Synergy Pharmaceuticals Inc fka SGYPQ

[Snackman]

Synergy Pharmaceuticals: Why Does The Company Keep Pushing Its CRG Loan Borrowing Dates?
Sep. 12, 2018 4:53 PM ET|

About: Synergy Pharmaceuticals, Inc. (SGYP)
Jose Solorio

Long/short equity, special situations, healthcare, options
(966 followers)
Summary

Synergy promised its investors that on or before August 9th it will provide a strategic update.

The company instead reported Q2 earnings without a conference call with analysts and stated that a strategic update will happen during Q3.

The company also amended its CRG loan agreement once again to provide 2 additional months of time to borrow another tranche of money.

The stock price has reacted negatively to the missed deadline to provide a strategic update and has given up any gains since their Q2 quarterly report.

Investors shouldn't look too much into price action as a guide about what recent events mean for the company as 60% of the company shares are owned by retail investors.

Investors in Synergy Pharmaceuticals (SGYP) have recently been extremely disappointed by the lack of communication and understanding about what's been happening inside the company. The company has gone in silent mode and that has a lot of investors fretting about what the future might look like. I urge investors to take a measured approach based on facts and not on emotions.

Once in a while, it's a good practice to turn off your screen monitors and stop watching the stock price for a few days to give you some time to analyze facts rather than emotions. The best investments I have had in my investing career were those where I was a contrarian to what the market was saying. Some of those involved buying Bausch Health Companies (BHC) when Bill Ackman capitulated on Valeant, buying calls on Mylan (MYL) last year when it was trading at $36 just to see it run to $46, buying (XOM) when oil was trading at $29 per barrel, etc. All of those examples provided me returns in excess of 200% using the leverage of calls.

So let's review the facts.
CRG has been extremely flexible with Synergy

Originally Synergy had secured a $300 million loan agreement from CRG. Under the original agreement Synergy needed to have $128 million in cash and cash equivalents on January 31, 2018, to access an additional $100 million in funding. The company in order to stay compliant had to hit at least $100 million in net Trulance sales for 2018.

Instead of taking the $100 million which would have resulted in an additional $9 million in interest payments for 2018, Synergy changed the terms of the agreement for a total commitment of a $200 million loan and a $61 million net Trulance sales target. The additional $100 million to be borrowed was to be drawn on 3 tranches: $25 million, $25 million and $50 million on or before June 30, 2018, September 30, 2018, and December 31, 2018.

The 180 turn shows part of the change in strategic direction from the replacement of Gary Jacob to Troy Hamilton as CEO of the company. Given that the IBS-C label had not yet been achieved in time for the 2018 formulary updates - the company didn't achieve preferred formulary status in insurance formularies. Therefore the company felt that the return on investment this year would be less than ideal and decided to conserve cash.

In fact, Synergy has avoided borrowing money and instead has focused on making its operations a lot leaner.

CRG has proved to be extremely flexible in working around Synergy's needs by amending the first $25 draw date to August 29 in exchange for a $500,000 penalty if/when the money was borrowed. The other draw dates were to remain the same: $25 million on September 30, 2018, and $50 million on December 31, 2018.

When August 29th came there was yet another modification. This time all 3 tranches were moved far out. According to the SEC filing:
The first sub-tranche of $25.0 million may occur after June 30, 2018 through and including October 31, 2018 provided the Company pays to the Administrative Agent a fee of $2.5 million at the time of borrowing and the second and third sub-tranches of $25.0 million and $50.0 million, respectively, may be made no later than December 31, 2018 and February 28, 2019, respectively.

