Is Going-It-Alone Feasible In GI Market For Synergy Pharmaceuticals?

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Summary

Synergy is attempting to enter an exclusive club via its FDA approved drug Trulance.

The company is currently going head to head against IRWD and SCMP for CIC indication market share.

Can being a best in class drug be enough to become best in revenues?

Several recent patent extensions to 2032 add undeniable value.

The prescription-based market for treating constipation and irritable bowel syndrome in the last few years has become a near duopoly for two well-known industry names, Valeant Pharmaceuticals (NASDAQ: VRX) and Ironwood Pharmaceuticals (NASDAQ: IRWD). The former with its lead GI drug Xifaxan, treating OIC and IBS-D, while the latter with its star product Linzess, treating CIC and IBS-C.

The top of this hill has potentially not only become more crowded, but we may be privy to a coronation ceremony of a new, undisputed king underway as of this very moment.

Less than three months ago, the FDA approved the first indication, Chronic Idiopathic Constipation (NYSE:CIC), for Synergy's (NASDAQ: SGYP) gastrointestinal drug Trulance (Plecanatide). After a rigorous clinical process that included well over two thousand (1,346 and 1,337) test subjects in two separate Phase 3 trials and clearly defined primary/secondary end points, the conclusions are undeniable, with efficacy at 11%/9% difference to placebo for the 3mg dose, outstanding statistical significance with p-values of <.001, and tolerability (5% discontinuation rate).

It was not all too surprising to witness Wall Street create an attractive entry opportunity in the weeks since the milestone of FDA approval, which ended up not being coupled with an acquisition as many had expected, but rather with a dilution. The reality of launching a commercial drug for the first time without the resources of a more established name, which possess much larger sales forces (e.g. 1,500 for AGN/IRWD vs. 300 SGYP) along with bigger coffers, set in.

But all is not what it may seem if one were simply following the stock price (down 35.6% since peak close of $7.07 on January 31st) going into 2Q17.

When looking at the larger GI landscape, it quickly becomes evident that Trulance holds greater odds than it has been awarded thus far by the powers that be.

For one, the direct competition does not surpass, nor match, the clinical accomplishments that Synergy has found with the Plecanatide compound. For Linzess, as mentioned at the top, and even more so for Amitiza (Sucampo Pharmaceuticals (NASDAQ:SCMP)), one has to wonder how much future growth is possible with such a superior product entering the market.

Each has multiple disadvantages vs. Trulance:

CIC Indication

Dosage

Diarrhea

Abdominal Pain

Flatulence

Upper Respiratory Infection

Sinusitis

Abdominal Distention

Nausea

SCMP - Amitiza

24mcg

12%

8%

6%

6%

29%

IRWD - Linzess

145mcg

16%

7%

6%

5%

3%

3%

72mcg

19%

2%

SGYP - Trulance

3mg

5%

Amitiza causes nausea and abdominal pains, while Linzess has clear diarrhea issues among the company of several others. A near crystal clear label for Trulance anyone? The difference is striking.

As for Valeant, they are safe as of the moment before further progress is made by Synergy on the Dolcanatide compound, which will target OIC and has so far only completed Phase 2 clinical trials (Amitiza is also approved for OIC use since 2013).

One does have to note that both IRWD and SCMP are partnered with Allergan Pharmaceuticals (NYSE:AGN) and Takeda Pharmaceuticals (OTCPK:TKPHF) respectively. Not to mention, Xifaxan was developed under Salix Pharmaceuticals, which was acquired by VRX. Although this would make Synergy appear to be the underdog, it also makes it a very attractive (and likely) takeout candidate. Even partial success going alone in the first several quarters against these titans, would not only raise eyebrows, but in all likelihood, open up some in-depth due diligence by a big pharma name that has an eye on a strong GI portfolio addition.

These early script numbers will be the biggest catalyst near term for SGYP's price and in all likelihood through mid-summer 2017, when the first full quarter of sales (Q2) will be officially announced by management.

The following chart illustrates what happened to Amitiza as Linzess entered the market back in late 2012. Prescriptions have slowed to a crawl while IRWD keeps climbing in both revenues and prescriptions, having already surpassed its competitor in year 3 (full) of sales.

