. 5, 2018 12:12 PM ET|1 comment| About: Synergy Pharmaceuticals, Inc. (SGYP)

Summary
Synergy Pharmaceuticals has seen a disastrous 2017, despite approval for TRULANCE.
A slow pick up in sales and continued cash burn, along with the associated dilution, makes the situation very painful for investors.
I still do not see imminent appeal at this valuation given the very modest revenue base and steep losses, unless growth can meaningfully pick up in 2018.
This idea was discussed in more depth with members of my private investing community, Value In Corporate Events.
Synergy Pharmaceuticals (SGYP) continues to struggle after what should have been a good 2017, given that TRULANCE had been approved at the start of the year. The pick up in sales is very modest in relation to the cost base, which means that losses continue to be quite severe, resulting in continued dilution for investors. This means that Synergy's shares still represent a sizable valuation despite the optically low share price.
Despite the continued pressure on the shares, I see no immediate improvement in the currently challenging situation, unless TRULANCE gets approval for its second indication later this month and sales pick up nicely in Q4. I continue to watch Synergy from the sidelines.
Troubles Since the IPO
Synergy Pharma went public in December of 2011 and its shares traded around the $4 mark at the time. In the five years since then shares have been quite volatile, having traded in a $2-$10 range ever since. They are currently trading toward the low end of the range.
The company had no working product until early 2017. A year ago, Synergy received FDA approval for TRULANCE, a medication used to treat adults who have chronic idiopathic constipation (CIC). This medication replicates the function of uroguanylin, a rare gastrointestinal peptide that stimulates fluid secretion to result in stool consistency. This condition is very prevalent, as an estimated 33 million U.S. patients are impacted by CIC.
News of the approval in January of last year sent shares to levels around $6 per share. The company took the opportunity to sell more than 20 million shares at $6.15 per share, adding to a tradition of significant dilution since the IPO to fund losses in the absence of product revenues. In May, Q1 results showed that initial sales were very soft at just $98,000. This was as the 250-person workforce was only put to work in March and as free samples were provided first.

In August, Q2 results revealed that TRULANCE sales had grown to $2.3 million, as the FDA review for TRULANCE for patients suffering from irritable bowel syndrome with constipation was set for January 2018. The problem is that these sales did not even cover the cost of goods sold, while R&D expenses came in at $22 million a quarter and selling, general and administrative expenses totaled another $50 million. Operating losses of $73 million in Q2 were very large in relation to revenues and in relation to a cash position of just $82 million.
Shares had fallen to $3 per share in August on the back of the slow ramp up in sales and big losses. To avoid severe dilution at these lower levels, Synergy arranged $300 million in financing in September (although released in tranches) carrying a steep interest rate. In November, the Q3 results showed that revenues came in at $5.0 million, while the company cut operating expenses and R&D efforts, thereby limiting operating losses to $48 million. As the company borrowed $96 million as part of its $300 million financing package of September, cash balances grew to $118 million as the share count was flat. A few days later, the company issued nearly 22 million shares at just $2.58 per share, surprising investors a great deal. This dilution is quite severe, increasing the share count by nearly 10%, while the money raised it enough to cover losses for a period of just 3-4 months.
The revenue number for Q3 was based on 25,124 monthly prescriptions, as the September number came in at 9,164. This suggests that if this number remains constant in Q4, amid constant prices as well, revenues are set to grow only to $5.5 million if we assume the September run rate into Q4. Factoring in modest sequential revenue growth, that number might come in a little bit higher, but it would still mark a very modest increase in sequential revenues. Notably, the sequential prescription growth between August and September has been very weak. In fact, the absolute growth was the lowest since the launch in March.

Very Poor "Shareholder Value" Management
The problem with Synergy is that it has a very high cash burn despite a working and approved product. Cumulative losses are quickly approaching a billion. Including the latest offering in November, the company has about 247 million shares outstanding, which at $2.50 are valued at roughly $620 million. Following the adoption of some debt, Synergy operates with a flattish net cash position as of Q3. Losses in Q4 are probably financed with the November equity issuance, which means that the $620 million number is equivalent to the enterprise valuation.
The problem is that the company has been issuing a lot of stock at relatively low valuations, and that the company is actually issuing shares recently at low levels despite substantial cash holdings. This situation looks very odd, but is the result of a covenant that requires the company to maintain substantial minimum cash levels in order to quality for subsequent borrowings under the $300 million loan facility being offered in September.
With revenues running at just $5 million and losses being very steep, it is clear that the company needs success in the ramp up in TRULANCE for the current approved indication, while approval for treatment of IBS-C later this month will be crucial as well to grow sales even quicker. The problem is that the ramp up in sales is likely to be very small as revenues are still a fraction of operating expenses (even if they come down), while the revenue ramp up is a bit soft as well and does not appear to have real momentum based on Q3 results.
Not a Buyer Yet
Despite the optically low share price, Synergy actually represents a >$600 million valuation that increases every day because of the substantial losses reported. Worse, revenues run at just $20 million a year, while operating losses run at $200 million, as this situation is not likely to change dramatically in the near term. This makes continued cash burn the most likely route for 2018 as break-even results are still far away.

As management in the past has not been very savvy or smart in preserving shareholder value, it's no surprise to see shares trade near their lows despite an approved product. The good news is that investors have recently seen a change at the top, but unfortunately that has been an insider. That can be good, but it means that investors are likely rightfully skeptical about the financing side of the business. FDA approval for the second indication on Jan. 24 could be key for the confidence of investors and lenders, as I still do not see any reasons to pick up shares at these (optically) low levels.
While a sale by a large and resourceful competitor with trust in the product can never be ruled out, management has a poor negotiation position as the downside remains substantial. This makes the risk/reward not appealing enough yet, even if the chances of a takeout might be realistically seen at 20%-50%.
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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.