By Jake King
On April 9, Synergy Pharmaceuticals (NASDAQ:SGYP) reached a new 52-week intra-day high of $7.44, driven by a Cantor Fitzgerald analyst report highlighting more detailed trial results (disclosed in a prior Form 8-K) for Synergy's lead drug candidate plecanatide. A compelling dose-response curve and strong safety, efficacy, and tolerability data gave investors significantly more confidence in the approve-ability of this potential class-leading treatment for chronic idiopathic constipation (CIC) and irritable bowel syndrome associated with constipation (IBS-C); Cantor Fitzgerald raised its price target on SGYP from $12 to $15 as a result. However, coincident with the run-up, investment bankers raised new equity capital for Synergy, which immediately knocked the stock off of its highs. Shares of SGYP continued to decline through this past Tuesday when Ironwood Labs (NASDAQ:IRWD), which markets a head-to-head competitor to plecanatide, reported lower-than-expected 1Q13 results, sending SGYP shares down a full 19% below the price at which the new equity capital was raised.
But now, with even stronger clinical results disclosed for its lead compound and a solid balance sheet (an estimated $117M in cash assuming full exercise of over-allotment), SGYP still trades 36% below its highs in early April. The stock is just starting to bounce, and we believe this is a compelling opportunity to own SGYP, particularly as the investment banks that did the equity deal work to support the stock. New investors can currently buy the stock in the open market at a 13% discount to the price that institutional investors paid for SGYP on the recent equity raise, and considering how Wall Street works, analysts from the two major investment banks that ran the financing should be rolling out coverage of Synergy in the coming weeks. On the fundamental side, a late-breaker presentation at the largest gastroenterology meeting of the year, Digestive Disease Week (DDW, which begins May 21 in Orlando, FL), will feature the full Phase II data set for plecanatide. This is the forum in which treating physicians and opinion leaders from around the world will become familiar with Synergy's differentiated drug.
With over $115 million in cash, and visibility on plecanatide increasing within the medical community, we believe SGYP will be on the radar screens of major drug companies and will top the list of takeover targets by those on Wall Street. With an enterprise value of only $280M vs. Ironwood Pharmaceuticals' $1.75B valuation, SGYP looks just plain cheap. Note that SGYP has full rights to plecanatide, while IRWD only gets ~45% of the economics on its similar compound, Linzess (linaclotide), globally. Additionally, the new plecanatide data support that this drug may be superior to Linzess from a tolerability standpoint once approved. We expect shares of SGYP to continue to recover as investors revisit the thesis for value creation in the coming months.
Pre-DDW, data on Plecanatide are compelling. When it released "top-line" results for plecanatide in January, Synergy didn't show all of the data corresponding to the drug's tested dose range in an effort to preserve some of the clinical results for the DDW presentation (a typical industry strategy). The company released its late-breaker abstract for the upcoming presentation at DDW earlier this month, which included more details on dosage, primary and secondary endpoints, and adverse events. Analysts and investors were positively surprised by the results in the abstract, particularly given the highly consistent dose-response (higher dose, greater efficacy), apparent "best-in-class" tolerability, and benign safety profile for the compound.
Patients in the Phase IIb/III trial (NCT01429987) of plecanatide were randomized to receive one of 3 doses of plecanatide (0.3mg, 1mg, or 3 mg) or placebo once daily for 12 weeks. The primary endpoint of the trial was the number of Complete Spontaneous Bowel Movements (CSBMs) per week, and secondary endpoints included time to CSBM, stool consistency, straining, constipation severity and quality of life.
At trial completion, 21.5% of patients on 3 mg of plecanatide, compared to 11.5% of patients on placebo (p=0.003), demonstrated a weekly response (>3 CSBMs/week and an increase of >1 CSBM from baseline) in at least 9 out of 12 weeks. More importantly, overall responders (including response in 3 of the last 4 weeks of treatment to demonstrate durability) was 19% for plecanatide 3mg vs. 10.7% for placebo (p=0.009). Weekly responder rates for 3mg plecanatide were significantly superior to placebo from Week 1 through 12. Weekly CSBM frequency of >1 from baseline over 12 weeks was 52.3 % for plecanatide 3mg versus 36.8% for placebo (p<0.001). The median time to first SBM was 9.6 hours for plecanatide at 3mg, versus 25.1 hours for placebo (p<0.001). Secondary endpoints showing statistically significant benefit of plecanatide 3mg when compared to placebo included: frequency of CSBMs and SBMs; stool consistency, straining, constipation severity, treatment satisfaction, and QOL (quality of life) scores. Most importantly for the commercial prospects of plecanatide, the drug demonstrated that diarrhea as a side effect is not a major issue for plecanatide. The use of Ironwood's competing drug, Linzess (linaclotide), is known for its diarrhea side effect to the point that patients may not be able to tolerate the treatment (20% rate of diarrhea, 5% discontinuation in the drug's label). With just a 9.7% rate of diarrhea and only 3% drug discontinuation based on the Phase IIb/III trial, plecanatide has potential to become the go-to drug in this treatment segment, once approved.
