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What We Can Learn From Synergy Pharmaceuticals' Disastrous News

By Motley Fool Staff - Nov 2, 2018 at 10:49AM

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The revelation that this biotech may be on borrowed time is a great reminder to investors to analyze balance sheets.

Synergy Pharmaceuticals (NASDAQ: SGYP) beat the odds by successfully winning FDA approval of Trulance last year, but it may not matter. Recently, management warned it's struggling to renegotiate its debt, and that increases the risk of its bankruptcy.

In this clip from Industry Focus: Healthcare, host Shannon Jones is joined by Motley Fool contributor Todd Campbell to discuss what's going on with Synergy, and more importantly, how biotech investors can learn to spot high-risk companies like this in the future.

A full transcript follows the video.

This video was recorded on Oct. 31, 2018.

Shannon Jones: Our next stock, Todd, this is a stock called Synergy Pharmaceuticals, ticker SGYP. This is a biopharma stock that has had its eyes set on the very highly lucrative and very competitive gastrointestinal space. It has its lead drug, Trulance, that was actually approved in two GI indications going back to early 2017. They got approved for their second indication earlier this year. I took a look at this stock. Right now, the stock is sitting at about, believe it or not, $0.39 a share. That's down 85% on the year.

Todd, this stock is another classic example of where marketing approval is really only the beginning. Commercialization is a much larger, much bigger beast that's much tougher to conquer.

Todd Campbell: Absolutely. Clinical stage stocks, they'll rally up, they'll rally down, they'll trade a lot on excitement and peak sales forecasts and all that stuff. Then, when it gets to rubber meets the road and you actually have to prove that out by winning over payers and getting in front of doctors, it's a very different ballgame. A lot of companies struggle to do it, and that's why they go out and get licensing partners. Trulance competes against Ironwood's Linzess. Ironwood is paired up on that drug with Allergan, which is a huge company with plenty of deep pockets that can market the drug and get it in front of people and swing a big stick when it's talking to different payers to get formulary coverage that is better than what Synergy could do with Trulance.

The scary thing here for investors really is the disclosure recently that Synergy is having a very difficult time in refinancing its debt. That has increased the risk that this company's operating expenses are just so high that it's going to burn through the remaining cash that it has. And if it can't renegotiate, then it could be called into default, because currently, it doesn't meet the covenants on the debt that it owes. Of course, that would be bad news for shareholders and the employees of the company and for patients, because they'd lose, potentially, access to what could very well be a fine drug that would work very well for them.

Jones: I think, between the go-it-alone strategy... I know back in 2015, the company was attempting to find a partner, potentially even a buyer. According to the company, there weren't any offers that they thought met the value of what Trulance was offering and for the value of the company. There was no buyer, no partnership. You mentioned the other issue, and that's related to these loan agreements. You've got sales and liquidity covenants that the company is currently not meeting, which puts it in a particularly dire place. There was the business update that they provided recently. Honestly, that was one of the saddest, most depressing business updates I think I've ever read. Ultimately it came down to, "We are very close and on the verge of bankruptcy." That's what I got from that.

Another thing I want to go back to is, you mentioned with Linzess and Ironwood and Allergan, this is a very competitive space. You've got very deep-pocketed competitors who have a very strong commercial sales force. And now, you're attempting to come onto the market alone. You don't have a deep-pocketed partner that can really help offset some of these costs and get you across the finish line. What you see happening with Synergy is a classic tale of, for these small biotechs, you have to have a big partner, especially in competitive spaces like GI.

Campbell: Yeah. Again, to lessons learned or the warning signs, what were those creaking doors? What were those voices saying to us that maybe would have helped us to avoid investing in Synergy? I think the things to bear in mind are, rapid cash burn. How quickly are operating expenses and R&D drawing down the cash that you have on your balance sheet? How often are these companies going out and having to tap investors for dilutive equity? And if they're not able to do that, do they owe money through loans to other third parties that aren't your traditional banks that are providing liquidity? Are they converts? Are they preferreds? Do they have interest rates that are, in the case of Synergy, 9.5%? Obviously, lenders were not very willing to front up favorable rates, money to this company. Maybe that's a warning sign. Just pay attention, listeners, to how much debt companies have on the balance sheet, how much cash they have, how quickly they're going through that cash, and where they're getting the funding that they need to keep going.

Jones: Fair enough. Todd, I'm going to throw out another warning sign. You tell me if you think this is a warning sign. This was actually the company that was behind the infamous Poop Troop. Excuse my language, I'm not making that up. This is literally the marketing ploy the company went after in 2017. They created this pack of emojis designed to increase the conversations around constipation. Weirdest, strangest thing I think I've ever seen, Todd. Was that a warning sign in your eyes? [laughs]

Campbell: [laughs] Could be! I mean, someone took a swing, and unfortunately, it missed in the marketing department on that one.

Jones: For sure. Certainly not enough to keep this stock out of the toilet. Yes, I did go there.

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