SYNERGY PHARMACEUTICALS 74% PLUNGE ON FUNDING CONCERNS PROVIDE ONCE IN A LIFETIME OPPORTUNITY RETURNS
-SGYP Target Returns Equity: 300%-800%
-Debt: 10% annualized
-Strategy: 13D Filing along with 2-3 director nominations and alleviation of funding concerns through a debt package.
-Market: Chronic Idiopathic Constipation and IBS-C
November 7, 2018
Greetings:
To best understand the size of the opportunity it’s best to look at Allergan’s/ Ironwood’s inferior drug Linzess for CIC/IBS-C. With net sales on track to exceed $800 million for 2018 (5 years after commercialization). Ironwood has a market cap valuation of $1.85B for only 50% of the market rights to Linzess down from $3b earlier this year. Ironwood is basically a one trick pony pharmaceutical company with one asset which consists basically of Linzess only and some pipeline acquisitions which have cost less then $600 million with included R&D expenses to date and those expenses have mostly been financed with debt so they aren’t reflected by the market cap. Trulance can achieve at least the same sales with the right strategy.
Linzess is a modified strand of the E-Coli enterotoxin protein which is the cause of acute diarrhea in infants and travelers in developing countries. Trulance is a synthetic replication of the naturally occurring human gastrointestinal peptide uroguanylin that controls secretion on the intestine.
Trulance has a much safer profile and can be taken without food. It’s much gentler and has less side effects. Also, unlike Linzess, where the body can build up an immune response to the drug given the E-Coli component over time, Trulance can be taken indefinitely.
Any GI doctor who prescribes both drugs will attest to the better profile and efficacy of Trulance. Data released this year confirmed that people who suffer from CIC and IBS-C in general have up to a 35% deficiency of Uroguanylin on their digestive tract. Trulance is the only analog on the market that replicates the function of Uroguanylin.
The opportunity for up to 800% Equity returns
Earlier this year Synergy enjoyed a $700 million market cap, last year it enjoyed a $1.2 billion market cap. Now, thanks to a funding warning its market cap is only $115 million. The opportunity lies on accumulating up to 34.5% of the equity on the open market during a 5 day period through the use of options, open market stock purchases as well as direct block institutional purchases (Anything over 34.5% would trigger a loan repayment from CRG). Then file a 13D form with the following plan:
• Offering the company a loan of $100 to $125 million in $25 million increments with a 10% interest rate with the condition of quarterly cash burn reductions of $4 million per quarter.
• Offering the loan in exchange for 2 or 3 director seats on the board to supervise the investment and help the company on the successful sale or partnership of the company.
On a theoretical practice a $35 million equity investment could easily triple after the news to reflect the market cap previous to the funding warning. It would then be up to the buyer of the equity to decide whether to dispose of the stake at a profit of $70 million and just keep the debt commitment (as long as the company keeps making progress on cash flow reduction) or to ride up the equity investment with the hope the market cap returns to the beginning of the year valuation of $700 million for a return of 800%
Synergy: A de-risked play
Synergy is on track to achieve net sales of $50 million for 2018 and it has patent protections till at least 2031. This year net sales reflect only the CIC labeling. The IBS-C label was acquired til January 2018 but isn’t covered by insurance yet. Considering a single-label insurance coverage, a 29% preferred coverage vs. Linzess 72% preferred, a salesforce 1/10th of the size of Allergan/Ironwood, and limited funding and I would say $50 million is quite impressive for the first full year in the market.
Bright Future
Trulance unrestricted insurance coverage helped by the additional IBS-C label is expected to increase by 350% next year. It’s not out of question that sales could exceed $100 million in 2019 and possibly even achieve quarterly profitability in the second half of 2019.
As an example of insurance coverage, on 2018 Trulance was excluded from the Express Scripts preferred formulary costing them over 83 million covered lives. For 2019, Trulance would be on the preferred formulary for Express Scripts. As well important is the exclusion of Amitza on several formularies.
The Goal
The goal of any new directors would be to help the company better negotiate a partnership or a complete sale of the company while working on cost reductions. The only concern plaguing the shares of Synergy at the moment have to do with covenant requirements from the loan of CRG. These covenants of sales targets, market cap requirements and financial targets have destroyed confidence in the company.
A new flexible source of funding whose only covenants are the increase on sales along with the reduction of costs will help provide significant upside to anyone exposed to the equity side of the equation.
Once the market cap has recovered, use of the capital markets could be done to provide more cushion to the lender of new debt.
Significant Upside
The company is already aggressively looking for buyers of its assets as well as of the whole company. Acquiring shares at the current price would provide a nice exposure to the successful completion of the total sale of the company before the 13D strategy could be implemented.
Given the net sales in excess of $100 million expected for 2019 and long term debt of only $120 million, there shouldn’t be any problem for Synergy to repay their obligations through future cash flows.
