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Summary

  • Synergy is substantially undervalued over the long term.
  • Plecanatide has the potential to generate significant revenue for Synergy.
  • Continued Plecanatide development will provide many catalysts for shareholders.
  • SP-333 will also help to provide the potential for growth over the long term.

As investors in the biotech industry, we have realized the need to find companies that are small, but have the potential to grow large. While almost any biotech will tell you that they have this potential, very few have a risk/reward ratio that makes it worth it for shareholders. One company that I believe is a very interesting investment opportunity for shareholders is Synergy Pharmaceuticals (NASDAQ:SGYP). Synergy is a compelling investment ahead of multiple catalysts related to its lead development compound, and is substantially undervalued by the market.

Plecanatide

Plecanatide is Synergy's lead pipeline product, and will be instrumental in the growth of the company moving forward. Plecanatide is being studied in two different indications, chronic idiopathic constipation and irritable bowel syndrome with constipation. Plecanatide represents some of the most immediate catalysts for Synergy shareholders, and shareholders should be watching closely as Plecanatide continues to progress through clinical trials.

Plecanatide is being developed primarily as a treatment for Chronic Idiopathic Constipation. Chronic Idiopathic Constipation (CIC) is the chronic presence of constipation (passing a stool less than three times per week or difficulty passing stools). The most important metric in terms of treating constipation would be an increase in the average amount of stools passed in a week. Other metrics that matter to patients would be reduced difficulty in passing a stool, and less pain. Synergy's drug helps to address these concerns, and could provide a compelling option for patients suffering from CIC. The drug is in two phase III trials for the indication, which will lay the basis for the FDA approval of the drug. If approved, this would be Synergy's first product on the market. To date, the clinical trial results for Plecanatide have been impressive.

In a phase IIb/III trial conducted on over 950 patients, the company reported that Plecanatide was effective in helping to increase the mean number of times per week that a subject passed a stool. The mean increase in the number of times that the patient effectively passed a stool was 2.13. This is very significant in terms of efficacy as it relieved the constipation that patients were suffering from and helped them to effectively pass stools. The trial also noted that patients had an easier time passing stools, which is very important for patients, especially elderly patients who typically have issues passing stools. It will be important to see if Plecanatide is able to replicate this data in a large scale phase III trial. The phase 2b part of the trial was to help find the proper dosage for patients, the company found that there was increasing efficacy at an increasing dose and therefore settled on the 3mg dosage moving forward. The incidence of diarrhea in the Plecanatide arm was 9.7%, while this may seem rather high to investors it is actually lower than what is typically seen with other drugs that are designed to relieve constipation. The drug was otherwise well tolerated with no other noteworthy side-effects. These results helped to lay the groundwork for Plecanatide's current phase III trial regimen, and should help to give investors confidence in the results of the upcoming phase III trial, as this was a very large phase II trial in which Plecanatide was shown to be a safe and effective treatment option for patients. Often, investors do not have the benefit of an incredibly large phase II trial in order to help project the results for phase III. In this case we have that benefit, and it should help put investors at ease with the idea that Plecanatide will likely pass its phase III trials.

The phase III trial will be in many ways similar to the phase II trial, only larger. The phase III trial is projected to enroll 1350 patients. The researchers will be looking for similar efficacy out of Plecanatide versus placebo. It is also noteworthy that Synergy has decided to increase the dosage for Plecanatide subjects. The subjects will be administered either 3.0 or 6.0mg of Plecanatide. This should help to further increase the efficacy seen in the 3.0 mg dosage, as in the phase II study the researchers observed increasing efficacy as the dosage increased. The other phase III trial looks almost identical to the first in nature. These phase III trials will be very important to the company, and should they see increased efficacy at the 6.0mg dosage while being able to hold side-effects relatively stable, it should provide a huge boost for the company and help the company should Plecanatide make it to the market, as increased efficacy would be a large marketing advantage over current products.

