Synergy Pharmaceuticals: A Buying Opportunity Now That Could Pay Off Nicely Later

 |  About: Synergy Pharmaceuticals, Inc. (SGYP), Includes: FRX, IRWD
by: VFC's Stock House

While the inherent nature of trading in the biotech/healthcare sector is always risky and there are far more stories of failure than success as many drugs fail to make it through late stage trials, proper DD and investigation into developments at Synergy Pharmaceuticals (NASDAQ:SGYP) could reveal an attractive buying opportunity for those willing to play the volatile nature of the sector.

Synergy shares have slipped over the past couple of weeks and are again trading at levels under the four dollar mark, prices not seen in many months beforehand. With key catalysts pending later in the year and with a product in the late stages of development that could be worth billions over the long run on the open market, SGYP could be trading for quite the relative bargain at the current time. As the year progresses and the significant trial catalyst draws nearer, Synergy could be gearing up for a reversal from the current downtrend.

Also encouraging, Synergy secured a key merger agreement last month with Callisto Pharmaceuticals that wholly boosts the company's short and long term potential. For months investors had been wondering when the SGYP market cap would begin to approach that of competitor Ironwood Pharmaceuticals (NASDAQ:IRWD), which sits at well over a billion dollars, since Synergy's Plecanatide has proven thus far in studies to have a superior side effect profile to Ironwood's Linaclotide, which is currently before the FDA for approval review.

The Callisto/Synergy merger opens the door for an equalization in market cap.

Previous to the merger, Callisto had owned roughly forty percent of SGYP shares. Such a heavy investment by one entity often keeps large funds and new heavy investors from taking a stake in a company that is ultimately largely controlled by another entity. That will no longer be the case since the merger spreads Callisto's Synergy holdings throughout the entire Callisto shareholder base, therefore eliminating the forty percent control by one entity. As previously discussed, that opens the door for large funds and institutions to start buying in.

Also of significant note, the SGYP shares being spread across the Callisto shareholder base will be "locked up" for eighteen months - unless a "Change of Control" even takes place first - which means the shares will not weigh down the SGYP share price in the meantime. The "Change of Control" language also raises the already robust buyout speculation surrounding the company, as the Synergy management team may be already looking for suitors. To speculate further, Synergy may have already been advised that the Callisto holdings may be the roadblock to completing such a deal, hence the need for the merger.

The completion of this merger strengthens the case of SGYP as both a short and long term investment. IRWD's Linaclotide is already before the FDA for approval in the treatment of chronic idiopathic constipation (CIC) and could receive the nod next month - barring any additional decision delays - and such an approval would validate the technology and could also provide a boost to SGYP.

Plecanatide, however, has already proven in trials to have favorable side-effects profile than Linaclotide, hence the belief that the product could quickly steal market share, once approved. Data from the pending Phase II/III trial later this year are widely expected to roll in positive, based on previous studies, as well as the noted success of Linaclotide, which shares origins and the same mechanism of action with Plecanatide.

Both Linaclotied, and Synergy's competing product Plecanatide, are also being developed to treat constipation-predominant irritable bowel syndrome (IBS-C).

Another positive for Synergy is that the company is still yet to land a major partner or buyer, while Ironwood has already partnered its product with Forest Laboratories, Inc. (NYSE:FRX). Since IRWD's market cap already sits well north of a billion dollars, the market is valuing Linaclotide at roughly double that, since IRWD is only due to receive a royalty of fifty percent of future sales.

Those facts alone justify the belief that SGYP could start inching towards a much higher valuation with the Callisto deal finalized - especially if the trial results later this year are as positive as they have been previously.

Given the recent developments, pending catalysts and share price retreat, SGYP is one to keep an eye on right now. In just a few months time, it's possible that the current prices will be looked back upon as a bargain.

Disclosure: I am long SGYP.