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Bet Against Synergy Pharmaceuticals Inc Stock Has Paid off — for Now

Chris Lau

Last year, prospects for Synergy Pharmaceuticals Inc. (NASDAQ:SGYP) looked promising, until markets grew risk-adverse for small-cap biotechnology companies. Even though prescription growth neared 100% month-over-month since the launch of its main drug, Trulance, investors, and analysts grew less confident of SGYP stock. It fell steadily in the second-half of last year while the short-selling position accumulated in a big way.

Are bears right in betting against Synergy stock?

Bearishness Grows

Bears are sitting on gains with their 30.5% short float position in SGYP stock. Short interest more than tripled from Jan. 13, 2017, through to Dec. 15, 2017 and now stands at 74.6 million shares. Third-quarter results failed to spur any investor interest. Synergy reported prescription volume growth of 105% quarter-over-quarter for Trulance. Net revenue grew by 117% during that period.

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The company attributed this growth to healthcare provider enthusiasm for the drug. It is steadily gaining coverage from major commercial Medicare providers across the U.S. Synergy already has Trulance placed on formulary with CVS Health Corporation (NYSE:CVS), under the CVS Caremark name, so there are no restrictions for their clients this year.

Synergy also has an upcoming PDUFA date of Jan. 24, 2018. The FDA will review the supplemental NDA and IBS-C. If successful, it will accelerate the company’s revenue growth.

Investors are Getting Impatient With SGYP Stock

By third quarter’s end, Trulance had been on the market for just over seven months. The company just needs more time to build sales. As the sales force works hard to set-up a prescriber base with the medical community, revenue will grow. Synergy is in the early innings with Trulance. To widen its revenue potential, the company is studying other possible uses for the drug. But until the FDA approves it for treating other diseases, Synergy will raise awareness of the drug through DTC (direct-to-consumer) activities. It carried out branded and non-branded DTC campaigns last quarter, so the results of those efforts will start to show up in the quarters ahead.

Synergy faced some headwinds in September, but still managed to grow total prescriptions to 38,000 — more than double its growth in the last quarter. Looking ahead, the company will continue its efforts in stimulating demand for the drug for chronic idiopathic constipation (or CIC).

Light Numbers and Risks

While the relative growth numbers look impressive, Synergy’s absolute results are still small. It reported third-quarter revenue of $5 million and $7.4 million since it launched Trulance in March. Expenses outpaced sales, since operating expenses totaled $59.3 million in Q3.

Cash burn rates for the second half of 2017 will be similar to the first half of last year. The cash burn rate could worsen if Synergy does not control its R&D activities and cut expenses. Even if costs fell, Synergy may sell shares or issue debt to continue funding the launch of Trulance. If Synergy does not make profits over time, it may need a bigger pharmaceutical company’s help. This could be a partnership or an outright buyout from a suitor. Bears are making the bet that neither scenario will happen.

It is worth noting that MannKind Corporation (NASDAQ:MNKD) is facing similar headwinds in its attempts to grow sales of Afrezza. It has debt due and may be unable to pay it off if revenue does not outpace costs. The point here is that these small companies — Synergy and MannKind — need cash to cover operating costs. As the market grows an awareness for their product, sales will get better. Synergy’s sales team has little room for error in working effectively to grow prescriptions for Trulance.

Last Word on SGYP Stock

Bears already made a tidy profit betting against Synergy. The firm’s losses may mount in the short-term as sales of Trulance ramp up.

Yet, if the company succeeds in getting more doctors aware of Trulance, triple-digit prescription growth could continue. That makes betting against Synergy a potentially dangerous proposition as time passes.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

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