Synergy Pharmaceuticals: Best Drug + Terrible Management = Terrible Investment
Apr. 23, 2018 2:30 PM ET
About: Synergy Pharmaceuticals, Inc. (SGYP), Includes: AGN, IRWD
Jose Solorio
Summary
Almost 3 months into approval of a second indication, the prescription trends are flat since December before IBS-C approval.
The measly gains in Rx don't make up for the significant cash burn.
New dilution fears have risen since a new clause to approve an additional 100 million shares were added to the annual meeting proxy.
Trust in management is non-existent as share price is trading at 52-week lows. Management is disconnected from shareholder interests as the current vote to increase compensation indicates.
The failed launch strategy was made worst by naming Troy Hamilton, the mastermind behind the launch strategy of Trulance, CEO of the company.
When it comes to Synergy Pharmaceuticals' (SGYP) management team, I can only think of one word to describe it: incompetent. But before we dig into this article, I want readers to understand that this isn't the time to sell your shares yet, but rather to raise your voice against management through the voting power of your shares. For new potential buyers, this company could potentially bring exponential gains on a quick period of time if management changes direction in the next couple of weeks.
It was just 15 months ago, when Synergy received its much-anticipated approval for its CIC drug. Shares were trading at over $6 per share and management was able to sell an additional 20.3 million shares to raise $120 million.
ChartSGYP data by YCharts
Failed Launch Strategy and doubling down on a bad strategy
Management had the unrealistic assumption that sales would take off within months and that insurance companies were going to pile up to cover the treatment because it was the best in class. The failed launch strategy was made worse by management's deception about their approval of "non-dilutive financing." In an outrageous move, management ended up diluting shareholders by 20.3 million more shares on the market at a price of $2.58 and warrants for another 20.3 million for $2.86 respectively.
What's even worse is that they put Troy Hamilton, the man responsible for the failed launch of Trulance, at the helm of the company all while leaving Gary S. Jacob as chairman of the company. There was no true change in leadership at the company and Gary S. Jacob continues to have too much power on a company that has forgotten that it has a fiduciary duty to its shareholders.
In a recent presentation at the Oppenheimer 28th healthcare conference, CEO Troy Hamilton stated that sales were going "according to the company's projections" which in my opinion is completely absurd. The company can't claim that sales are going according to trajectory all while diluting at all-time lows the shares of the company. Is the company saying that after raising $120 million the plan was all along to dilute shareholders just 6 months after their first offering? Why did they wait so long to do the secondary?
Unclear strategy and unrealistic expectations
The problem with Synergy is that they aren't transparent about what their true goal is. Is their goal to continue to develop analogs and become a R&D powerhouse in GI? Is their goal to move to cancer treatment? Is their goal to sell the company? Is the goal to partner outside the US and go alone in the US? Clear goals always equal clear results.
It also seems clear by the lack of partnerships, that management is asking unrealistic prices for rights to its drug.
Time decay on Intellectual Property
It seems that the management team has an unclear strategy to begin with all while the patents on their products are running out of value. It took management 7 years already, since the patents were first registered, to bring Trulance to market and is costing them more in lost revenue to continue with their going alone strategy.
Dolcatanide is almost halfway through its patent life cycle and it hasn't entered final trials to bring it to market. On a probable best-case scenario, (if a partnership were to occur right now), it would hit the market until late 2020.
If Trulance were to have 1 billion in peak sales 7 years from now with a 70% gross profit margin and 50% net margin after administrative expenses, every year that goes by without gaining traction 500 million in profits are simply wasted by time decay. To put it in other words, failing to gain significant traction at the beginning will result in massive lost profits in the future.
Lost bargaining power
Synergy now finds itself on a death spiral where lower share price and high cash burn makes its leverage gone.
The sales pitch of "we have the BIC (best in class) product is gone." The fact that sales have not accelerated make future partners weary of whether there's something wrong with the product or not.
Insurance companies are also playing hardball against a smaller player. Given that Synergy only has one product and no bargaining, all that it can do is beg for the best possible deal. Unlike other diseases, IBS-C is something that people rarely die from making coverage more difficult. From recent conversations with doctors, I was told some insurance companies require a 6-month waiting period of taking fiber and OTC laxatives before getting approved.
Unlike other companies with bigger portfolios of drugs where a sales force makes more sense, carrying a 200 sales force for one single drug is a total waste of money since doctors have their hands tied by the insurance companies. Written prescriptions are returned many times due to lack of coverage.
