Description

Investment Thesis: Allowing a modestly successful launch of Trulance, SGYP gets sold in a strategic sale between $8 to $12 per share. Low risk launch given Phase 3 test results and growing CIC/IBS-C market that has only 2 branded drugs. SGYP is a net cash company with an immaterial amount of debt lowers downside risk. It has a ~$1b EV, with a drug that could do $500m-$1b in sales, and exit multiples can be ~6x sales.

Description: Synergy Pharmaceuticals (SGYP) is GI focused pharma company that is currently launching its first drug, Trulance (Plecanatide), to treat IBS-C (constipation) and CIC (chronic idiopathic constipation). SGYP is also developing Dolcanatide for treating Ulcerative colitis (UC), however this program remains in early stages. Including the outstanding converts and stock options, SGYP has a fully diluted market cap of ~$1.15b (based on ~259.5m shares) and an EV of ~$950m (~$204m cash and $22m in convertible debt)  

• SGYP received Trulance’s CIC approval in early Q1 and hopes that the drug takes market share as it demonstrates a more favorable safety/side-effect profile vs. AGN’s competitor IBS-C drug Linzess which is a $650m drug in a $1.3b branded market (ex-OTC)

• Trulance shares a similar mechanism of action as Linzess (owned by Allergan) but Trulance showed a much lower side effect rate vs. Linzess in trials. Albeit some analysts may claim that the definitions of the term are not quite apples to apples between trials, Trulance had a ~6% diarrhea rate vs. ~20% for Linzess.

• Further the “real-world” diarrhea/side effect incidence rates for Linzess are estimated to be much higher (nearly double this) given obstacles and practicality of taking the medicine on an empty stomach, meanwhile this inconvenience is not an issue for Trulance.

• Note, Synergy tested Trulance in two large pivotal IBS-C trials that enrolled over 2,000 subjects—the largest pivotal studies done in this indication (Linzess was ~1,600 patients)

• Linzess has already filled over 1m scripts since its launch in 2013 and is expected to attain blockbuster status (from ~$720m run-rate currently) over the next 2-3years as the size of the overall IBS and IBS-C Rx market continues to expand.

• SGYP has already filed a sNDA for the treatment of IBS-C, and approval is expected by year end, however due to off-label prescribing behavior, this approval is not considered a material catalyst.

• More importantly, the CIC launch is already in its early stages and has shown a similar pattern to Linzess, which had a relatively slow initial start despite facing less competition than Trulance

• Full data related to the recent IBS-C trial is expected to be released in May, and bulls hope to see favorable findings related to Trulance’s impact on reducing abdominal pain which is arguably the biggest concerns of IBS-C patients and thus would provide further evidence of Trulance’s superior efficacy profile vs. both Linzess and OTC options

• SGYP has 100% of worldwide rights to Plecanatide and in the wake of a shake-up elsewhere in the GI space, SGYP has been able to acquire an experienced salesforce from companies such as Salix, VRX, Shire, AGN and AZN

• SGYP is launching Trulance via its hybrid sales model utilizing an experienced contract sales force of ~150 - 200 reps that is expected to target ~27,000 high-prescribing physicians.

• Formulary access remains a timing risk near term and negotiations with payors could take up to 6 months

• In the interim, SGYP is trying to get the word out by using sample blister packs in hopes that IBS patients will try Trulance and find “their experience” to be much better than Linzess or other options. Mgmt. has implemented some direct to consumer (DTC) marketing and has gone as far as creating special emojis to use in its marketing, but also stated that a full DTC campaign must wait until at least next year.

Situation: SGYP currently has a favorable risk reward setup given the limited downside due to its depressed valuation, relative to Trulance’s overall potential value due to its favorable efficacy. Overall the situation remains a takeover story, which may have been pushed out for another 6-12 months.

• SGYP’s current EV of ~$950m vs. street valuations of Linzess ~$4b

• Shares have suffered recently as many investors were hoping for a takeover to occur following the CIC approval.

• Takeda was a potential suitor given its GI focus and its status as a motivated buyer given Mgmt.’s stated intention of spending up to $10b on acquiring US assets

• However, when a takeover did not occur and SGYP built out a sales force, most short term investors likely exited their position, causing SGYP shares to fall from ~$7 in late Jan to almost $4 by early April.

• SGYP has already demonstrated that Trulance is a valuable asset that is favorably positioned in an attractive and expanding market relative to its competition, particularly Linzess.