Plecanatide is not, however, being isolated to just being studied in CIC. It is also being studied for the treatment of Irritable Bowel Syndrome with Constipation (IBS-C). IBS-C is constipation that causes pain and bloating for the patients, along with stomach discomfort. In regards to the IBS-C indication, Synergy just recently completed phase IIb trials in the indication, and will likely be advancing the compound into phase III after discussing the trial design with the FDA. Taking a look at the results from the Phase IIb trial, there is a lot for investors to be excited about. The drug was once again shown to be safe and well-tolerated, with statistically significant efficacy. At the 3.0 mg dosage (which is what Synergy plans to advance with, they also tested a 1.0mg dosage and a 9.0 mg dosage), Plecanatide was shown to provide for a statistically significant decrease in pain associated with bowel movements (demonstrating a greater than 30% reduction in worst abdominal pain), as well as an increase in the average number of bowel movements that each patient has (by more than one). The reduction in abdominal pain will be a very important metric for the company moving forward, as the drug has the potential to significantly relieve the pain that patients are feeling through actually solving the problem by increasing bowel movements. At the 3.0mg dose, there was a diarrhea rate of less than 10%, which I told you before is very good for drugs that are designed to relieve constipation. These results were very impressive for the drug and will help to give investors confidence. The company predicts that it will be able to initiate phase III trials in IBS-C in the second half of this year.

We do not know exactly how the phase III trial is going to look yet, as the company has not announced the beginning of the trial. It is likely that the trial will look a lot like the phase IIb trial. What should be interesting for investors is whether or not Synergy decides to also have the option for the 6.0mg dose in the IBS-C trial. The phase III trials will help to lay the groundwork for FDA approval.

In both indications Plecanatide was shown to be a safe and effective treatment option for patients. It is very likely that investors will see positive phase III results and a subsequent NDA filing for Plecanatide in both IBS-C and CIC. These are both relatively large indications with millions of patients affected by both of these conditions each year. With that in mind, let's take a quick peak at the sales potential for Plecanatide. Considering how long it takes to enroll all of the phase III trials, I would estimate that Synergy could see Plecanatide on the market by the end of 2016.

Plecanatide has the potential to be a best in class treatment option for patients. With reduced side effects compared to other drugs in the market and enhanced efficacy, it is likely that doctors will prescribe Plecanatide once it is available. Peak sales estimates vary for Plecanatide, however, one that I find to be very credible is the estimate of $835 million. Synergy is deeply undervalued if the company is able to achieve peak sales of $835 million. The costs to launch the drug in the same estimate are around $300 million. This would mean over $500 million in profits for Synergy each year. With this kind of profit, Synergy should be trading much higher (see analysis below). Plecanatide has the potential to meaningfully impact Synergy's growth strategy for years to come. Plecanatide profits will be important as it will allow for Synergy to advance the rest of its pipeline.

SP-333

Synergy is by no means just Plecanatide. It also has SP-333 which is being developed for two different indications as well. SP-333 is further back in Synergy's pipeline than Plecanatide, but will be very important for investors as it continues to progress through clinical trials.

SP-333 is being developed primarily in Opioid induced constipation. The company recently began a phase II trial to evaluate SP-333 in opioid induced constipation. This trial will be very important, as it will help to give us some of the first hints at the efficacy of SP-333 in OIC. The trial's primary endpoint will be to see whether or not SP-333 to a statistically significant extent increases the number of spontaneous bowel movements for its patients. This will be a huge indicator of efficacy and will likely be the primary endpoint for any sort of phase III trial as well. The number of spontaneous bowel movements for patients will meaningfully help them to overcome their OIC. With this in mind SP-333 could help to meaningfully improve the lives of patients. A key indicator that investors should pay attention to is the rate of diarrhea caused by SP-333. If it is low again, it could also provide a marketing advantage for the drug and would help to make sure that SP-333 has the potential to become a best in class treatment option for patients. Remember that phase one trials are not typically geared towards finding efficacy, just to make sure that the drug is safe to progress through trials. This phase II trial will be a large catalyst for shareholders as it will allow us to more effectively assign a potential value to SP-333 and to also allow for shareholders to know the potential for the compound.

