Synergy Pharmaceuticals Inc fka SGYPQ

[Opti Mist]

The Short Covering Has Begun
May 13, 2018 3:43 AM ET|15 comments | About: Synergy Pharmaceuticals, Inc. (SGYP)
https://seekingalpha.com/article/4173384-synergy-pharmaceuticals-short-covering-begun

Jose Solorio

Summary
There are 62.43 shares shorted and we noticed yet another increase from the previous period. Expect a heavy attack to the downside followed by a significant recovery.

The company has telegraphed an oncoming resolution to the strategic review of the business and expects results to be announced on or before Q2 results.

A partnership, sell or merger of the company is coming. Q1 results confirm the theory that a going alone strategy isn't viable.

Company (as expected) didn't acknowledge the ongoing shareholder revolt that has already exceeded 10% of the share float.

I continue to recommend on voting against increasing the number of authorized shares.

For many shareholders, Q1 results might seem like the reason they were looking for to bail on their investment at Synergy Pharmaceuticals (SGYP) and shorts know that and are going to capitalize on it. I expect after the opening bell a huge of amount of sell orders to hit the bid. This will create a huge drop in price from the previous day and will force even more to people to liquidate their positions. Then the share price will start to recover over the next few days.
The company was very clear that in Q2 there will be a resolution to the ongoing strategic review which most likely means a partnership is in the works. This is not the time to sell shares but rather to hold, average down or even do opportunistic buys. There are many indications that a recent activist movement in the company shares asking them to partner, buy or merge before the annual shareholder meeting is bearing fruit.
Now, I want to emphasize that a failed investment rarely is the shorts fault. Shorts, just like longs, are constantly searching the market for big opportunities to profit and on Synergy Pharmaceuticals they have found their own paradise. It's management who should be blamed for creating this environment where every pop on the share price should be shorted rather than every dip should be bought environment.

Shorts: Facts vs Fiction
Blaming shorts for a drop in share price is an amateur game especially when short interest doesn't reflect that theory. In this case is different because almost 25% of the shares are shorted. Whoever shorted the shares in Synergy knows that the company is telegraphing a strategic move ahead of time and that it will most likely cause a change in trend direction. The time to maximize their profits is coming to an end so they have to decide whether to capitalize on a revenue miss and short more shares or to use the weakness to start covering their shares. I think the latter is more likely.
The damage is already done. Don't make decisions based on emotions
As I spoke with many investors over the last few days I realize there are many here who bought this stock at $4 or $5 a share and have been holding for over 3 years. There's no point in giving up now until the next Q2 results are announced.

I urge everybody to wait for Q2 results before making a decision to bail out on Synergy Pharmaceuticals. Troy Hamilton, the CEO of the company is still relatively new to the company and partnerships, mergers and co-promotion agreements are not something that happens overnight.

The drug is definitely not worthless and the science is very good. It's all about the cash burn and the strategy. And it seems that with the failure to gain significant ramp up in April, the company only has one option left: partner.

Covenants indicate the need for a partnership
The company needs $61 million in sales this year or it will be forced to repay back the loan immediately. At the current scripts rate, it will be impossible to achieve this goal even if sales doubled beginning in the third quarter.
To put this in perspective we will need beginning the first week of July for scripts to be running at 6,000 Rx's per week and growing in order to achieve the sales goal. Our current rate is 3,238 per week as of the report of the week ending on April 28th, 2018.
I expect sales to significantly accelerate in the following weeks to reach around 4,300 to 4,500 at the beginning of July but that still leaves the company short of reaching their sales goal.

No mention of a shareholder revolt
As I was expecting the company remained silent on the shareholder revolt. That group is already the largest blocking vote in the company and might grow even larger in the weeks to come.
That to me is actually a good sign. I interpret that as a sign negotiations are ongoing and that they can't show a weak front as a company.
The inclusion of the word M&A into their Q2 presentation slides reflects just how much pressure behind the scenes the group has already exerted on management.



As mentioned at the beginning of the open letter to the CEO, Troy Hamilton.
"We have a message for you: If you can’t deliver on a partnership before the annual meeting then hire a group of investment bankers and put the company on the market for sale. We are willing to be auctioned to the best bidder rather than continuing with the current failed marketing strategy."
Conclusion
There's huge and tremendous upside for the shares if Synergy is able to close a significant ex-USA partnership or USA partnership. I recommend investors to give management until Q2 results as asked as management asked before giving up on their investment. The best shareholders can do for now is to wait, join the shareholder activist movement and vote against an increase in the number of authorized shares of the company.


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: The opinions and facts presented here don't represent an offer or advise to buy, sell or trade securities. Consult an investment advisor before placing any trade. The risks involved with trading securities include but are not limited to total loss of capital invested.