The strong equities market of 2013 has benefited from the participation of individual investors such as myself who have arrived late in life with modest resources and great enthusiasm. We rarely buy large positions in a single trade but rather accumulate shares over time. Once enlarged, we can ill-afford to hold our equity through problematic binary events incurring massive portfolio losses.
This new investor profile of finite resources and abundant desire demands a strategy that emphasizes safety and proper timing. Reading the blueprint means identifying companies with strong financial positions, which essentially means no debt and a substantial amount of working capital preferably from recent financing activity.
Strength of Safety: Synergy's Solid Financial Position
Synergy Pharmaceuticals (SGYP) is just such a company. Still in its developmental stages, Synergy, with a market-cap of $414M, has no debt and a $105M balance sheet most of which came from a net $84.5M public offering on April 16th of this year. The nearness of that date and a cash burn rate of roughly $40M suggest that additional financing won't be required until the latter half of 2014. The stock price of today comes at a discount of nearly a dollar to the offering price of $5.50 which is a bargain.
Before I explain why, from Synergy's Website we have its mission statement: "At Synergy our mission is to improve the quality of patients' lives by discovering and developing novel drugs that will bring relief to millions of sufferers of gastrointestinal (GI) illnesses. We are committed to advancing the understanding of human biological mechanisms and the factors that can be influenced to correct disease states."
Essentially then, Synergy is in the same business as Ironwood Pharmaceuticals (IRWD) developing a competing and arguably superior biological treatment to Ironwood's groundbreaking constipation cure - Linzess.
To explain the 20% fall back in price from April, one need only look at the sluggish commercial start of Ironwood's product which shadowed Synergy's secondary offering. This dark confluence of events and the absence of any immediate FDA calendar catalyst for the balance of 2013 has left the stock aimlessly bobbing along the shores of buyer interest.
I don't know about you, but when I see something bobbing up and down on the horizon, I like to move in for a closer look because it just might be a big bag of cash like Vanda Pharmaceuticals was back in April of this year.
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No, no, no, I'm not making that comparison. However, Synergy could very well be a steady growth opportunity through March of next year. Strong insider buying statistics with purchases of 605k shares over the past 12 months with no insider sales indicate that Synergy is at least taxiing to the runway to prepare for take-off.
By comparison, Ironwood is a fully realized investment with a $1.42B market-cap and little potential for appreciation due to its enormous debt and paltry share of Linzess revenues (45%).
Plecanatide on the other hand is a wholly owned Synergy product with a low risk profile and thanks to Ironwood's stellar Q2 Linzess growth, astoundingly high potential reward as well. Simply stated then, Synergy is Ironwood Pharmaceuticals at one-third the present price.
So what makes Plecanatide better? Let's find out.
Strength of Safety: A Better Product In An Expanding Market
When scanning about for safer investment opportunities in biotechnology, I prefer companies with product constructs that are similar to those that have already been proven to pass muster in FDA trials. Since Plecanatide is essentially a better version of an already approved product, the entire approval process though not risk free is essentially risk diminished.
The market opportunity here is wide open. Sufferers of constipation in its many delineated forms often don't seek professional help because they're too embarrassed to talk about it. Over the counter remedies like laxatives are the first line of defense and are often abused exacerbating the problem. When frustration culminates in a doctor's visit, patients often meet with measured resistance because constipation is not a specific illness but rather a constellation of symptoms clustered into several clinical categories with a blurry set of solutions.
Ironwood therefore is spending large blocks of cash to educate the clinical, pharmaceutical and patient population of this very fact and it's working. Look at the Q2 script chart and the growth of late is astounding.
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Linzess is catching on, but at what price? Ironwood's total sales and marketing expenses for Linzess in Q2 were $16.9M with an additional collaboration expense of $11.1M. Assuming the latter was a one-time occurrence (you know what they say about assumptions) the sales and marketing expenses are at a yearly run rate of just under $68M.
Crazy world that we live in tells me that this large sum of operating cash is highly beneficial to not only Linzess but to Plecanatide as well as every dollar spent educating the medical world is a dollar Synergy doesn't have to spend.
Plecanatide Is Linzess Only Better
Like Linoclotide (Linzess), Plecanatide is a compound that stimulates fluid secretion in the intestinal tract that is instrumental to proper digestion. Constipation is in part the result of a drying out of the intestinal walls. In fancy scientific terms, Plecanatide is a proprietary GC-C receptor agonist that activates these receptors stimulating synthesis of cyclic GMP and activating the cystic fibrosis membrane conductance regulator which secretes fluid into the intestinal lumen. At that point, Plecanatide promotes spontaneous bowel movement and further reduces abdominal discomfort and bloating.
