Synergy Pharmaceuticals Strengthened On Ironwood's Setback

Synergy Pharmaceuticals (NASDAQ:SGYP), a company developing a potential billion-dollar drug, Plecanatide, according to numerous analyst predictions, may have received quite a boost on the news front at the open of this new trading week.

Ironwood Pharmaceuticals (NASDAQ:IRWD) and partner Forest Laboratories, Inc. (NYSE:FRX) informed investors on Monday that the FDA will take an additional three months to review data for Linaclotide, which is before the FDA for review in the indications of chronic idiopathic constipation (CIC) and constipation-predominant irritable bowel syndrome (IBS-C).

Linaclotide should be considered a direct competitor to Synergy's Plecanatide, as the two are being developed to treat the exact same indications, but Linaclotide had the edge of potentially reaching market first and chipping away at market share before Plecanatide even appeared onto the scene. With the superior side effect profile of Plecanatide, any momentum gained by Ironwood and Forest Laboratories' commercial launch would be critical and maintaining the edge.

The fact that now Synergy has a full quarter's worth of time to play catch up is key.

Results from the ongoing Phase II/III Plecanatide trial are due later this year, and as mentioned, thus far the product has not been known to cause the side effect of severe diarrhea, as has Linaclotide. With a new lease on time and the favorable side effect data, Plecanatide's early market potential has become consequentially strengthened with Monday's announcement of an extended FDA review period.

Synergy's unexpected boost also comes at a time when big pharma is on the prowl for new buyout opportunities in order to boost pipelines that are becoming depleted by the loss of patent protection. As an example, GlaxoSmithKline (NYSE:GSK) last week threw an offer the way of Human Genome Sciences (HGSI) for a $13 per share - which equates to roughly $2.6 billion. At the time HGSI was trading for just above seven dollars, so the offer came at a significant premium and was even deemed as not enough by the company, who quickly rejected the offer and is probably awaiting a follow-up offer.

Other companies in the sector have also received buyout bids only to reject them, not only highlighting the booming nature of the buyout offer these days, but also emphasizing the confidence on display by the smaller companies who know the big boys are willing to pay. Illumina Inc. (ILMN) rejected two offers from Roche Holding AG (OTCQX:RHHBY) a few weeks ago, one for $44.50/share and the other for $51/share, and Amylin Pharmaceuticals (ALMN) turned away Bristol-Myers Squibb Company (NYSE:BMY) last month on a $3.5 billion, $22/share offer.

Synergy's market cap is just a fraction of the full annual potential of Plecanatide, which may make it a cheaper, and a possibly more attractive buy than some of the other players in the sector whose names have come up in speculation.

Company leadership is also not unfamiliar with being in the heat of buyouts, mergers and takeovers.

Chairman Gabriele Cerrone, for example, has been with Synergy since 2008. Mr. Cerrone was the largest shareholder in Inhibitix (INHX) when it was sold to Bristol-Myers Squibb earlier this year for $2.5 billion. He was also a founder of FermaVir Pharmaceuticals until that company was eventually bought out by Inhibitix. It's safe to say that Mr. Cerrone's experience and expertise in consummating such deals could have been a factor when he moved to the Synergy board.

Synergy also has another key advantage over its competition - right now the company owns 100% of Plecanatide, making it ripe and attractive to a potential buyer, especially when considering that as a result of licensing and partnership deals, Ironwood holds less than 50% of Linaclotide. Such a factor should also not go unnoticed.

Speculation aside, Monday's news of the extended FDA time frame for review provides a crucial bit of news for Synergy Pharmaceuticals and its potential to eventually overtake Ironwood's head start in bringing its product to market first.

SGYP continued to inch higher on the news, rising by nearly two percent on volume a little bit above the norm.

With buyout talk heating up around the sector, keep an eye on Synergy as a not-so-talked-about wild card.

Disclosure: Long SGYP.