Synergy Pharmaceuticals Getting Closer To 'Go Time'

Synergy Pharmaceuticals (NASDAQ:SGYP) has inched a little higher since I last reviewed the company, climbing a little less than 10% over a time when biotechs in general have declined (as measured by the iShares Biotechnology Index (NASDAQ:IBB) and SPDR Biotech ETF (NYSEARCA:XBI)). On the other hand, Synergy's closest comp, Ironwood (NASDAQ:IRWD) has risen close to 40%.

Synergy remains an interesting biotech opportunity to me, but I think the company has a lot of work to do to reassure the Street that it can really compete on its own in the market and gain real share once its lead drug plecanatide hits the market. Without a large partner (Ironwood has Allergan (NYSE:AGN) and Nektar (NASDAQ:NKTR) has AstraZeneca (NYSE:AZN) selling its OIC drug Movantik), I think a lot of investors fear that Synergy will never manage to break through and could find it in a situation like XenoPort did with its restless leg drug. I believe there are some key differences between those situations, though, and while I do worry that Synergy's plecanatide sales may ramp more slowly than its bullish analysts' forecast, I think these shares are worth more than $9 on the potential of plecanatide.

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Synergy Pharmaceuticals Getting Closer To 'Go Time'

Seeking Alpha: Synergy Pharmaceuticals Looks More Interesting Today

I can't really complain with how the Synergy Pharmaceuticals (NASDAQ:SGYP) story has developed. When I last wrote about the stock in April, I calculated a fair value of just under $6 with the shares trading at around $4 at the time. Since then, the shares have moved up $1 (up about 25%), though there was a big move up to $10 in the meantime as investors reacted very positively to strong Phase III data on the company's lead drug.

Since then, I think reality has set in and dragged the shares down with it. Medically significant constipation (by which I mean a condition that is persistent and not quickly relieved with OTC options) has proven to be a challenging market for Allergan (NYSE:AGN)/Ironwood (NASDAQ:IRWD) and Sucampo (NASDAQ:SCMP)/Takeda (OTCPK:TKPYY), as these companies have had to push direct-to-consumer campaigns to drive awareness. I likewise believe that investors had inflated expectations of an acquisition, and impatience with that process has disappointed some shareholders (or former shareholders).

I do believe that Allergan et al are slowly chipping away at the awareness issue, and that by virtue of its solid efficacy and better tolerability, Synergy can reap the benefits of these early market-building exercises. My fair value estimate has nearly doubled as the successful Phase III results for plecanatide significantly de-risked the value and I believe the company's efficacy/safety trade-off can gain more share than I previously assumed. I do see meaningful risk of further dilution as the company will need to raise funds to build a marketing effort, and investors will likewise have to wait to see whether a lower-dose version of linaclotide can better balance the tolerability issues.

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Synergy Pharmaceuticals Looks More Interesting Today

Seeking Alpha: Progress At Synergy Pharmaceuticals, But Not Enough To Really Please Investors

Synergy Pharmaceuticals (NASDAQ:SGYP) continues to be an unusual little biotech with almost as many weaknesses or concerns as strengths. On one hand, you have a company with what could be a best-in-class drug that addresses a market that may include millions of people in the U.S. alone. On the other hand, the drug will be second-to-market and may have difficulty differentiating itself, to say nothing of the difficulties of developing the market as a whole and securing good reimbursement.

Synergy shares have risen almost 20% since my last article on the company, but not without spending most of the intervening time down about 20%. Management has possibly secured enough cash to get its lead drug to market, but the company still needs a partner (or a buyer) and that financing didn't come cheap. The prospective dilution of the financing takes my fair value down, but the shares still look undervalued with two catalysts on the way that could improve the risk-adjusted fair value by almost 30%.