Now grasp this: Plecanatide is safer with less side-effects than Linzess as revealed in the large Phase IIb/III trial recently completed and conveyed.
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Strength of Safety: A Major Catalyst A Comfortable 8 Months Away
While I'm reticent to write articles that suggest a stock price target (and in 13 thus far I haven't done that), I'm convinced that this one will eclipse its pre-offering price of $5.50 by a solid 20% (meaning 45% growth from today's price) on positive Phase IIb in Plecanatide for constipation-predominant irritable bowel syndrome (IBS-C) due by March 31, 2014. By then, Synergy's phase III trials in chronic idiopathic constipation (CIC) should be enrolled and well underway with completion dates firmly positioned on the FDA calendar.
PropThink, a valuable resource in all things biotechnology related, has been a major proponent of Synergy on this website with two in-depth articles teeming with insights. Both stories, found here and here, seem to suggest that the lack of short term catalysts in the form of FDA trial results are offset by the probability of a big pharma buyout. The wholly owned rights to Plecanatide by Synergy are the linchpin of that position.
Whilst I prefer dreams to reality the facts don't necessarily support this thesis. Finding a buyer for Synergy at a premium price will be difficult for the following reasons.
The market is relatively new and untested. And because of this any buyer will have a difficult time assessing value.Even if they could put a price to the market, Linzess is not the only competing product to reference. Furthermore, generic challenges to Linzess could occur within a few years of Plecanatide's commercialization further muddling the picture.While SG&A expenses will be reduced for the seller of Plecanatide in terms of educating doctors, pharmacists and patients about the efficacy of this remedy, they will be increased relative to seizing market share from a formidable opponent whose sole weakness is a side effect that may in many cases can be regulated through dosage adjustment.Any buyer will pay a licensing fee to its competition which happens to be none other than Ironwood as that is how Synergy came about developing the compound to begin with. Though in the small single digits (I assume this means between 2 and 5% but nowhere can I find the exact figure) this is a bitter pill to swallow.By March of 2014, we'll know better how much the market has opened up to Ironwood's Linzess because two more full quarters of scripts and sales will be on the books. Regardless of my pessimism, big pharma no doubt will be watching and evaluating. And if the efficacy of Plecanatide remains high and the percentage of adverse events remains low, Synergy may well be the itch big pharma needs to scratch on skyrocketing Linzess numbers.
A Word About Safety
Throughout this article, I've mentioned the word "safety" and feel the need to clarify how I'm using it so that there's no room for misunderstanding.
In the stock market and especially in small-cap biotechnology, there's no such thing as safety. There are safer investments than others but each of them carries considerable risk.
One need look no further than this particular space to find the tragic story of Zelnorm which was a drug approved for the treatment of constipation in 2002 and was pulled from the market in 2007. The FDA had determined its use was associated with a statistically significant increased risk of heart attack and stroke. A prescription can still be written and filled but only for patients with no other treatment option.
Fortunately for Novartis (NVS) shareholders, the maker of Zelnorm, the company was diversified enough to absorb the blow without it being fatal. Should such an occurrence befall Ironwood or Synergy, that would not be the case.
In Conclusion
I tend to veer toward safer biotechnology opportunities in the stocks that I own and articles that I write. This year, I've endorsed three companies by way of authorship as good long-term (by my definition 3-9 months) propositions - Novavax (up 31%), Seattle Genetics (up 41%) and Amarin (down 14%). And while I'm certainly more comfortable applying my stock selection process to identifying colossal mishaps in the making than to ferreting out gargantuan success stories, I remain pleased that my schemes are equally adept at targeting safer and appreciating biotechnology purchases.
In this particular case, I'm confident that Synergy will be a swelling tale of good fortune. I'll initiate my first position on September 4th and add to it upon satisfactory consideration.
Disclosure: I 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. (More...)
Additional disclosure: The purpose of my article is to provide information the accuracy of which is as good as the public sources it was derived from. If providing my opinions on matters related to any investment has entertained you then I have accomplished my only goal. Do not act on anything I have written. Rather, do your own due diligence and consult an investment professional before making any investment decision. Acting on what any one writer, including me has imparted to you is foolish at best. I have no better access to resources or gift of opinion formulation than you do. Do not act on anything I have written without doing your own research. There are a myriad of things which can happen in lieu of any forward looking statement I have made. Any stock featured in an article I compose is subject to all manner of influences which can change its value in dramatic fashion upwards or downwards. Invest at your own risk and attain the reward your efforts have wrought.
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