Synergy Pharmaceuticals: Is The End Near?

by: Alexander Maxwell
Summary

Inability to hit sales targets combined with a tough market environment have hurt Trulance Sales.

Trulance sales will fall below the required sales floor.

Synergy likely to default absent an agreement.

Investors in Synergy Pharmaceuticals (NASDAQ:SGYP) woke up to quite a shock yesterday when the company announced that it is having trouble renegotiating its loan with its largest creditor CRG Servicing. This announcement, combined with the announcement that Synergy has stopped looking for buyout and partnership opportunities has helped to cause the perfect storm for the shareprice to plunge.

What Happened

CRG Servicing is by far Synergy's largest creditor, and could be the ultimate cause of Synergy's downfall. According to its loan agreement with CRG, Synergy is required to achieve minimum sales for its constipation drug Trulance of $61 million. Synergy announced that they will be far short of that target by the end of the year, and up to this point have not been able to receive relief from many of the covenants required in the loan agreement with CRG.

If Synergy is unable to obtain relief, it will have to pay CRG anywhere between $38 million and $51 million by March 31, 2019. It is very unlikely that Synergy will have sufficient capital in order to be able to make this payment. Furthermore, it is unlikely that sales of Trulance will increase to the magnitude required in order for Synergy to be able to make this payment.

What Are Synergy's Options?

Based on the announcement, there are really only two options for Synergy to be able to continue operating. The first and perhaps more probable is that they amend the agreement with CRG. Synergy would need to obtain relief of the sales covanent, and likely would want to obtain relief of some of the capital covanents in order to be able to efficiently maintain operations.

It should be noted, however, that CRG would have all of the bargaining power in this scenario. Any relief is likely to be expensive for Synergy long term and could harm the long term investment potential of the stock. Furthermore, investors have to wonder how long CRG's patience is likely to continue. If CRG grants relief, it could come at a substantial long term price, and if CRG is unconvinced that Synergy will be able to meet the terms of even a revised loan agreement, then it may be in the best interest of CRG to see Synergy head for bankruptcy.

There is at least one reason to be somewhat optimistic that a deal will get done. The previously announced formulary wins for Trulance, which are just starting to take effect, should help position the drug for continued sales growth in 2019. Some of the highlights of the formulary wins include being added to the Express Scripts Medicare Part D Formulary, which recently took effect on September 15, 2018, being added to the Express Scripts National Preferred Formulary beginning January 1, 2019 and a recent movement from not covered to an unrestricted preferred agent on the United Health National Preferred Formulary, which was effective on October 1, 2018. These formulary wins represent the best hope that Synergy has in order to be able to find a deal. If Synergy is able to show that the recent additions to major formularies are yielding the potential for a substantial increase in Trulance sales, CRG will be more confident that Synergy could be able to fulfill the terms of the loan agreement. Investors in Synergy should look for guidance when the company announces its quarterly results as to how sales have improved since Trulance was upgraded in status on many different national formularies, and management's expectations for the increased sales resulting from the various formulary wins. The important thing for investors to keep in mind is that CRG will effectively be able to call the shots on any sort of an amendment/ loan covenant relief, so the opinion of CRG as to the future of Trulance will be extremely important.

Obtain Other Financing/Sources of Liquidity

Synergy's second option in order to be able to continue to operate would be to find some other source of liquidity. There are two major ones that I will consider for purposes of this article. The first being obtaining a new loan agreement from a different provider, and the second is signing a partnership agreement with a substantial upfront payment. Both of these situations are admittedly unlikely.

Synergy will presumably be trying to obtain a loan agreement from a different provider in order to provide take out financing for the CRG loan. Essentially, Synergy would want to try to refinance in terms that are more favorable than what (if any) CRG is currently offering. It is, however, unlikely that Synergy will be able to obtain the requisite financing. Many of the lenders capable of providing the funds will likely be skeptical that Synergy will be able to meet its loan covanents moving forward, as they are already admittedly likely to default on their loan with CRG. For a new financier to come in, that financier would have to be very bullish on the potential for Trulance, and would have to be willing to work with Synergy regarding the flexibility of the terms of the loan. With how far off Synergy currently is from its sales floor per the CRG agreement, many lenders will likely be skeptical that Synergy management will be able to execute on any sort of sales projections. It will be interesting to see if Synergy is able to line up any other interested party, as even another interested party could help push CRG to relax some of the covanents. I do believe that it is unlikely, however, that Synergy will be able to obtain any sort of financing that would be suitable in order to replace its current capital needs.

The other option for Synergy would be to find a partnership agreement for Trulance that provides a substantial upfront payment. There are currently two ex-US licensing deals that are in place for Trulance, and another could provide some sort of capital but is unlikely to be enough to meaningfully move the needle for Synergy shareholders. The real focus will be on if Synergy is able to sign a deal for the US rights to Trulance. This is also admittedly unlikely, as Synergy admitted in its release that it has been unable to find anyone to partner with on reasonable terms since 2015. Any interested partner might be better off waiting to see if Synergy goes bankrupt and then trying to scoop up the rights to Trulance for effectively pennies on the dollar (assuming that Synergy is liquidated). A partner would also likely be able to demand very favorable terms for the partner and very weak terms for Synergy, as the announcement that Synergy is struggling to amend its loan agreement with CRG will allow for any partner to negotiate from a position of strength.

Bankruptcy Likely Outcome

There are two likely outcomes for Synergy shareholders. Either it is able to reach an amended agreement with CRG, or that Synergy will have to declare bankruptcy. Unfortunately, it seems like the latter is more likely than the former. CRG is likely doing the calculations to figure out its position in the event that Synergy does file bankruptcy, and Synergy will have to do something to move the needle away from it being more favorable for CRG to see what happens in bankruptcy, than to allow Synergy to continue to operate. According to its most recent quarterly report, Synergy had $61.2 million in cash. It is unlikely that Synergy will be able to make a minimum $35 million payment to CRG in 2019 assuming that it does not find any other source of liquidity, as Synergy was still losing substantial amounts of money last quarter (reporting a net loss of $29.7 million).

Conclusion

Investors should stay away from Synergy until there is any reason to hope that they will be able to obtain relief from CRG. The reporting of the third quarter financial results will be one of the last chances for Synergy management to be able to change the market perception, and to help show that Synergy will still be viable. The most important group of people listening to that call will not presumably be regular investors, but CRG. Ultimately, the fate of Synergy likely lies in the hands of CRG and so far it seems that CRG is willing to let Synergy spiral into bankruptcy. Investors should be concerned about the ongoing viability of Synergy Pharmaceuticals.

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.