As a final observation, Synergy has a second pipeline asset Dolcanatide which has shown great promise on early trials.
-SGYP Target Returns Equity: 300%-800%
-Debt: 10% annualized
-Strategy: 13D Filing along with 2-3 director nominations and alleviation of funding concerns through a debt package.
-Market: Chronic Idiopathic Constipation and IBS-C
November 7, 2018
Greetings:
To best understand the size of the opportunity it’s best to look at Allergan’s/ Ironwood’s inferior drug Linzess for CIC/IBS-C. With net sales on track to exceed $800 million for 2018 (5 years after commercialization). Ironwood has a market cap valuation of $1.85B for only 50% of the market rights to Linzess down from $3b earlier this year. Ironwood is basically a one trick pony pharmaceutical company with one asset which consists basically of Linzess only and some pipeline acquisitions which have cost less then $600 million with included R&D expenses to date and those expenses have mostly been financed with debt so they aren’t reflected by the market cap. Trulance can achieve at least the same sales with the right strategy.
Linzess is a modified strand of the E-Coli enterotoxin protein which is the cause of acute diarrhea in infants and travelers in developing countries. Trulance is a synthetic replication of the naturally occurring human gastrointestinal peptide uroguanylin that controls secretion on the intestine.
Trulance has a much safer profile and can be taken without food. It’s much gentler and has less side effects. Also, unlike Linzess, where the body can build up an immune response to the drug given the E-Coli component over time, Trulance can be taken indefinitely.
Any GI doctor who prescribes both drugs will attest to the better profile and efficacy of Trulance. Data released this year confirmed that people who suffer from CIC and IBS-C in general have up to a 35% deficiency of Uroguanylin on their digestive tract. Trulance is the only analog on the market that replicates the function of Uroguanylin.
The opportunity for up to 800% Equity returns
Earlier this year Synergy enjoyed a $700 million market cap, last year it enjoyed a $1.2 billion market cap. Now, thanks to a funding warning its market cap is only $115 million. The opportunity lies on accumulating up to 34.5% of the equity on the open market during a 5 day period through the use of options, open market stock purchases as well as direct block institutional purchases (Anything over 34.5% would trigger a loan repayment from CRG). Then file a 13D form with the following plan:
• Offering the company a loan of $100 to $125 million in $25 million increments with a 10% interest rate with the condition of quarterly cash burn reductions of $4 million per quarter.
• Offering the loan in exchange for 2 or 3 director seats on the board to supervise the investment and help the company on the successful sale or partnership of the company.
On a theoretical practice a $35 million equity investment could easily triple after the news to reflect the market cap previous to the funding warning. It would then be up to the buyer of the equity to decide whether to dispose of the stake at a profit of $70 million and just keep the debt commitment (as long as the company keeps making progress on cash flow reduction) or to ride up the equity investment with the hope the market cap returns to the beginning of the year valuation of $700 million for a return of 800%
Synergy: A de-risked play
Synergy is on track to achieve net sales of $50 million for 2018 and it has patent protections till at least 2031. This year net sales reflect only the CIC labeling. The IBS-C label was acquired til January 2018 but isn’t covered by insurance yet. Considering a single-label insurance coverage, a 29% preferred coverage vs. Linzess 72% preferred, a salesforce 1/10th of the size of Allergan/Ironwood, and limited funding and I would say $50 million is quite impressive for the first full year in the market.
Bright Future
Trulance unrestricted insurance coverage helped by the additional IBS-C label is expected to increase by 350% next year. It’s not out of question that sales could exceed $100 million in 2019 and possibly even achieve quarterly profitability in the second half of 2019.
As an example of insurance coverage, on 2018 Trulance was excluded from the Express Scripts preferred formulary costing them over 83 million covered lives. For 2019, Trulance would be on the preferred formulary for Express Scripts. As well important is the exclusion of Amitza on several formularies.
The Goal
The goal of any new directors would be to help the company better negotiate a partnership or a complete sale of the company while working on cost reductions. The only concern plaguing the shares of Synergy at the moment have to do with covenant requirements from the loan of CRG. These covenants of sales targets, market cap requirements and financial targets have destroyed confidence in the company.
A new flexible source of funding whose only covenants are the increase on sales along with the reduction of costs will help provide significant upside to anyone exposed to the equity side of the equation.
Once the market cap has recovered, use of the capital markets could be done to provide more cushion to the lender of new debt.
Significant Upside
The company is already aggressively looking for buyers of its assets as well as of the whole company. Acquiring shares at the current price would provide a nice exposure to the successful completion of the total sale of the company before the 13D strategy could be implemented.
Given the net sales in excess of $100 million expected for 2019 and long term debt of only $120 million, there shouldn’t be any problem for Synergy to repay their obligations through future cash flows.
As a final observation, Synergy has a second pipeline asset Dolcanatide which has shown great promise on early trials.