SP-333 is not, however, just being developed for the treatment of OIC. SP-333 is also being looked at as a potential treatment for Ulcertive Colitis (which is a specific form of Inflammatory Bowel Disease), which affects the lining of the large intestine. It is a very painful condition for patients and having another treatment option would be very important. The drug could be very effective in this indication as it has been shown to have a remarkable anti-inflammatory effect. If this remains true, this drug could provide a compelling treatment option for patients. Synergy is working on trying to find the right formulation it wants to advance into clinical trials, and should be able to update shareholders on that as it continues its work in this important indication.

SP-333 has the potential to help add value to Synergy over the long term. It is hard to assign a value to SP-333 due to the fact that we do not even have phase II results yet. In terms of market potential though, there are millions of patients who suffer from OIC. Ulcerative Colitis is also a rather large market potentially for SP-333. It is estimated that 233 in 100,000 children are suffering from Ulcerative Colitis. This number only continues to climb as Ulcerative Colitis has been growing in prevalence.

SP-333 has the potential to break into a huge market for Synergy, and a completely separate market from Plecanatide. As it continues to progress through clinical trials, it should be able to provide substantial value for shareholders and will provide a compelling set of catalysts that should help to prop up the stock price while the development of Plecanatide continues.

Financial Position

When looking at the investment potential for any company it is important to look at the financial position. Nobody wants to take a position in a company just to see themselves constantly diluted and have nothing to show for that investment. With this in mind, it does appear as though Synergy has the cash resources needed to continue its development program and to minimize the risk of dilution for shareholders.

As of its most recent quarterly filing, Synergy was sitting on a very large pile of cash, $70.6 million. Last quarter it lost $16.2 million. While this may seem like a lot of money, the company is in the middle of recruiting for two phase III trials and is also conducting a phase II trial in SP-333. The cash pile should be large enough for Synergy to begin the phase III trials in Plecanatide, and to have phase II results complete for SP-333 once the need for dilution comes around again. Unfortunately, that is a realistic need for Synergy as it will have to raise money to continue to pay for its trials. The company already has an at the market issuance program in place which will help it to raise additional funds should it continue to exercise it.

Risks

No discussion of an investment opportunity would be complete without analyzing some of the risks associated with the investment. Like any biotech company Synergy comes with its fair share of risks. The biggest concern for any investor in biotech is generic manufacturers coming in. Synergy has a very strong patent portfolio around both of its products, so at this point in time generic competition is not considered to be a problem.

The failure of Plecanatide would be a much larger problem for Synergy as it would significantly drop the company's valuation. Synergy's other pipeline product would not be able to prop up the valuation of Synergy as much as Plecanatide and SP-333 together. This is the bigger risk, however, as I told you I do not believe that there is a high likelihood of this happening. The phase II trial results all came back very well for Plecanatide and have helped to make me confident that the company will be able to successfully navigate its phase III trials.

Valuation Estimate

As I mentioned before, Plecanatide alone has the potential to produce significant revenue for Synergy. With what I believe to be a largely de-risked phase III trial, Synergy should be valued at a much higher price than it is currently at. If we assume that Plecanatide is able to reach its peak sales and provide around $500 million in profits for Synergy even taking out a huge $100 million in other costs, we would still conservatively by applying a P/E of 2 (which is very low) reach a market cap of $800 million, more than double what the company is currently trading at. This valuation also does not include the potential for SP-333, which by everything we saw in phase I testing should help to drive growth. SP-333 would be entering a huge market if approved and would only further enhance this valuation.

Conclusion

Synergy is substantially undervalued heading into largely de-risked phase III trials. Plecanatide is likely to pass its phase III trials and reach the market, at which point it will provide significant revenue to Synergy. SP-333 will help to bring up the rear and provide other growth opportunities for the company as it continues to progress the Plecanatide pipeline. The company appears to be substantially undervalued given the peak sales estimates for Plecanatide alone, and when combined with the potential for SP-333, we can see why shareholders have the potential for very large gains if they are willing to take a long-oriented position.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Synergy Pharmaceuticals: An Interesting Investment Ahead Of Multiple Catalysts