The politics of Pharma
As we constantly see in politics, I am sure there are thousands of Americans that would do a better job in Washington but they are just not elected. Unfortunately, in life it's not always about who is the best but who is already at the top.
In the Pharma world, it works the same way. Who do you know, how much money you have to spend, what rebates are you going to pay the insurance companies back are many times more decisive than what product is the best.
Allergan (AGN) is choking Synergy out of the market with a 1,500 sales force. Allergan already priced Trulance out of the Express Scripts preferred formulary and it has flooded the media with their ads. This will be a war to the death and the only way to win is to match Allergan's and Ironwood's (IRWD) sales force with an equal sales force.
Synergy will continue losing to Allergan with current strategy
The big question for shareholders is this: Will management finally understand that it doesn't matter what the potential peak sales of the drug are or how safe it is, as long as they continue to be alone in this war, they will always lose?
Will they understand the non-financial benefits of partnering with a larger Pharma? Access to a large sales force, reputation, bargaining power, cheaper financing, connections, credibility, pharma-doctor relationships, etc. It's not just about the initial fee but about the intangibles associated with it.
Even if they receive $300 million for 50% of the rights, it's better than the current path. 50% of $1 billion in sales is better than 50% of $200 million in sales.
Otherwise, in exchange for a preferred status formulary, Allergan can continue to outbid Synergy for years and years in the insurance market. That along with the great relationship that Allergan's 1,500 sales force has with doctors along with robust portfolio of GI drugs in the market and on the pipeline that makes for a pharma-doctor relationship that Synergy just won't be able to challenge alone.
In comparison, at this point in time, Allergan and Ironwood's Linzess had already achieved 23,000 Rxs per week. Talk about the mediocre results that management has had with a supposedly better and safer drug.
Amended terms to loan facility reflect uncertain future
The following excerpt is from Gary S. Jacob during the company's fourth quarter conference call:
"First, we reduced the total amount of commitment from $300 million to $200 million as the decline in the company’s market capitalization resulted in uncertainty in our ability to meet the requirements to drawdown on the original third and fourth tranches. We decided to forego access to those additional two tranches of up to $100 million in exchange for more flexible terms around the original second tranche.
We’ve amended that second tranche borrowing structure which originally required us to drawdown the entire $100 million in one tranche by February 28, 2018. The amendment allows for us to access the $100 million in three sub-tranches with no minimal cash balance requirement as follows; $25 million by June 30, 2018; $25 million by September 30, 2018 and $50 million by December 31, 2018."
As part of the initial CRG covenants, Synergy was required to have an $800 million market cap to access the last $100 million tranche of the loan facility. As you can see, terms were renegotiated so that no market caps or cash balances are required to access an additional $100 million in funding.
Use your shares to vote against new management propositions
Among the propositions are an increase of 100 million shares authorized for issuance as a "poison pill," an increase of $10 million for stock options as well as an increase in compensation for the management team. More information about the proxy fillings can be found here.
At this point in time, the best thing that could happen to investors is precisely the opposite of what management is suggesting. A change in control of the company could open up the possibility for an auction of the company, a transparent Board of Directors could truly determine the best interests of the company and management shouldn't be rewarded with increased options for a 75% drop in share price in a year and a failed Trulance launch.
Use caution when investing and final thoughts
At this point in time, I would advise against selling your shares. As a matter of fact, I recently poured 200k in January 2019 and 2020 $1 strike calls for an average of $1.10 apiece. I own more than half the open interest on both. And even though the spreads aren't great they are ITM calls, which means I can exercise them at any point and sell the shares in the open market.
Given the high short interest, a change in course from management can quickly make the share price double. At this share price, the market is expecting one more dilutive offer and no partnerships. If one of those factors change, the share price should double.
But make investments at your own risk. Management seems greedy, selfish and zero concerned about being friendly to stockholders in the company. They reward their total launch failure by expanding their pay and options instead of delivering results. They cower behind a poison pill to prevent a change in control instead of putting extra effort to gain the goodwill of their shareholders, which if they were happy they would not support a change in control.
If they continue down the road they are, it's totally possible that the company's best-case scenario would be a buyout close to the actual price where the shares were trading this January. For those who bought higher than $5.50 a share, the prospects of a full recovery are almost nil for the time being unless a full buyout does happen.
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.
Additional disclosure: Consult your investment advisor before investing. Risks to investments include but are not limited to total loss of capital.
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