Synergy Pharmaceuticals (SGYP) is a small, commercial biotechnology company that markets Trulance for chronic idiopathic constipation and constipation associated with irritable bowel syndrome. They are also, very slowly, advancing dolcanatide for ulcerative colitis and colorectal cancer prevention.
The purpose of the following article is to provide an autopsy of an investment thesis that, simply, has not worked out. Also, we will look into key recent developments that suggest brighter days ahead.
Flawed Investment Thesis
Synergy was trading at $2.77 with a market cap of $623M when I penned my first Seeking Alpha article, "Synergy's Potential Is Undervalued". Ironically, the first mistake in my investment thesis was staring straight at me through the title.
Apparent undervaluation is often justified
There are dozens and dozens of biotech stocks that appear undervalued. However, most often, there are good reasons for this. In general, the market is pretty accurate when it comes to valuation.
Looking back, an investment thesis in Synergy was based upon management's ability to strategically partner with a larger company to bring the greatest value, the fastest to its shareholders. This was not the case. They decided to go it all alone.
Big market opportunity does not equate to big money fast
The "constipation market" is worth about $2B. I theorized that if Synergy could grab just a small piece (10%), this would represent $400M in annual sales. Sounds great considering the market cap, right? I did mention two risks in the November article that have come to fruition:
- Trulance is entering a crowded market, dominated by two better-known drugs.
- It may take a while for Trulance to catch on, inviting Synergy's share price to stagnate for an extended period of time.
The constipation market is already constipated. There isn't much of a demand for it, given the market is already concentrated
