Synergy Pharmaceuticals: FDA Decision Play

Summary

Synergy is coming off recent 52 week low.

Increase in share price ahead of Plecanatide FDA approval is very likely.

Multiple mid term catalysts should increase the share price.

FDA approval will help to make investors confident in the ability of Synergy to obtain approval Plecanatide approval in other indications.

Synergy Pharmaceuticals (NASDAQ:SGYP) has been disappointing so far this year due to its low stock price. With the company just recently bouncing off of its 52 week low, however, investors are presented with a very interesting buying opportunity. The company recently announced the filing of a New Drug Application with the FDA for the approval of its lead product, Plecanatide, for the treatment of Chronic Idiopathic Constipation (CIC). Plecanatide is important to the long term outlook of Synergy and with the medium term catalyst of FDA review of Plecanatide, investors should buy Synergy.

Plecanatide

Synergy is developing Plecanatide in a variety of indications. The furthest along is CIC, for which Synergy recently filed a NDA. The upcoming decision will be very important for the future of the company, as it is planning to file another NDA towards the end of the year to have Plecanatide's label expanded to include Irritable Bowel Syndrome with Constipation. This expanded label will help for the drug to be able to reach more patients and help to expand the sales potential for Plecanatide.

Plecanatide has been through two separate Phase III trials. In both trials it was shown to be a safe and effective option for patients. In the first trial Plecanatide was tested in 1346 patients, who were randomized to receive either the 3 mg, 6 mg, or placebo version. The primary endpoint was the proportion of overall durable responders. In both the three and six milligram dosages, Plecanatide demonstrated statistical significance in beating the placebo (21.0% for the 3 mg dose and 19.5% for the 6mg dose). In both of dosages, Plecanatide was shown to be safe, with the most common side effect being diarrhea. Plecanatide was also better than placebo to the level of statistical significance in the secondary endpoint of stool consistency for both dosages. This first trial helped to lay a solid foundation for the drug to be able to obtain FDA approval. The second trial also had the same primary endpoint which it met, with a similar safety profile.

Both trials should help to make investors confident that Plecanatide will stand a solid chance of obtaining FDA approval. As Synergy gets closer to its PDUFA date, I would expect for investor interest and activity (as well as the shareprice) to increase significantly.

Importance of Initial Approval

The importance of obtaining the first approval will be that it should help to make investors confident that Plecanatide has a safety profile that could potentially allow for the drug to be approved in Irritable Bowel Syndrome with Constipation. If Synergy is able to gain an expanded label, this will help to grow sales.

Synergy also plans on marketing the drug on its own in the United States. The initial approval should allow for Synergy to launch the drug sometime early in 2017 (based on average FDA review times). This will give Synergy the chance to build out a sales force and show that it is capable of potentially generating substantial sales. Investors will need to watch the ability of Synergy to execute on its sales estimates for the drug, especially in the face of stiff expected competition from Ironwood Pharmaceuticals (NASDAQ:IRWD).

Investment Thesis

While Synergy has not been performing well as of late, I expect for the price to turn around as we receive more information about the ongoing clinical trials in Irritable Bowel Syndrome, as well as a potential for an increase in share price in anticipation of FDA approval.

SGYP Chart

SGYP data by YCharts

As you can see from the chart, the last six months have not been positive for Synergy. However, we have recently seen a bounce back off of its 52 week low of $2.50, which was set last week. With many upcoming catalysts for the rest of the year, I expect that the price will rise in anticipation of FDA approval. This is a phenomenon that I have written on extensively, if you are interested in articles regarding potential increases ahead of FDA catalysts, please click here. While I am only linking to one article, there are a number of articles that I have written exploring this idea on Seeking Alpha. I believe that this company fits a lot of what I typically look for in a stock that I am watching for an increase heading towards FDA approval. This would be the company's first approved product, and the company's market cap is small enough to be moved substantially by the ultimate decision of the FDA. While I do believe that Synergy will ultimately obtain FDA approval for CIC, I would recommend that investors sell a few weeks before the PDUFA date in order to lower the risk of anything going wrong. By that time we should have preliminary readouts for the phase III trials in Irritable Bowel Syndrome, which will only help to further increase the shareprice should the trials (as I expect) come back positive. The phase III readouts are expected for sometime in the third quarter of 2016. Assuming that Synergy does not receive priority review, this would mean that these results will come in before the eventual FDA decision. I believe that with multiple pending catalysts, Synergy has the potential to generate substantial value for shareholders.

Financial Position

A major consideration before investing in a company is the financial position of the company. At the end of its most recent quarter, Synergy had $111.8 million in cash and cash equivalents. This should be concerning for investors, as the company went through $101 million last year for its operations. I would expect for the company to continue to spend at a similar, if not larger pace, moving forward. This means that investors should price in dilution. I would imagine that the management team will be worried to let the cash pile get much lower than $50 million. Assuming that cash flow used in operations is relatively even, we should see dilution sometime around the end of Q3 or beginning of Q4. This should not be a large concern for investors, as the dilution is likely to occur at a much higher price than what the stock is currently trading at, and I would assume that the dilution will come after the release of positive phase III data to help take advantage of the bounce in the stock at that point. While I am typically weary of being diluted, I do not believe that this will change my investment outlook for the stock, but it is something that shareholders need to be aware of. I would also include though, that Synergy might be able to issue bonds which would, of course, help to raise capital. I think that this is the more attractive option with relatively low interest rates across the economy right now, and because it would minimize dilution. I believe that investors are in a safe position heading into potential FDA approval.

Conclusion

The approval of Plecanatide will represent a significant catalyst for Synergy Pharmaceuticals shareholders. The company will need to be able to obtain approval for CIC in order to help make sure that investors are confident in the company's ability to expand the label to include IBS-C. With the stock bouncing off a recent 52 week low, and ahead of multiple medium term catalysts, investors should be buying Synergy Pharmaceuticals moving forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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