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After A Stumble, Synergy Pharmaceuticals Is Poised To Rise

 
 Oct. 6, 2017 11:40 AM ET

John Engle
Value, special situations, Deep Value, Growth
 

Summary

Synergy has suffered due to slower than anticipated uptake of chronic idiopathic constipation drug, Trulance.

Going to market without a larger partner has exacerbated difficulties and raised costs, but progress is clearly being made.

Trulance represents a best-in-class product and will eventually secure significant market share.

While Synergy has seen some upward movement since itpresented at a recent conference, it is still significantly undervalued.

Where you stumble and fall, there you will find gold.

– Joseph Campbell

Investors in Synergy Pharmaceuticals (SGYP) started the year in good spirits, but quickly soured. From a high of $7.15 a share in early February, Synergy fell to a low of $2.56 in September – a 64% drop. Yet, after months down in the dumps, this past week has seen something of a recovery. Shares now trade around $3.40-3.50.

The recovery has been thanks to new clarity around the sales growth prospects for Synergy’s sole FDA-approved drug, Trulance, which treats chronic idiopathic constipation, or CIC. With Trulance’s rocky rollout a chief driver of share price slide, the drug’s star once again ascending should mean good things for Synergy.

This article addresses the current state of Trulance and Synergy’s financials to make the case that Synergy’s recent upswing is the start of a more general recovery.

Post-Approval Blues

Synergy is not the first drug company to get hit with the post-approval blues. For investors holding through an approval catalyst, the wave of relief and excitement from an FDA green light can sometimes carry stocks away. Add to that expectations surrounding peak sales and sometimes overly exuberant projections for market penetration, and you have a recipe for disappointment.

In the case of Synergy, the pain was probably compounded further by two factors: A hoped-for buyout never materialized, and the company opted to pursue commercialization on its own. Synergy presents an excellent example to companies such as Dynavax Technologies (DVAX), which is currently contemplating a similar go-it-alone strategy for its leading drug candidate. While being able to keep all the profits from a drug has its allure, launching a marketing and sales operation can prove an unexpected challenge.

At the time of approval, in January 2017, peak sales for Trulance were projected to be $350 million by 2021 and, while the constipation drug has been making inroads to the market, it hasn’t been gaining traction as swiftly as expected. I have lamented before about how so many investors seem to flip a switch in their minds as soon as a drug is approved: Before approval they are willing to think in the long-term with an eye toward peak sales; after approval, it’s suddenly all about quarterly revenues and sales growth. Fortunately for investors interested in the longer view, such irrational attitudes can create buying opportunities.

Trulance on the Rise

No one can deny that the rollout of Trulance has been less than perfect. The cost of marketing has been especially high. In Q2 2017, despite beating revenue estimates by $0.34 million, Synergy missed on earnings by $0.08 per share (more than 30% above estimates).

While that higher than expected cost was not particularly heartening, the money was put to good use expanding the sales pipeline, including securing a contract with CVS Caremark. The hard work of building out a sales force and securing contracts appears now to be bearing fruit.

On September 27, Synergy presented at the Cantor Fitzgerald Global Healthcare Conference and, unlike most conference attendees, actually delivered some significant new information. The company reported that Trulance’s monthly total prescription volume had been expanding by 116% month-over-month, on average, and that total prescriptions in August had been 8,774 (for a cumulative total of 28,608 since March).

Furthermore, Trulance has been muscling in on market share, reaching 13.5%. Trulance has made some progress chipping away at the market share of Linzess, the market leader produced by Ironwood Pharmaceuticals (IRWD) in partnership with Allergan (AGN). Linzess is down to 64.5% market share, down from 66.9% in March.

Linzess continues to be the big dog of CIC treatment, and investors have clearly been worried about Synergy’s ability to compete directly with with sales power of Allergan, but Trulance is building up a strong position as the best-in-class treatment. While their clinical benefits are similar, Trulance stands apart from its main competitor in that it does not need to be taken before the first meal of the day. More importantly, the rates of diarrhea, a common side-effect of CIC treatments, are radically lower in Trulance than Linzess. Add to that Trulance’s lack of other unpleasant gastrointenstinal side-effects – which Linzess can cause – and the case for Synergy’s product winning significant market share over time is very strong indeed.

Solid Financials Going Forward

At the end of Q2, there was a bit of uncertainty surrounding Synergy’s near-term financial health. The company reported a net loss of $73.9 million and a cash balance of $82 million.

The uncertainty was dispelled quite resoundingly in early September when Synergy announced it had secured $300 million in debt financing. While the market through a slight tantrum at the time, the decision was sound. It prevented dilution and brought in enough cash to continue operations for four quarters at the current burn rate.

Given expectations for Trulance’s sales growth over the next year, Synergy should have no need to go out in search of cash injections for the foreseeable future.

Investor’s-Eye View

Looking at Synergy’s financial position and Trulance’s growth prospects in the CIC market, a market capitalization of less than $775 million looks far too low – not much more than twice projected peak sales.

While the struggle to gain market share will be unglamorous, and may come in fits and starts, Trulance clearly has an upward trajectory. Investors looking for a de-risked and undervalued biotech play need look no further than Synergy.

Disclosure: I am/we are long SGYP, DVAX.

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.