Why Synergy Pharmaceuticals Shares Fell 14.6% Today

By Todd Campbell Markets Fool.com


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What happened

Synergy Pharmaceuticals(NASDAQ: SGYP)announced a $125 million stock offering yesterday, and shares slipped 14.6% today, after the company announced it's pricing the offering at $6.15 per share.

So what

On Jan. 19, the FDA gave Synergy Pharmaceuticals a green light to launch plecanatide for use in patients diagnosed withchronic idiopathic constipation. An estimated 42 million people are affected by constipation, and many people don't respond to existing therapies.

In preparation for its planned launch, the company has been building out its infrastructure and improving its balance sheet. Last May, the company closed on an approximately 30 million-share offering of common stock that raised gross proceeds of about $89.8 million.

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This time around, management is offeringof 20,325,204 shares of its common stock at $6.15 per share, before underwriting discounts, commissions, and other expenses associated with the offering. Management expects to close the offering on Feb. 6.

Now what

The company's principal balance on its 7.5% convertible senior notes fell to $79.2 million on Sept. 30, from $159 million on Dec. 31, 2015. The company further improved its financial position by exchanging more than 7.5 million shares for an aggregate principal amount of $20.7 million of those notes last quarter.

Money raised in this offering is earmarked for the commercial launch of plecanatide, which will be sold under the brand name Trulance. Given that the company's going on its own with Trulance, the capital raise makes sense. Synergy Pharmaceuticals faces tough competition fromIronwood Pharmaceuticals (NASDAQ: IRWD) and Allergan's(NYSE: AGN) Linzess, a fast-growing drug with annual sales in the nine-figure range. In Q3,Linzess' U.S.net sales increased 40% year over year to $164 million.

Whether Trulance can elbow its way to some market share won't be known for a few more quarters, so that does make this company's shares a bit risky. However, this market is big, and there may be room for multiple players. In addition, a filing for approval in IBS soon could boost Trulance's addressable market, boosting the drug's peak sales opportunity.

Overall, Synergy Pharmaceuticals burned through $92 million in cash through the first nine months of 2016, and that spending is likely to increase as Trulance's rollout picks up steam. Therefore, investors might want to take a wait-and-see approach to sales before taking the leap and buying.

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Todd Campbell has no position in any stocks mentioned.His clients may have positions in the companies mentioned.The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.