Synergy Pharmaceuticals: Things Are Looking Better
Summary
- Shares of Synergy were trading in the low $2s in early January as I looked at the prospects for the business.
- I was really cautious at the time, as positive developments have been seen ever since.
- This includes reasonable Q4 sales growth, wider FDA approval, a licence deal in Canada and a much more discipline management team in terms of its finances.
- While the outlook looks much better than it did just two months ago, Synergy continues to have financial challenges as I anxiously wait more clues about the pace of the sales ramp-up.
Synergy Pharmaceuticals (NASDAQ:SGYP-OLD) continues to see continued struggles. Early in January I looked at the prospects for the business in an article titled "Synergy Pharmaceuticals - Continued Challenges After Difficult 2017."
Despite approval of TRULANCE last year, last year has been a very disappointing year, as the pick-up in sales was very modest, while high costs continued to result in steep losses and, thereby, dilution for investors.
Even as shares kept falling, I was not appealed to the shares, as dilution still results in a sizeable valuation amidst continued cash burn. Key in changing my stance would be a great pick-up in fourth-quarter sales or approval of TRULANCE for a second indication. As the company announced its fourth-quarter results, it is time to revisit my thesis.
Troubles Despite TRULANCE
Following the IPO of the company back in 2011, shares have been trading in a $2-10 range ever since, currently trading towards the lower end of the range. For all of the time, Synergy had no working product, until it received FDA approval for TRULANCE in early 2017.
TRULANCE is a medication which helps adults who have chronic idiopathic constipation (CIC). The drug replicates the function of so-called "uroguanylin," a gastrointestinal peptide which stimulates fluid secretion, resulting in stool consistency. More than 30 million people in the US are set to be impacted by CIC.
2017 Revisited
Following approval in January 2017, shares jumped to $6 per share as Synergy took the opportunity to raise $120 million by issuing 20 million shares at the time. First-quarter results revealed that product sales came in at just $98,000, prompting shares to fall towards the $4 mark.
Second-quarter sales rose to $2.3 million, as the pick-up in sales was not comforting to investors, with shares having fallen back to $3. The modest revenue number came despite the fact that 250 sales reps were put to work at the time. The problem is that the revenue base remains totally inadequate to fund expenses, resulting in a second-quarter operating loss of $73 million, as cash levels were depleting rapidly.
This forced the company to arrange $300 million in financing in September at a very steep interest rate and with very restrictive terms in order to avoid another round of severe dilution, as shares traded at $2-3 at the time.
Third-quarter resales rose to $5.0 million, as a reduction in expenses narrowed the operating loss to $48 million, although Synergy was already dipping largely into its $300 million financing package of September. Furthermore the company issued another 22 million shares at $2.58 per share, increasing the share count by another 10%, as the proceeds are merely sufficient to finance losses for about a quarter.
January Announcement
By the end of January, Synergy offered some good news for investors, as the FDA approved TRULANCE to treat irritable bowel syndrome with IBS-C adults, on top of the CIC approval already received in January of last year.
As IBS-C affects about 1 in every 20 Americans, and CIC impacts over 33 million US patients, this approval boosts the target market of Synergy and TRULANCE by about 50% compared to CIC alone.
Fourth-Quarter Results
The good news is that sequential revenue growth continued, with TRULANCE sales hitting $9.4 million in the final quarter of the year, although the number includes $1.9 million in sales previously recorded as deferred revenues. If we adjust for this, revenues seem to grow by $2.5 million on a sequential basis in the most recent quarters, which is a bit on the slow side, if you ask me.
As the company cut R&D efforts to just $2 million for the quarter, operating losses narrowed to $38 million. It should be said that growth in prescriptions was pretty solid during the quarter, suggesting that investors could, and should, look forward to further growth in Q1 2018. By December, the company had more than 9,600 subscribers, up from 7,000 by September.
If we assume further sequential growth and approval for BIS-C, we could easily see +$10 million in sales in Q1 and further growth in the coming months. This is very important, as operating expenses are seen around $180 million in 2018, at a quarterly run rate of $45 million, resulting in continued cash burn.
To offset the cash burn, the company is making license deals for TRULANCE abroad. Cipher Pharmaceuticals is paying the company $5 million upfront as well as unspecified royalties and milestone payments on sales of the drug in Canada. This brings in some much-needed cash (although royalty payments will be very limited in the near term) without Synergy having to incur costs.
This cash is much needed given the burn rate which is reducing the cash position of the firm. Synergy ended 2017 with $137 million in cash, as it has room to draw down another $100 million on its September credit facility, which has in agreement been cut towards $200 million. Furthermore, the company can borrow the money in smaller tranches, which gives it greater flexibility, as well as opens the opportunity to avoid interest expenses and penalties relating to pre-payments.
With operating expenses running at $180 million this year, it is obvious that Synergy will continue to burn money. If sales continue to grow by $2.5 million on a sequential basis, revenues might approach a run rate of $70 million by Q4 2018, still resulting in relative steep losses. Note, however, that sales could benefit from the wider approval, as Synergy furthermore has access to its cash holdings and another $100 million under the credit facility.
Risk-Reward Has Improved Dramatically
On January 5 (when I wrote the previous article), shares traded in the low $2s, but rising to $2.50 following FDA approval late in January. They fell to $1.70 in recent days, as the stronger revenue number for the final quarter triggered a 25% rally to $2.10 again.
With 236 million shares outstanding, shares still represents a $500 million valuation, which, in combination with a modest-to-flattish net cash position, is somewhat reasonable. While expenses are large, sales multiples based on Q4 revenue numbers stand at 16 times, and probably in the single digits based on further growth in 2018.
While trading at similar levels as early January, I am much more optimistic on the current situation. For starters, shares trade at the same level despite FDA approval for wider indication, a solid Q4 revenue number and financial discipline imposed by new CEO Hamilton. The openness to new partnerships, like the one announced with Cipher, might be good as well, bringing in revenue streams as well as upfront payments without Synergy having to incur any costs.
While the risk-reward shares improved a great deal compared to my look in early January, I am not convinced enough to buy into the story at this point. While I am very happy with the wider indication and reasonable growth (adjusting for deferred revenues), as well as the focus on cash flow management and partnerships to drive sales and cash flow generation, the reality is that the company remains in a tough spot.
I will be very curious to learn about Synergy Pharmaceuticals' sales pick-up in Q1 and commentary about the sales growth of the widened indication approval, as well as potential deals overseas (perhaps Europe). While the situation has improve a lot, I am not pulling the trigger just yet, although I recognise that the risk-reward has improved rather dramatically in recent weeks.
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Comments (28)
MACD > buy sign
ichimoku cloud > buy sign soonand pivot point has arrived. So I bought 130000 at 2.04(average).I wish for good luck.
If we assume this acceleration to be 1 $MM / Q Synergy will achieve positive cash flow by Q2'19 for a total 30$MM positive Op.CF.
If we assume no acceleration at all they are -70 $MM for 2019 year.I still expect them to be taken out @4-5 $. A large Pharma can integrate them fast and achieve massive synergies, pun intended.
