Synergy Pharmaceuticals Inc (NASDAQ:SGYP) Is Cheap Right Now

Synergy Pharmaceuticals Inc (NASDAQ:SGYP) had bit of a strange month in January. Mid month, the FDA approved its lead development candidate, Plecanatide. The approval came 10 days earlier than expected, and traditional interpretation suggests we should have seen some immediate upside. However, for whatever reason, and likely rooted in some uncertainty surrounding safety in a youth population, the company didn't pick up strength right away. It bottomed out a few days' post-approval, however, and between January 25 and January 31, the company gained close to 50% on its PPS.This week, the rollercoaster action has returned. Synergy has given back a large portion of its gains, currently trading for circa six dollars a share. The correction comes on the back of a capital raise announcement; a raise that will be dilutive to shareholders. Sure, dilution is never ideal, but see very real potential in this approval, and as such, we think that this correction should quickly turnaround.The just approved drug is called Plencanatide, and will be commercially known as Trulance. It is targeting a condition called chronic idiopathic constipation (CIC), and in doing so, is in direct competition with a drug that has been available for around four years called Linzess, developed and marketed through a collaboration agreement between Ironwood Pharmaceuticals, Inc.(NASDAQ:IRWD) and Allergan plc Ordinary Shares (NYSE:AGN). Linzess generates around $150 million quarterly revenues. Analysts expect this to increase to nearly $1 billion in annual sales by 2020.Synergy is going after this market, but here's the important thing – it has an improved tolerability profile over Linzess.One of the biggest problems with this sort of treatment is a side effect of drug-induced diarrhea. Around 15% of Linzess patients report this side effect, yet despite this seemingly high prevalence of a relatively serious adverse event, the drug still manages to generate consistent and growing revenues. In studies, Trulance has proven itself comparable to Linzess from an efficacy perspective, but has also shown that it only induces diarrhea as a side effect in 5% of patients. It is this key aspect of the drug that Synergy's sales teams is going to focus on when pitching to physicians, and – in our eyes – is what is going to help the company redirect a large portion of Linzess' revenues towards its own balance sheet.Which brings is nicely to the latest raise.As we have said, this raise is going to be dilutive, and to quite a high degree – the company is looking to gross just short of $125 million by issuing 20 million shares. With that said, the move to raise capital just before, or in this instance, just after an FDA approval of a lead asset at this end of the biotechnology space is standard practice, and doesn't come as unexpected. When bringing a new drug to market, the cost of physician education alone is high. When there is already an established asset in the space, and even if said asset has an inferior safety profile, this cost is even higher. Synergy doesn’t have enough cash on hand to market the drug effectively, and so needs the raised cash to do so. Effective allocation of said capital should result in large scale revenue collection, which in turn, should translate to market capitalization upside, as and when it is announced. As such, we see the dilutive impact of the raise being quickly negated by the value-add from a sales push, and in turn, we see the latest correction as a real opportunity to get in at a discount ahead of the roll out. Even if the company hadn’t just corrected, we feel markets have under-responded to the approval, and that a buy at pre-correction highs would have been cheap.We will be updating our subscribers as soon as we know more. For the latest updates on SGYP, sign up below!Disclosure: We have no position in SGYP and have not been compensated for this article.