Synergy Pharmaceuticals' Cash Flow And Prescription Trends

Summary

• Synergy Pharmaceuticals achieved the cash balance necessary to access Tranche 2 of its debt agreement. Liquidity is now sufficient to fund operations into 2019.
• Synergy sells Canadian rights to TRULANCE for $5 million; no plans to commercialize outside the US.
• Prescription data through February 23, 2018 indicates Q1 prescriptions are trending lower than Q4.
• To move the needle on the stock price, prescriptions will have to grow at an exponential rate, somewhere between 20-50% compounded quarterly.

Synergy Pharmaceuticals (NASDAQ:SGYP-OLD) has had an eventful few months. New CEO, achieving the milestone to access an additional $100 million in debt, sale of Canadian rights for $5 million.

In November 2017, SGYP entered into a debt agreement with CRG. Provisions of that agreement required SGYP to have a cash balance of $128 million at January 30, 2018 to access the second tranche of $100 million. They made it. How?

At December 31, 2017, SGYP had $137 million in cash, an increase from $117 million at the end of Q3. This was the result of a secondary offering netting $53 million, offset by Q4 cash used in operations of $33 million. Q3 cash useage was almost $60 million. (In an article dated November 18, 2017, I had estimated Q4 cash use of about $32 million).

We don't have numbers for January, but with $137 million in cash at 12/31/2017, SGYP could have burned $9 million in cash in January and still made the milestone. Given Q4 cash burn of $33 million ($11 million per month) it was probably a close thing. But they made it.

Let's analyze how they reduced cash used from ops by $27 million dollars in one quarter.

Income Statement

Three months ended	12/31/2017	9/30/2017	Change
Net sales	$ 9,400	$ 5,008	$ 4,392
Cost of goods sold	3,820	1,722	2,098
Gross profit	5,580	3,286	2,294
Costs and Expenses:
Research and development	1,990	5,876	3,886
Selling, general and administrative	41,779	45,110	3,331
Loss from Operations	- 38,189	-47,700	9,511
Other Income/(Loss)
Interest expense, net	- 2,909	- 1,226	- 1,683
Change in fair value of derivative instruments-warrants	4,124	55	$ 4,069
Net loss	$ (36,974)	$(48,871)	$11,897

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So the loss from ops was reduced by almost $12 million. Of that, $2.2 million was from increased sales (not margin expansion), and $7 million was from operating expense reduction offset by an increase in $1.7 million in interest expense.

The revenue trend should continue to improve, although it certainly has not been a straight line since launch. Here is a link to scrips by week. If that linked information is close, the gross to net is around 50%. That may improve as well.

R&D expenses may stay lower because there is not much in development. In fact they may go down. SG&A on the other hand will probably increase as the commercialization activities increase.

Statement of Cash Flows

Under Generally Accepted Accounting Principles, SGYP is not required to present quarterly cash flows, so we have to derive them ourselves. Here it is.

CONSOLIDATED STATEMENTS of CASH FLOWS - USD ($) $ in Thousands	12 Months Ended	9 Months ended		3 Months ended	3 Months ended
	Dec. 31, 2017	Sept 30, 017		Dec. 31. 2017	Sept 30 2017
Cash Flows From Operating Activities:
Net loss	$(224,338)	$(187,364)		$(36,974)	(48,871)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	165	121		44	41
Amortization of deferred debt costs and debt discount	1,342	1,014		328	229
Accretion of back-end facility fee	106	21		85	21
Loss on disposal of property and equipment	46	44		2	44
Stock-based compensation expense	22,715	20,082		2,633	3,887
Interest expense — Payment-in-kind (PIK)	3,212	765		2,447	765
Change in fair value of derivative instruments—warrants	-4,340	-216		-4,124	-55
Debt conversion expense	1,209	1,209		0	0
Changes in operating assets and liabilities:
Accounts receivable	-6,491	-5,036		-1,455	- 3,254
Inventories	-11,574	-7,405		-4,169	- 1,192
Security deposits	31	25		6	89
Accounts payable and accrued expenses	8,669	2,145		6,524	-11,569
Prepaid expenses and other current assets	-3,580	-7,671		4,091	- 192
Deferred revenues, net	0	1,927		-1,927	429
Accrued interest expense on senior convertible notes	-61	287		-348	348
Total Adjustments	11,449	7,312		4,137	-10,409
Net Cash used in Operating Activities	$(212,889)	$(180,052)		$(32,837)	$(59,280)

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Total adjustments, i.e. changes in assets/liabilities, went from a use of $10.4 million of cash in Q3 to a source of $4.1 million in Q4, a beneficial swing of about $15 million. How?

Accounts payable and accrued expenses went from a use of cash of $11.5 million in Q3 2017 to a source of cash of $6.5 million in Q4 2017, a swing of $18 million. This while expenses were reduced by $7 million, and inventory and receivables increased by $5.5 million.

So to summarize;

SGYP achieved the milestone of $128 million at month end January 2018.

This enables them to draw an additional $100 million from CRG over the next year.

They did it by expense management, and (mostly) by stretching payables.

Without the $18 million benefit from AP, Q4 cash flow would have been negative $50 million, or $17 million a month.

