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Updating a Small Speculative Play

Synergy Pharmaceuticals is developing drugs to treat gastrointestinal disorders and diseases. The
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For the last couple of Fridays, I have been delving deeply in a couple attractive but speculative small-caps in the biotech/biopharmaceutial space in an effort to identify good "stocking stuffers" in front of the fast approaching holiday season.

Continuing that theme, today I want to do a deep dive on Synergy Pharmaceuticals (SGYP), which has a couple of promising compounds moving through trials. I have not profiled this $290 million market cap equity since early May. The stock is down just over 20% since then and is currently trading around $3 a share.

The other stock highlighted in that same article, Avanir Pharmaceuticals (AVNR), is up 240% over that time frame and has received a buyout offer. The wide divergence of outcomes in this space is why I take much smaller positions in a bigger pool of attractive plays when investing in the biotech/biopharma sectors. It is something I have dubbed "shotgun investing." This area tends to provide many home runs as well as frequent strike outs.

Synergy remains on track in its process focusing on developing drugs to treat gastrointestinal disorders and diseases. The company's two core products are Plecanatide (SP-304) and SP-333, both of which are making progress through trials.

Working with more than 400 patients, Synergy completed a Plecanatide phase 2b dose-ranging study assessing the safety and efficacy of the compound to treat irritable bowel syndrome with constipation. The study successfully made its endpoint and showed statistically significant improvement in the overall responder rate. The findings were presented in late October at the American College of Gastroenterology Annual Scientific Meeting.

The company also announced positive top-line results from a phase 2 study on SP-333 in late November. SP-333 is Synergy's candidate to treat opioid-induced constipation. The compound met the primary objective of the study. Cantor Fitzgerald reiterated its Buy rating on the stock and raised its price target to $8.50 upon announcement of the successful study. Roth Capital also reiterated its Buy rating on Synergy at the same time. It has a $6 a share price target on the stock.

Both of these promising candidates will now proceed to later stage trials. Phase 3 Plecanatide constipation trials should be completed next year and could be a significant catalyst for stock price appreciation if successful. SP-333 also could have some applications to treat ulcerative colitis and Synergy recently launched a small Phase 1b study on that indication. It is hoped that Plecanatide will function like linaclotide from Ironwood Pharmaceuticals (IRWD) but with fewer diarrhea side effects. Sales of linaclotide reached almost $80 million last quarter and sales are increasing rapidly.

Synergy has several "shots on a goal," which is one of things I look for when deciding on stocks to invest in within these speculative sectors. In addition, insiders have been net buyers of the stock over the past two years, making small but frequent purchases.

Finally, at the end of the last completed quarter, the company had more than $30 million in cash on the balance sheet, which was boosted by a $200 convertible debt offering. This should ensure that the company has funding into 2017. Hopefully by then, trial success will have resulted in FDA approval and significant capital appreciation to shareholders.

At the time of publication, Jensen was long AVNR and SGYP.