Summary
This article was posted for our subscribers in November, providing them with an early-opportunity window to buy into the unfolding Synergy Pharmaceuticals story.
Here, we do a valuation of the company.
While there’s some near-term dilution risk, there’s still considerable upside.
It has been a bad year for Synergy Pharmaceuticals (NASDAQ:SGYP). Year to date, the stock has dropped more than 67%. The most recent sell-off came after the company announced a secondary offering, which also included warrants offering. The risk of future dilution has kept investors on the sidelines despite the potential of Trulance. The question most SGYP longs have is whether there is upside in the long term. Based on the potential of Trulance in just U.S., we see a significant upside in SGYP from current levels, although there is still the risk of further dilution.
SGYP Valuation
We calculated free cash flows until 2032, the year Trulance goes off patent. Since the launch of Trulance, SGYP has seen a growth of 100% month over month in prescriptions filed. We expect uptake to be strong over the next four years, given that Trulance has a best-in-class safety profile. We expect total number of prescriptions to reach 130,000 next year and cross the 1 million mark in 2021. This is a reasonable assumption, considering that Linzess prescription numbers are north of 2 million per year five years after launch. We expect Trulance to cross the 2 million per year prescription mark by the end of 2024 and peak at above 4 million.
By 2032, we see peak sales at around $1.28 billion, which is above the consensus forecast. Trulance reaches blockbuster status in 2027, based on our estimates. In 2033, after the drug goes off patent, we have modeled a 40% drop in price per prescriptions. As a result, sales of Trulance drop to $800 million.
We see cost of goods sold (COGS) stabilizing at 20% of sales. In terms of operating expenses, we modeled a reduction in R&D expenses going forward. The company has already hinted at that. We have modeled for R&D expenses at $15 million per year after 2020, which will be partly maintenance R&D. SG&A expenses are expected to remain at the same level ($180 million) in 2018 as the company continues to ramp up its marketing efforts. We have modeled SG&A expenses for 2018 at the same level as 2017, as we do not expect any additional marketing costs when Trulance is approved for IBS-C, because the prescribing doctors are the same. Based on our assumptions, SGYP turns EBITDA-positive in 2020. The same year, the company also turns EBIT- and EBT-positive.