Many here will argue that CRG is not being friendly by charging a $2.5 million penalty fee by moving the deadlines but that's erroneous thinking. See, CRG is on business to make money. By reducing the loan commitment from $300 to $200 million CRG had to go into the market and find another party interested on borrowing that extra $100 million that they had set aside for Synergy. That creates additional work and expenses for CRG.
On top of that, CRG has needed to set aside money in case Synergy comes back and asks for more money. For example, right now and at any point between now and October 31, 2018, Synergy can ask CRG for a $25 million tranche and CRG needs to have those funds readily available. That's money CRG can't lend out to anybody and is costing them money on lost interest. Not only that but if CRG is borrowing money from somebody in order to make money on the spread of lending it out to Synergy at a higher rate then Synergy's pushback of the draw dates is costing CRG money for the interest they have to pay to keep those funds readily available.
CRG Officer to be present at annual meetings

Many here are uncomfortable that a representative from CRG will be present at the board of directors meetings as stated in the SEC filing. I wouldn't view this development as a negative. First of all, as I have already mentioned CRG is losing interest income on "parked" money that they have until Synergy decides whether or not they will borrow more money. Though they have shown extreme willingness to work with Synergy my guess is that they want to see that true progress is being made at the board to close on whatever initiatives they've been using to postpone the draw dates.
Keep in mind that CRG has offices in New York where Synergy headquarters are located so CRG is not going out of there way or traveling to make it to the meetings. They are just sending one of their local representatives to assist.

Also, there's a 40% prepayment penalty on the CRG loan should a change in control of the company were to happen. In case a merger is on the works the board might be trying to negotiate a smaller penalty with CRG and in order to expedite things they will negotiate this on a face to face meeting with the Board.
What happens if CRG doesn't meet the net sales requirement?

At current sales growth trajectory, it's likely that Synergy will fall short of the $61 million in net sales by about $6 million. In such an event Synergy would have 90 days to cure the default by depositing the shortfall in revenue by either borrowing more money from another source or by issuing equity equivalent to the shortfall.
There's no forced bankruptcy scenario here where somehow Synergy will end up insolvent and without access to the loan. The amount of capital that would need to be raised would also be minimal in comparison to previous occasions.
A partnership or merger is on the works

The most important thing to remember is that with the win of the Express Scripts preferred formulary Synergy is on track to break even in Q4 of 2019 or Q1 of 2020.

If the company was interested in borrowing more money they would have already worked with CRG to reduce the sales target for this year or they would have already borrowed the $25 million on June and been more aggressive on sending samples and trying to gain more scripts.
Instead, the company seems to only be using the loan as an insurance policy in case talks collapse. The 2 more likely scenarios are a partnership or a merger because no money was borrowed. Some type of upfront money deal is likely on the works - otherwise, Synergy wouldn't keep pushing the deadlines to borrow money and most importantly CRG wouldn't keep working with them to modify the deadlines while costing them money.

As a final point on this subject don't forget CRG stands to win a significant one-time payment in case of a change in control or a merger.
Summary

At the annual meeting, Synergy CEO Troy Hamilton made it very clear that by originally going alone they made the best decision. That had to do with some confidential information that couldn't be disclosed in regards to what partners/offers were on the table. But they made it clear that now that they had achieved some traction on Trx's and gained the approval of a 2nd FDA indication what was available for them to strategically review was a lot more attractive.

We still don't know what the final outcomes of the strategic review will be but what we do know is that any closed deals could cause a surge of 100% to 200%. With an almost 23% of our shares shorted and low institutional exposure any good news can cause a significant short squeeze as shorts cover and institutional investors buy into the stock.

Though investors are right to be disappointed on the delay of the strategic review - they should also understand that what any real long-term investors want isn't just a deal but a really good deal that will ensure the success of the company. The company has now issued a new deadline to provide an update during Q3 of this year and I think this time they will have no choice except to deliver something as I don't think CRG for the mentions provided above would amend the borrowing deadlines again. That gives the company just 18 days to provide such an update, a drop in a bucket compared to how long many long-term holders have owned this stock.

Disclaimer: The statements made in regards to the future of the company are my own personal opinion and should be used only at the beginning of a long due-diligence process. The risk of investing in securities includes but is not limited to total loss of capital invested. Consult a registered financial advisor regarding any questions in regards to investing in securities and before placing any trades on your own.

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.