Synergy Pharmaceuticals Inc (SGYP): A 2018 Story Shapes Up

By Bret Jensen

Small biotech stocks especially ‘Tier 3‘ concerns like Omeros and Flexion Therapeutics have been taking it on the shin for most of October as investor sentiment has shifted suddenly and violently into a negative stance.  It is times like these I start to deploy some ‘dry powder’ to incrementally add shares to core positions in several promising names in this high beta part of the market.

Today I would like to highlight a very undervalued small biopharma concern called Synergy Pharmaceuticals Inc. (NASDAQ:SGYP) which has taken its lumps in this latest downdraft.  However, I think the stock will be a great story and big winner in 2018.  I see a big sales ramp up for its recently approved GI drug Trulance in the quarters and years ahead.

The company’s primary drug candidate Trulance was approved for Chronic Idiopathic Constipation in January of this year and stock moved up to around $7.00 a share on the approval.  However, the shares have slowly declined since then and currently trade for just under $2.75 a share.  There a few key reasons for the poor performance of the equity since the approval of Trulance.

  1. No buyout has materialized as some had speculated upon approval of the drug
  2. The usual concerns about the challenges of rolling out a new compound in the market
  3. The company also had worries about funding that was a huge headwind for the stock.

The company recently addressed its funding overhang by entering into a debt deal that will provide up $300 million in tranches over the next year or so that should take care of all worries about funding issues.

Sales of Trulance have ramped up slowly and consistently in 2017.  At yearend, the drug should be delivering at a $50 million annual run rate.  Approximately half of Trulance prescriptions are coming from individuals new to the branded GI market and half from competitors.

Trulance has two important advantages over the market leader Linzess which does around $160 million in quarterly sales.  First, it can be taken at any time of the day where Linzess has to be taken before the first meal of the day.  In addition, diarrhea occurs in approximately one in six individuals that take Linzess.  The rate for Trulance is approximately a third of that.  Given Trulance has price parity with Linzess, I expect it to steal considerable market share in a growing part of the market.

Tepananor from Ardelyx recently posted solid late stage trial results for the treatment of IBS-C. However, it had the same diarrhea side effect ratio as Linzess.  It also will be at least two quarters after Trulance is approved for IBS-C before that compound hits the market.  I don’t expect it to be a notable competitor in this space.


2018 should be a big year for growth in Trulance sales.  The drug should be approved for IBS-C in late January of next year which will expand its potential customer base by a third.  As 2018 opens, the compound will also be available in more formularies and covered by more insurance networks as new contracts kick in.  I see the drug doing $80 million to $100 million in revenues in 2018 and similar sales growth in 2019.  As that growth materializes I expect SGYP to trade back to the mid to high single digits, making for a big rise from current levels.

Disclosure: I have added some shares of SGYP on the recent decline. I have also increased my exposure with some bull market call spreads using the Jan 2019 $4/$7 call option spreads for a net debit of 50 cents.


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