Considering that the Phase IIb/III trial was run with 951 patients (946 treated), a trial of comparable size to what we expect for another Phase III pivotal study, the results provide a strong indication that plecanatide will have consistently similar results in future studies, and that the drug has a high probability for approval and commercial success.
Several key drivers to come. Plecanatide has now demonstrated high quality efficacy and safety results in a large well-controlled and well-designed clinical study (some assert that the trial will be accepted as registrational by the FDA). But investors focusing on top-line results for plecanatide in the IBS-C indication as the next event may be missing other upcoming, near-term catalysts. While we believe that the IBS-C data (expected next January) will be key to Synergy's story, the results seen in CIC readily imply that this second indication will be successful, as has been the case for Ironwood's Linzess. Nevertheless, several value-driving events should materialize in the next couple of months.
- First, and perhaps most driving, will be analyst initiations over the next few weeks. As is standard on Wall Street, when large banks run investment deals with publicly traded firms, their in-house research firms pick up coverage of the company. Per the 424B5 filed alongside Synergy's capital raise, announced April 9, two of the largest Wall Street houses, Credit Suisse and Citigroup (arguably the largest investment bank in the world) acted as joint book-running managers. Canaccord Genuity and Cantor Fitzgerald, which already cover Synergy, were also behind the transaction. What this means is that we expect to see two of the largest research firms initiate coverage of Synergy within the next several weeks. As evidenced by Cantor Fitzgerald's affect on the stock on April 9 (the stock rallied 16%), these initiations could generate impressive results for SGYP.
- In tandem, Synergy will be presenting full results for the Phase IIb/III trial at Digestive Disease Week 2013 on May 21 in a late-breaking oral presentation. DDW is the premier expose for new technology in the world of gastroenterology. Not only will Synergy be speaking with physicians and providers, but investors (not to mention big pharma) will be in attendance as well, putting new eyeballs on the impressive data backing this CIC/IBS-C treatment. Analyst reports on any further developments from the full data set should further increase plecanatide's visibility in the investing community.
- Finally, Synergy will meet with the FDA in late May or early June to discuss the development path forward for plecanatide (called an "End of Phase II Meeting"). The company will release the details of this meeting afterward, and the key takeaways could be: 1) whether the company plans to run one or two pivotal Phase III studies; and 2) whether it will pursue development of a higher plecanatide dose (potentially a 6mg dose), given the strong safety and tolerability data seen thus far. Of note, plecanatide 3mg has thus far demonstrated strong efficacy, but the linear dose curve suggests that a higher dose could be used to get best-in-class efficacy. Meanwhile, drug companies eyeing Synergy will also be awaiting the outcome of the End of Phase II Meeting with the FDA. When/if negotiations take place between the company and larger drug firms, knowing the cost to fully develop plecanatide to maximize its commercial potential and ensure regulatory success will be key in such discussions. Given prior approvals for drugs like Linzess and Amitiza in the category, the pathway for regulatory approval is generally straightforward, hence the high probability of regulatory success.
