Synergy Pharmaceuticals (NASDAQ:SGYP) had an exciting 2016, with great results from its CIC (chronic idiopathic constipation) trial for plecanatide the year before, followed by an NDA in April, then a number of buyout rumors, numerous funds and star investors taking up stake in the stock, then excellent results for plecanatide in two phase 3 trials of irritable bowel syndrome with constipation (IBS-C). Dolcanatide, its other uroguanylin analog, also showed positive early stage results in ulcerative colitis (UC), and SGYP also announced filing its second NDA for plecanatide for IBS-C in the first quarter of 2017. PDUFA date for its first NDA in CIC is January 29, 2017, and the stock is up almost 100% from its lows in March. No wonder investors are wondering if everything is priced in before the PDUFA, and if there's any upside to buying the stock now.
To answer that question, we need to do a quick valuation of SGYP. Based on my research, the current market size for CIC and IBS-C are each $1 billion, and these are forecast to double by 2021. So, the total target market for plecanatide is $4 billion by 2021. Plecanatide patent expires in 2023, and there will be generic trouble at that time, effectively making the drug valueless for SGYP. Until then, assuming peak market penetration of just 25%, not unreasonable given Linzess is predicted to have a 30% market share by 2021, plecanatide will be making $1bn for SGYP. Considering its current share count, and plecanatide alone, as well as its current cash balance, this translates to more than $10 per share for SGYP based on plecanatide alone, and in two indications only. SGYP is trading at $6 right now, so there's a 75% to 100% upside from current levels based on plecanatide alone.
There is going to be dilution at some point soon, unless there's a buyout. Hopefully, that dilution would come when the stock price is even more robust. However, perhaps the dilution will reduce the stock price back to the $4 levels, despite the fact that my simple calculations above price in a small secondary offering of, say, 10% of total current float. If we see $4 again, that will be an idea opportunity to buy this potential blockbuster. However, even at current levels approaching - and sometimes crossing - $6, there is considerable upside to SGYP. Even a quick look at consensus price targets for SGYP gives me $11.75, so my quick calculation actually appears conservative.
Are there risks to this investment? Well, I don't see hardly any reason for plecanatide not to be approved in CIC; and even though IBS-C NDA has not been filed yet, the excellent results from the two phase 3 trials leave no doubt as to the outcome of the PDUFA, which should happen sometime by end-2017.
However, Ironwood's Linzess is the main competitor, and it is more entrenched in the market. Linzess is probably marginally more effective than plecanatide, however it has diarrhoea risks that plecanatide doesn't have in the same degrees. This is because Linzess is an ecoli enterotoxin derivative , while plecanatide is an uroguanylin analog. Therefore, the drug should eventually pick up, but uptake will be slow since SGYP has hardly any expertise in marketing and sales.
So, these are some of the risks in SGYP, however, the upcoming PDUFA catalyst offers an immediate, near term opportunity to buy in the stock at below $6.
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.