The debt agreement with CRG was amended, as follows (from the 10K filing):

On February 26, 2018, Synergy and CRG amended the Term Loan Agreement dated September 1, 2017. Under the terms of the amendment, the 2nd tranche borrowing of $100 million prior to February 28, 2018, was replaced with three separate tranches to borrow $25 million, $25 million and $50 million on or before June 30, 2018, September 30, 2018 and December 31, 2018, respectively. Additionally, the total amount of the commitment was reduced from $300 million to $200 million (excluding PIK loans) and the Minimum Market Capitalization covenant of $300 million was revised to be 200% of the outstanding principal amount of loan (excluding PIK loans).

SGYP sells Canadian rights to TRULANCE for $5 million; no plans to commercialize outside the US.

From the conference call:

While we have no plans to commercialize TRULANCE outside of the U.S. ourselves, the licensing deal we just closed with Cipher Pharmaceuticals for TRULANCE in Canada demonstrates our commitment to maximize the potential benefit of TRULANCE globally.

Under the terms of this agreement, we received $5 million upfront and are owed an additional milestone payment upon TRULANCE approval in Canada and subsequent royalty payments on net sales, which are not being disclosed for competitive reasons. We are continuing to evaluate additional ex-U.S. opportunities for TRULANCE and look forward to building further on this transaction in the future.

The question is: How much are the ex-US rights worth, and how long will it take to monetize them? It does remove an uncertainty, and gives them another cash lever to pull.

Q1 2018 Prescription Trends

Through February 23, TRULANCE prescriptions were about 18,500. Granted a higher percentage were probably 90 day prescriptions versus 30 day prescriptions, but we don't know the breakdown yet. Extrapolating, Q1 prescriptions be in the low 30K's, versus high 30K's for Q4.

Cash Flow Looking Forward

On the conference call, CFO Gemignani indicated operating expenses for 2018 of between $175 -$185 million. Using the midpoint of $180 indicates a quarterly average of $45 million per quarter, slightly higher than Q4. With revenue of $7.5 million, and a contribution margin of $4.5 million, the indicated cash burn rate is $40.5 million per quarter. That assumes no movement in working capital.

Without any prescription growth, at that burn rate, liquidity would last until early to mid 2019.

With a 20% compounded quarterly growth rate, liquidity would look like this:

($ in millions)(Quarter 1 is Q1 of 2018)

Quarter Revenue Contribution Cash Flow Liquidity $238.0 1 $9.0 $5.4 $39.6 $198.4 2 $10.8 $6.5 $38.5 $159.9 3 $13.0 $7.8 $37.2 $122.7 4 $15.6 $9.3 $35.7 $87.0 5 $18.7 $11.2 $33.8 $53.2 6 $22.4 $13.4 $31.6 $21.6 7 $26.9 $16.1 $28.9 -$7.3 Click to enlarge

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SGYP would remain cash flow negative 6 quarters into a 20% compounded quarterly growth rate, and would run out of cash in the 7th quarter.

With a 50% compounded quarterly growth rate, liquidity would look like this:

($ in millions) (Quarter 1 is Q1 of 2018)

Quarter	Revenue	Contribution	Cash Flow	Liquidity
				$238.0
1	$9.0	$5.4	$39.6	$198.4
2	$13.5	$8.1	$36.9	$161.5
3	$20.3	$12.2	$32.9	$128.7
4	$30.4	$18.2	$26.8	$101.9
5	$45.6	$27.3	$17.7	$84.2
6	$68.3	$41.0	$4.0	$80.2
7	$102.5	$61.5	-$16.5	$96.7

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Under this assumption, SGYP would turn cash flow positive in the 7th quarter after 50% growth started.

Both of the above are purely mathematical exercises, intended to give some indication of the challenges that face SGYP.

As a point of reference, Ironwood (IRWD), maker of Linzess, a prescription treatment for IBS-C and CIC, and the main competitor to TRULANCE, is projecting CAGR of 25% through 2020. In 2017, Lizness experienced 12% growth, from $625 million in sales to $701 million. So there is a market for prescription treatments for IBS-C and CIC, and it is growing. IRWD also shows similar commercial margins for Lizness, reporting a margin of 61% for 2017, vs. around 60% for TRULANCE.

Conclusion

TRULANCE has been on the market for almost a year. SGYP decided to forgo partnership or sale, preferring a go it alone commercialization strategy. As a result, the relatively slow launch has been ascribed to that go it alone strategy, and resultant slow acceptance by payers, and the time it takes to create and train a salesforce.

Not withstanding, the launch trajectory has been disappointing. Q1 2018 prescriptions look to be lower than Q4 2017.

The milestones in the CRG agreement in 2017 resulted in much of the discussion around SGYP focusing on survival. Meeting the Tranche 2 milestones, and gaining access to the additional $100 million, has alleviated, but not eliminated, that discussion.

CRG's reduction in its commitment, and deferring access to the capital, should not be ignored.

For SGYP to create shareholder value, as opposed to surviving, will require almost immediate exponential growth in TRULANCE. Absent that, they would have to seek a partner even in the US, but from a position of weakness.

There is potential in TRULANCE, there is a market for prescription treatments for IBS-C and CIC, but something good has to happen very soon. I will be watching the prescription data very closely for the next few weeks.

Analyst’s 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.

I am not an investment advisor, and this article is not meant as investment advice. Readers are encouraged to do their own due diligence before making any investment decisions.