Buying The Dip: SGYP’s Recent Breakdown Is an Entrance Point for the Long-Term

Since pricing its latest public offering at $5.50 two weeks ago, shares of Synergy Pharmaceuticals (SGYP) have failed to hold that print and are trading under $5.00 as of Monday morning. Nevertheless, existing clinical data for Synergy’s lead candidate plecanatide suggest that the drug will be competitive with Ironwood’s (IRWD) Linzess (linaclotide), a fellow guanylate cyclase-C agonist indicated for the treatment of irritable bowel syndrome with constipation (IBS-C) and chronic idiopathic constipation (CIC). Synergy is pursuing the same two indications, and plecanatide has already demonstrated similar efficacy with improved tolerability (fewer patients reported diarrhea as an adverse event). And although plecanatide is likely two years from hitting the market, IRWD’s valuation suggests that plecanatide, if trials continue to demonstrate its clinical benefit — especially over Linzess — is severely undervalued. Most investors point to the IRWD/SGYP disparity as reason to own the stock, and it’s true that the difference is compelling. With Linzess as its only product, IRWD carries a market capitalization of $1.9B; SGYP’s $363M valuation looks paltry in comparison, especially considering that IRWD only recognizes 50% of Linzess’ sales (partner Forest Labs (FRX) splits revenues). The market, then, values Linzess at close to $4B.

This isn’t new information to those following the story, but we believe that SGYP around $5.00 is a good place to be initiating and/or adding to a long-term position. The company has no major catalysts during the rest of this year, but will report the results of its Phase IIb IBS-C trial (NCT01722318) early in 2014. Synergy has an end-of-Phase-II meeting with the FDA in June, which should provide a clear path forward for plecanatide development. In addition, the company will present the full data set from plecanatide’s Phase IIb/III at the Digestive Disease Week conference on May 21 (see the abstract). Neither of these are major events for SGYP, but some investors continue to believe that the FDA will allow Synergy to file for approval in CIC based on existing data alone (Phase IIb/III) and the drug’s similarities to Linzess; we see this as unlikely. Linzess went through two Phase III trials for IBS-C and CIC each, suggesting that the FDA will want to see at least one more late-stage trial (possibly two) in CIC, depending on whether they accept the completed Phase IIb/III as registrational or not. There’s also the chance that Synergy will partner plecanatide in the near-term, which it will need to do at some point, but we think those odds improve following the Phase IIb IBS-C data in 1Q14.

The company has effectively shored up the balance sheet for the time being, but Synergy will need to run one more financing to fund plecanatide’s final pivotal trials and get the drug onto the market. We don’t expect a raise until 2014, most likely after the Phase IIb IBS-C data early next year, but investors should be prepared for further dilution in the long-haul.

SGYP is oversold based on its 14D MFI/RSI, and while traders were expecting the 200D MA to offer support last week, the stock broke below and has yet to show signs of a reversal.Note that on the weekly, SGYP’s 50MA lies at $4.95. Despite a lack of catalysts through the rest of 2013, we see SGYP’s recent weakness is a long-term buying opportunity, and investors can look for an opportunistic entrance point in the high $4’s. Cantor Fitzgerald pinned a $1.6B peak sales estimate on plecanatide just before the offering announcement, and although we take analyst numbers with a grain of salt, the IRWD comparison alone is enough to indicate the kind of upside that Synergy may produce in the long-term.

In connection with sGYP, PropThink has taken a long position.