Synergy Pharmaceuticals: Positioning For Pipeline Payoff

Synergy Pharmaceuticals (NASDAQ:SGYP), with a key trial catalyst pending, remains a hot stock to watch heading into the final quarter of the year. As confirmed last month, Synergy's Phase IIb/III trial testing Plecanatide in the treatment of chronic idiopathic constipation (CIC) has completed enrollment and is on track for a December results release. Investor sentiment regarding this trial is positive, as evidenced by a price run of nearly a dollar since the beginning of August, especially since Ironwood Pharmaceuticals' (NASDAQ:IRWD) recently received an FDA approval for Linzess - a product previously known as Linaclotide which shares origins and a similar mechanism-of-action with Plecanatide.

The Ironwood approval served as validation of the technology and investors took note as the SGYP share price breached the five dollar barrier for the first time in months after the news hit the street.

That said, investors still have other reasons for enthusiasm, however, even as Linzess will have a fairly significant head start in the commercialization process.

Although approved earlier this month for the treatment of adults suffering from irritable bowel syndrome with constipation (IBS-C) and/or chronic idiopathic constipation (CIC), there are some safety and side effect concerns surrounding the treatment. During the Linzess trials, some patients experienced side effects that included severe cases of diarrhea that were extreme enough to force 6% of them to abandon the trial altogether. Thus far in developments for Plecanatide, no such side effects were noted, according to publicly-released information.

That's a huge benefit for team Synergy, even with Linzess making headway in the market first. Should this superior side effect profile continue through the trial and approval process, then there's fair reason to believe that Plecanatide could quickly chip away at Ironwood's share of the market.

While Plecanatide remains the core of the near-to-mid term business plan, Synergy made another move last week to boost its value and give investors something else to chew on. On Wednesday it was announced that the company would expand its gastrointestinal (NYSE:GI) pipeline by filing an Investigational New Drug (NYSE:IND) application for SP-333 in the treatment of inflammatory bowel disease. The move offers Synergy a pipeline beyond Plecanatide and, although still only very early in development, could potentially position Synergy to become a leader in the GI field later on down the road. Synergy intends to quickly turn around any IND go-ahead with a trial initiation later this year. Such an event would offer investors a second trial catalyst for late-2012, coinciding with the Plecanatide results.

Not satisfied with the status quo, Synergy spent the summer expanding its pipeline beyond just the GI applications.

In a merger with Callisto Pharmaceuticals this summer, the company landed the Phase II cancer treatment Atiprimod, the Phase I L-Annamycin and the pre-clinical Degrasyns. Then, in an Asset Purchase Agreement completed last month with Bristol-Myers Squibb Company (NYSE:BMY), Synergy added the shingles-treating FV-100 to the mix for an up-front payment of just $1 million. The full financial terms of the deal were not disclosed, but the relationship with BMY could be noteworthy as it has been speculated that Synergy could be positioning itself for a buyout. It's no secret these days that big pharma is looking to replenish pipelines depleted by expiring patents with new and potentially vibrant new products.

Another benefit of the Callisto deal - and maybe more relevant for investors right now than the pipeline products that now join the Synergy arsenal - is that the merger alleviates the forty percent ownership of Synergy shares that were previously held by Callisto. Such a large investment by one entity could be a detriment to attracting more committed institutional investors and - since the merger spreads those previously-held Synergy shares throughout the entire Callisto shareholder base - the path is now clear to attract a much larger investor base, including the institutional types.

Yet another note not to miss from the merger is that the SGYP shares being spread across the Callisto shareholder base will be 'locked up' for eighteen months, barring a "Change of Control" event. That means that the shares will not weigh down the immediate upside potential of the SGYP share price as the short term catalysts play out. The "Change of Control" language also raises the already heightened buyout speculation surrounding the company, as it could be an indication of where management wants to take the company once the Plecanatide picture is clearer.

Synergy shares spiked into the close last week as investors absorbed the prospects of the IND filing and the potential for another trial initiation this year, but they opened the new week modestly lower on unimpressive volume. Many still expect, however, that SGYP could experience a pre-results runup in price over the next few months, as such a move would be in-line with sector trends, but beyond just a speculative move, SGYP could also start moving to match the market cap of IRWD.

Another catalyst not yet discussed is the potential of a large partner jumping on board to help bring Plecanatide to market, should the pending trial results be positive and the FDA approve the product.

Ironwood - with a market cap of roughly $1.4 billion - has already partnered Linzess with Forest Laboratories (NYSE:FRX), who will take half of the product's revenue. Synergy has yet to land a partner, meaning it currently owns one hundred percent of any potential Plecanatide revenue stream, but the company's market cap is but a fraction of IRWD's. That's a relevant statement when gauging future potential and Plecanatide value, as noted by a number of analysts who believe that SGYP has significant room to run, based on the IRWD valuation.

Considering the growing pipeline and pending late-year catalysts, SGYP remains a hot stock to watch. The company has taken measures to position itself as not only a leader in the GI field, but also as a legitimate developmental company with multiple pipeline paths to market. Such moves could be indicative that the Synergy team ultimately plans to sell and is therefore adding all the value it can at the current time - especially when considering the language in the Callisto deal - but it's highly unlikely any such move would materialize before we hear the Plecanatide results.

While there is more reason now than ever before to believe that Synergy can survive without Plecanatide, there's little doubt that the December results hold the keys to the short to mid term future - and that's why investors will be watching, and placing their bets in earnest.

Significant gains may be there for the taking if Plecanatide proves to be a success, and during any potential pre-results runup.

Worth watching.

Disclosure: I am long SGYP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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