Strong balance sheet means no sweat to execute on business plan, cheap EV, and solid negotiating power with strategic acquirers. Synergy netted $84.5M through the sale of 16.375M shares two weeks ago (an additional ~$12.5M with over-allotment), bringing the company's cash and equivalents balance to approximately $117M, including cash prior to the transaction. With an average quarterly burn last year of roughly $10M ($12M in 4Q), the company is well-positioned to continue funding development progress. But more importantly, Synergy is in a much stronger negotiating position than it was six months ago. As many on Wall Street know, Board Chairman Gabriel Cerrone has a track record of ushering in high take-out premiums for development-stage biotech companies (he championed the $2.5 billion sale of Inhibitex to Bristol-Myers Squibb (NYSE:BMY) in early 2012). As a result, SGYP's balance sheet positions the company to enter into strategic discussions with big pharma from a position of strength. Notably, because of cross-licensing agreements on patents between Synergy and Ironwood, Linzess and plecanatide are likely to be the only GC-C agonist-type compounds on the market in the CIC and IBS-C indications for some time. Linzess is owned by IRWD and sold by Forest Labs (NYSE:FRX) in the U.S. Plecanatide, wholly owned by Synergy, is still available to be partnered or acquired. Hence this asset has important scarcity value in a blockbuster space.
Long-term valuation prospects are compelling. The easy valuation comparison for SGYP is Ironwood Pharmaceuticals, which developed and markets Linzess (linaclotide) with partner Forest Labs. Linzess is a fellow GC-C agonist that, like plecanatide, promotes secretion of chloride and bicarbonate, along with water, into the intestine. Proper regulation of fluids in the bowel improves the symptoms of CIC and IBS-C. Ironwood, despite receiving only ~45% of Linzess' economics (Forest and ex-U.S. partner, Almirall take the rest), is valued at a whopping $1.75B. That essentially means that the market is valuing Linzess at $3.5B if one factors in that the current valuation is based on only half of the Linzess' economics. Compared to the Ironwood precedent, it's hard to deny that SGYP's valuation can go significantly higher as plecanatide advances toward approval. Pharma suitors are likely to come to this same conclusion.
SGYP's enterprise value is just $280M as of Wednesday's close, remarkably cheap when compared to IRWD and for a company with a product that has potential to generate blockbuster sales with its two lead indications - CIC and IBS-C. With data in hand from a large trial, Synergy's story has optionality moving forward, and we expect a premium to come into the stock as investors start to factor in the company's strategic options. Analyst price targets average over $16 per share according to Yahoo Finance, and this adds support to our thesis that SGYP is oversold and has significant upside potential near- and long-term.
SP-333 is currently free, but pharma could pay a premium for this potentially compelling asset. The Synergy story is, of course, based around plecanatide, given the candidate's late-stage status and convincing clinical results. Nevertheless, SGYP has another asset in the pipeline that pharma companies are likely to pay up for, yet investors assign no value. SP-333 is another GC-C receptor agonist being developed for Inflammatory Bowel Disease (IBD). SP-333 completed its first human study in December of 2012 and moved into a placebo-controlled dose-ranging trial in January of this year. Inflammatory Bowel Disease, primarily Crohn's Disease and ulcerative colitis, affect approximately 1.4M people in the U.S. and are often treated with anti-inflammatories in the front-line setting like 5-aminosalicylic acid, Abbvie's (NYSE:ABBV) Humira, or J&J (NYSE:JNJ)/Merck's (NYSE:MRK) Remicade. The GC-C approach is a novel tack, and while human studies of SP-333 have been limited to safety and tolerability thus far, SP-333 demonstrated better anti-inflammatory qualities over 5-aminosalicylic acid in animal models. It's a novel approach and considering that existing treatments are systemic, some with prohibitive side effects, SP-333 could carve a significant part out of this large market. Importantly, if SGYP gets a bid from big pharma, don't be surprised if the price paid is on the high end of expectations, as SP-333 won't be a "free" asset in such a transaction. A take-out is the way, in our view, that investors get paid for SP-333 in the short-term.
Investors can be opportunistic on SGYP. Synergy's next plecanatide clinical catalyst is expected in January of 2014 with the release of top-line data from the ongoing Phase II IBS-C trial (NCT01722318), and with that in mind, many investors have neglected to notice the upcoming events mentioned in this report. This, in our view, is the perfect time to be buying the stock, as investors have stepped to the sideline in false expectation of a slow news flow. Although SGYP has been in a downtrend since its capital raise two weeks ago, we believe the stock may have finally put in a bottom in the $4.40 area. Chairman Cerrone stepped in himself on Wednesday afternoon to pick up shares on the market at $4.46 and $4.66. The investment banks that backed the recent banking deal have some work to do, so seeing SGYP trade back to the mid-$5 level, the deal pricing, in short order wouldn't surprise us.
Disclosure: I am long SGYP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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