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Progress At Synergy Pharmaceuticals, But Not Enough To Really Please Investors

Seeking Alpha: Ironwood Has Plenty Of Market-Development Work Ahead

Biotech investors love to speculate on the basis of what a drug could generate in future sales, but relatively few of them have the patience to stick it out and support a company as it transitions from an R&D enterprise to a commercial enterprise. In cases like Ironwood (NASDAQ:IRWD) where the company has a lot of market development work to do, patience can be even thinner.

To be fair to Ironwood, the shares have done quite well over the past year (up more than 50%), but over the trailing five years the shares are up just 5% (during a red-hot biotech market). For Ironwood to work well as a stock from here, management has to deliver on its efforts to drive patient and physician awareness and that's no easy task when a large proportion of the market can arguably be suitably managed with diet modifications or cheap OTC and generic options. While the potential is here for Ironwood shares to be worth considerably more in a few years' time, I think the potential rewards and risks are pretty well balanced right now.

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Ironwood Has Plenty Of Market-Development Work Ahead

Seeking Alpha: Synergy Pharmaceuticals Could Be A Diamond In The Rough

For a biotech that has reported encouraging clinical results and seeks to address a significant market, Synergy Pharmaceuticals (NASDAQ:SGYP) can't get much love. I can appreciate that there's a funding overhang here and that the market doesn't always embrace drugs that look like "me too's", not to mention a general move away from risky smaller names, but I think those concerns miss a lot of positives at this development-stage biotech.

I don't think plecanatide is just a Linzess wannabe, and I believe direct-to-consumer marketing efforts from Sucampo (NASDAQ:SCMP) and Actavis (NYSE:ACT) (and maybe Salix (NASDAQ:SLXP) down the road) will raise awareness of prescription treatments for constipation and IBS. Moreover, I think plecanatide offers some meaningful quality-of-life advantages that may be underappreciated today. It seems to me that the market currently values Synergy as though it will be forced to market plecanatide on its own (an expensive proposition), but I believe some sort of partnering arrangement, if not an outright sale of the company, is more likely and these shares look undervalued today.

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Synergy Pharmaceuticals Could Be A Diamond In The Rough

The Motley Fool: Wall Street Has Taken A Sharp Turn Into Forest Laboratories, Inc.

Institutional investors and sell-side analysts are rather infamous for gnat-like attention spans and the capacity to dramatically change their opinions in relatively short periods of time. So, too, has it been with Forest Labs (NYSE: FRX  ) , though it certainly requires mentioning that Forest Labs has done a lot of work on its own to affect that change of opinion. Forest Labs announced a significant cost-cutting program and then followed it up with the nearly $3 billion purchase of Aptalis, both of which significantly impact the company's long term revenue and margin prospects.

I'm not totally sold on the company's "Project Rejuvenate", nor do I believe that all of the company's "Next Nine" products will live up to management's hopes. With that, I'm a little concerned that investor enthusiasm for the restructuring program at Forest Labs is getting caught up with excitement over similar programs at AstraZeneca, Valeant (NYSE: VRX  ) , Endo, and Amgen -- and perhaps overdoing things.

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Wall Street Has Taken A Sharp Turn Into Forest Laboratories, Inc.

Investopedia: Should Third Quarter Results From Forest Laboratories Worry Investors?

Given the wide divergence in opinions and expectations for Forest Laboratories (NYSE:FRX), I am a little surprised to see that the market (at least as of this writing) has reacted pretty calmly to another disappointing quarter and another miss. Importantly, the elements that led to the miss do not look all that serious and the company's long-term potential appears to be intact. That said, investors considering these shares need to appreciate that above-average volatility is likely.

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Seeking Alpha: Investors Can Still Benefit From Street's Doubts About Forest Labs

It's hard to remember the last time the Street was really hot on Forest Labs (FRX). Although this company has shown a pretty surprising resilience and an uncanny ability to find good licensing deals, analysts seemingly can't move past the admittedly huge ramifications of key drug Lexapro going generic. It's not as though Forest Labs has been caught flat-footed, though, and there seems to be value in Forest's pipeline than the Street can see.

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Investors Can Still Benefit From Street's Doubts About Forest Labs