Synergy Pharma: One Perplexing Biotech With Upside
Apr. 2, 2018 4:54 PM ET|
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About: Synergy Pharmaceuticals, Inc. (SGYP), Includes: CPHR
Stone Fox Capital
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Stone Fox Capital
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Summary
Synergy Pharma management caused the current stock weakness by not accurately forecasting reduced cash burn levels.
Trulance continues gaining market share and generating record prescription levels.
The small biotech has a better financing position due to willingness for partnerships and licensing deals.
All of these factors correlate to a stock that shouldn't trade at the lows.
Synergy Pharma (SGYP) reported Q4 numbers that deviated from guidance in a positive manner. The investment thesis in the stock is further enhanced that better transparency from management would've prevented the crash in the stock to new lows below $2 in the first place.
Positive Cash Flow Steps
The biggest issue with Synergy Pharma over the last several months was the perplexing statement by the CFO that Q4 cash flows would match the roughly $60 million burn rate for the 1H of last year. As revenues were growing and R&D spending was set to drop, the numbers never added up as the biotech would only burn another $60 million during the December quarter from a massive inventory build.
Source: Synergy Pharma presentation
Pushing cash burn down eliminated the fears of the small biotech never reaching financial goals. For the quarter, Synergy Pharma only burned an incredibly low $32.6 million from operations. The number was nearly half the original guidance that scared the street into thinking costs were out of control while Trulance faced a slow ramp.
The amazing part is that the small biotech even saw no material change to key assets like inventories and prepaid expenses. These categories actually roughly offset each other with inventories up $4.2 million and prepaid expenses down $4.1 million.
The other factor was a jump in the gross profit from higher revenues. Gross profits doubled to $5.6 million during Q4. As mentioned in the previous article, revenues were expected to jump in the quarter to near analyst estimates of $7.2 million. The company though hit $9.4 million due to $1.9 million recognized from deferred revenues.
The key was controlling operating expenses. The large cash burn in Q3 hid the improvements in this category. Further reductions in R&D helped reduce quarterly operating expenses to the lowest levels since ramping up the sales force for Trulance.
Source: Synergy Pharma Q4'17 presentation
Despite some concerns about prescription volumes, the total 30-day subscription units were growing. The trouble is meeting Q1 and Q2 estimates based on stalling numbers in the first two months of the year.
Chart SGYP Revenue Estimates for Current Quarter data by YCharts
Revenues are targeted to jump to $12.2 million in Q1, yet weekly prescription numbers only reached record levels in March. Total prescriptions only hit roughly 33,000 for the quarter, up from about 31,000 in the previous quarter. The shift toward extended units probably boosted the amount of 30-day units easily above the 42,486 in Q4. The number though isn't enough to grow revenues over 50% to $12.2 million from the $7.5 million in Q4 excluding the deferred revenue.
Source: Synergy Pharma Oppenheimer presentation
The Q2 set up is much more bullish as the weekly prescriptions top 3,000 and 30-day extended units reaching 4,000 by the end March. A simple jump to a 4,000 weekly prescription average brings prescriptions up to 52,000 in the quarter for nearly 60% growth.
Synergy Pharma is set for strong revenue growth while costs remain in check. Whether the biotech hits analyst targets isn't exactly key to the stock rallying from below $2.
Better Financing Terms
Synergy Pharma made a couple of moves during the quarter that were positive of the future financing situation of the company. The biggest move was the agreement to license exclusive rights to Trulance in Canada to Cipher Pharma (CPHR) for a $5 million upfront payment and potential future milestone payment and royalties. The key is the willingness of the new CEO to pursue partnerships and licensing deals while the additional cash never hurts.
As discussed above, meeting the cash flow targets helped reduce the need for a massive current infusion of cash along with the expensive interest costs and prepayment penalties. The company was able to defer taking on an additional $100 million in debt by the end of February while still leaving the option available over the next three quarters.
Synergy Pharma ended 2017 with a cash balance of $137 million. Adding in the $5 million payment from Cipher, the small biotech has the amount needed to cover the operating losses run rate of Q4 for over a year. Revenue gains will help extend the current cash beyond a year.
As well, the market is still waiting for the company to forge a partnership to provide funds to further support the ongoing ramp of Trulance in the U.S. and reduce any need of more funds to build out that business opportunity.
Takeaway
The key investor takeaway is that the market has missed that Synergy Pharma has shifted the stock to one of reduced cash burn and growing revenues while the company is now pursuing more shareholder friendly partnerships. The founding CEO didn't exactly handle the transition from the R&D phase to the launch of Trulance very well, but the small biotech is different now and in a much better financial position.
The stock is still trading below $2, but this only presents further opportunities to build a position.
Disclosure: I am/we are long SGYP, 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: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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