• IP looks solid as SGYP received three new patents related to Trulance last week that don’t expire until after 2030, prior IP protection was expected to be at least until 2022-2023 as SGYP has two composition of matter patents until then, and the company has another +13 patents issued that don’t expire until closer to ~2030.

• An estimated 30-45m patients suffer from CIC or IBS-C in the US (~10-20% of population), but only ~5% of these patients are treated with branded Rx drugs. The Rx constipation market nearly doubled in the last two years (’13-’15) and is expected to post double digit rates of growth over the next few years as market education and patient awareness continues to improve.

• IBS usually begins in late adolescence or early adult life, typically linked to factors such as emotional stress. Meanwhile, CIC is more common in a middle aged and older demographic (as an estimated 50% to 75% of elderly nursing home residents use laxatives daily), opening opportunities for Rx treatments such as Trulance across the population

• In terms of $ amount, market size projections are all over the place, as some companies in the space estimate that the overall IBS market may be worth as much as $8.5-$9.5b. Meanwhile per Bloomberg, the combined IBS-C & CIC branded drug market is projected to hit ~$3.2b by 2020 (up from $1.6b in 2016), driven by newer, more-effective therapies with fewer side effects.

• No matter the projection, analysts agree that safety (dehydration risks due to diarrhea) is both critical and key to unlocking peak sales potential, and Trulance tests well in this regard.

• Mgmt. has plenty of time for the launch to progress as it should have ~$160-170m of cash at the end of Q1 following the recent capital raise ($122m in cash via a 20m share stock offering at the end of Jan) and only $22m of debt (convertible notes), which should get it through another 4-5 quarters easily until revenues start to ramp.

• A strategic acquirer with a GI and primary care presence could easily reap significant synergies by bolting on the asset to its current GI and PCP sales force, it would just come down to a matter of price

• Given a WAC of ~$3k/year, Trulance is priced on par with Linzess and Amitiza,

• Amitiza currently does ~$300m but is only used to treat females not males, therefore, Trulance/Plecanatide should have ~1.5x more potential than Amitiza given IBS prevalence is ~2:1 female to male

• Consensus estimates for SGYP of $320m in 2020 basically assumes Trulance can gain a foothold of ~15% share of a ~$2b IBS-C Rx market (albeit some analysts see sales as high as ~$500m to nearly $1.0b in 2020).

• Assuming a suitor such as Takeda or Pfizer waits for the launch to progress past initial phases, a 6.3x revenue multiple would translate to ~$8 per share (vs. current levels of ~$4.50).

• Press reports note Takeda was willing to pay ~4.7x revenues an additional 0.8x in royalties to acquire Salix.

• Mgmt. should also be willing to sell for the right price, as the current CEO and Founder will receive an incentive bonus of 3.5% above an EV of $1.0b and 4.5% above an EV of $2.0b. The Chief Science Officer is also entitled to 1-1.2% bonus based on transaction size.

• Note, these EV values exclude the impact of net cash on SGYP’s books.

• Assuming a fully diluted share count of 256m shares, this translates to a share price of ~$7.75 based on a $2b EV, which is the milestone needed for the CEO to receive the 4.5% bonus.

• This represents 75% upside vs. current levels

Risks

• Launch fails to gain traction with payors and take share from Linzess

• Overall IBS-C Rx market doesn’t expand as expected

• No takeover bid as Takeda and other GI focused Pharma’s choose to wait to bid on VRX’s Salix assets

• Although a mitigating factor is activist shareholders (Paulson and Orbimed) pushing a sale at a lower price of $6 per share and the company is a net cash company with immaterial debt.

Upside

• Analysts think that Trulance can ultimately grow to be ~$600m/yr drug under Synergy’s control and a +$1b/yr drug under the control of a large pharma like Takeda

• Sale of $10 to $12 per share

Catalyst

Catalysts

• Takeover bid for entire company

• Licensing deal for ex-US rights

• Positive IMS Data showing traction and continued growth in Trulance Prescriptions

• Payor Progress with Trulance being covered by both commercial and Govt insurance plans

• Hybrid Sales force keeps costs low and allows SGYP to be cash-flow positive on a run rate basis exiting 2017

• Positive data from IBS-C study in May shows lower side effects and better efficacy, specifically with regard to pain

• Abdominal pain/bloating data expected in May, could help compare favorable vs. Linzess and other IBS-C drugs

• Lower diarrhea rates also improve safety profile as Linzess carries a pediatric warning for dehydration

• This could also be helpful in an OTC conversion scenario, which is presently remote but remains a future opportunity given the Trump administration’s willingness to cut regulation and lower healthcare costs.