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

SCMP

Total Revenue

$91.89M

$112.12M

$67.35M

$61.87M

$54.76M

$81.49M

$89.59M

$115.45M

$153.18M

$230.06M

Amitiza US Revenue

$27.54M

$34.44M

$38.25M

$40.30M

$41.50M

$50.70M

$52.10M

$62.78M

$85.11M

$127.42M

% Revenue

30.0%

30.7%

56.8%

65.1%

75.8%

62.2%

58.2%

54.4%

55.6%

55.4%

US Prescriptions

n/a

n/a

n/a

n/a

n/a

1.24M

1.30M

1.34M

1.48M

1.49M

IRWD

Total Revenue

$8.40M

$43.86M

$65.87M

$150.25M

$22.88M

$76.44M

$149.56M

$273.96M

Linzess US Revenue

$.0M

$.0M

$47.62M

$133.43M

$217.73M

% Revenue

0.0%

0.0%

62.3%

89.2%

79.5%

US Prescriptions

n/a

.58M

1.41M

2.13M

2.70M

(Note, IRWD did not earn revenues on Linzess until it became profitable due to its agreement with partner Allergan.)

This is the result of Amitiza not only being harsher (as demonstrated earlier) than Linzess but also due to it having to be taken twice daily vs. only once. For a lifestyle improving drug, this is a clear commercial disadvantage. While I do not believe Trulance will flatten Linzess sales immediately, a similar dynamic could reveal itself within the next 3 years.

The market cap of each of these three companies can also be used as a metric to gauge value. IRWD is currently sitting at $2.29B and SCMP much further down at $0.45B. If you were still doubting the odds for Synergy, you would be surprised to see that SGYP is already being priced favorably at $1.02B.

For a name that is as of this moment going to receive all of its future incoming revenues, maintaining worldwide rights, there is plenty of room for SGYP to run before being considered fully priced. If we were to estimate that Trulance can move $150m of product in 2018, utilizing IRWD's multiple from its 2016 Linzess revenues, we could have SGYP valued at just about $1.5B.

Below is a look at the price action since January 2016:

We see that IRWD still carries with it momentum based on continually impressive prescription numbers while SCMP seems to be falling more and more out of favor as SGYP's Trulance makes it almost impossible for Amitiza to gain any future market share.

The parallels between the launch of Linzess vs. Amitiza could be used to give an idea of what to expect in a Trulance vs. Linzess/Amitiza environment. Again, while Amitiza's short fall in lifestyle advantage is being a twice daily pill, Linzess falls short as a pill that must be taken before eating food as opposed to Trulance, which offers the unique and convenient freedom of being taken at any time. Not to mention the now extensively documented high diarrhea rates, which the older products do not fare well in by a wide margin.

It should be further noted that the GI prescription market is growing when taking into consideration how much of it exactly is up for the taking. This fact gives us even more justification for Synergy to be able to in the least match its competition's accomplishments commercially in the years ahead. A peak sales goal of $850 million for Trulance is achievable and my personal target for 2022.

If we were to consider the pitfalls of this task, it could be said that a slow rollout and limited acceptance by the physician community could put a damper on the aforementioned peak target. Limiting not only the true selling potential of Trulance, but also the odds of a favorable merger. Right now, Synergy holds an estimated sub $200m in cash ($82m reported end of Q4 plus stock sale of $120m this past January). Preparation for launch has been expensive, with nearly $200m spent in 2016 alone as the prior two years hovered around $100m. For those considering entry, this should not be overlooked as a risk to further near-term dilution.

What I am looking for going forward, is a divergence in not only price action of these three parties, but also their short interest and institutional ownership. I believe any astute investor will see where the preference will lay with both doctor and patient when deciding on the best, safest product on the market for treating this condition. (Synergy recently filed for FDA approval of the IBS-C indication of Trulance, which also had very successful clinical results, expected FDA approval).

For Sucampo and Takeda especially, the clock is ticking with a rather hurried pace on how much more can be squeezed out of Amitiza, increasing the price further will only accelerate the process of a shift away from the drug.

Management may be more than vindicated for choosing to try this venture on their own in order to secure a clear and undeniable value for the company with a proven sales performance (only helped by their recent patent extension for Trulance through 2032). There are still many doubters but the doubt should dissipate once the raw numbers point to a superior product that is not only preferential to already available alternatives on paper, but by real patients and their trusted physicians.

So far, it looks as if in fact the true value is being unlocked as the weeks go on since commercial launch. The impact of a smaller sales force could be revealed in the coming months since the product itself is clearly superior.

I am bullish on Synergy Pharmaceuticals and expect it to be looking down at its competition from the top of the GI hill sooner rather than later. My price target is $7.70 before any major announcement in regards to a potential partnership/acquisition deal.

Disclosure: I am/we are long SGYP.

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.