Will This Irritable Bowel Syndrome Drug Be a Cash Cow?
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As embarrassing and difficult to manage as chronic constipation and irritable bowel syndrome (IBS) are, there are surprisingly very few treatments available for patients at the moment. The treatments that do exist often cause diarrhea and nausea as side effects. Synergy Pharmaceuticals (NASDAQ: SGYP) has been focusing on its lead investigational drug Plecanatide, which is aimed at treating chronic constipation and constipation predominant irritable bowel syndrome.
Plecanatide is currently in Phase 2b/3 clinical trials. The hallmark of the drug is that it does not cause diarrhea as a side effect. Moreover, Synergy's Chairman Gabriel Cerrone purchased 87,820 shares of Synergy for an amount of $317,250, attracting the attention of many investors and observers. Below, I will examine the constipation drug Plecanatide and the theory behind the insider buying.
What Is Irritable Bowel Syndrome?
Irritable bowel syndrome can cause extreme distress to individuals. Much of the discomfort is related to not being able to pass stools in spite of experiencing an urge to move. The condition is treated with drugs that ease constipation and promote bowel movement without causing discomfort. When such treatment fails, psychotherapy is often recommended, as chronic IBS has often been linked to psychosomatic causes as well. Often, a combination of psychotherapy to reduce psychological distress and drugs to ease physical discomfort are used when treating individuals with irritable bowel syndrome and chronic constipation. Synergy’s Plecanatide could prove to be a panacea to those who suffer from this embarrassing but common condition.
Plecanatide: How it Works
Plecanatide is an analogue of Uroguanylin (UroG), which is critical for digestion to take place normally. While Uroguanylin (UroG) is a natural human hormone, Plecanatide is eight times more potent. The drug targets a large underserved market, which until now has depended on psychotherapy and drugs that cause unpleasant side effects. The Phase 2a clinical study revealed that plecanatide eases constipation and improves bowel movement without causing diarrhea. Reduction in abdominal discomfort, severity of constipation and increased gastric relief can be experienced within seven hours of ingestion of the drug, as compared to 16 hours for the placebo. All adverse events were both mild to moderate, and certainly transient. These factors make plecanatide a very attractive drug that could potentially target a market worth $2 billion annually. Moreover, plecanatide is a new class of drug and has only one competitor, Linzess.
Plecanatide Compares Favorably With Linzess
Linzess is developed and marketed by Ironwood Pharmaceuticals (NASDAQ: IRWD). Linzess is currently prescribed in the United States for chronic constipation and irritable bowel syndrome with constipation. But Plecanatide could outperform Linzess due to its lack of adverse side effects. Linzess (linaclotide) can cause diarrhea and nausea, both of which are as uncomfortable as the symptoms of irritable bowel syndrome. The Boston Globe reported that Linzess could achieve blockbuster status and generate sales of $1 billion annually. However, with the announcement of Plecanatide and its benefits over Linzess, Synergy could trounce Ironwood and achieve sales of $2 billion each year. Ironwood also borrowed $175 million to support Linzess, which increased the company’s liability.
Will Linzess Affect Synergy’s Profitability?
One cause for concern among investors is that Ironwood has already entered the IBS market with Linzess. The fact that it entered the market first does not mean the drug will ultimately be successful. The first few months are often a test for the drug and its maker, as side effects and other issues often arise during this time. Since Linzess can cause severe diarrhea, the drug may not be as well received as Synergy's plecanatide. Consider the following examples of drugs that faced headwinds after launch:
Pfizer's (NYSE: PFE) Lipitor (Atorvastatin), a statin used to lower levels of LDL (bad) cholesterol and increase levels of HDL (good) cholesterol, topped the list of best selling branded drugs for nearly a decade. In 2001, patients filled more than 57 million prescriptions for Lipitor. However, the drug had its share of problems. Jay S. Cohen, M.D. is a nationally recognized expert in the area of medications and side effects. He wrote about hearing more complaints about side effects from Lipitor than all of the other drugs in its class combined. "Perhaps this is because the standard dosage of Lipitor is so strong; it is far stronger than many patients actually need or can tolerate," he wrote.
He also wrote, "The Lipitor dosage guidelines do not distinguish between patients with or without heart disease. They do not distinguish between patients requiring large reductions and those needing small reductions. The recommended initial dose of Lipitor, 10 mg, is so powerful that doctors can treat many patients with the same dose and not have to bother matching the dose to individual patients."
Similarly, Merck's (NYSE: MRK) Vioxx (Rofecoxib) was withdrawn from the market after safety concerns arose. It was developed to treat osteoarthritis and other acute pain conditions. The drug was later found to increase the risk of heart attacks, which led to Merck withdrawing it voluntarily.
Bristol-Myers Squibb's (NYSE: BMY) Yervoy (Ipilimumab) is used to treat skin cancer. It was later found to be associated with potentially fatal T cell activation and proliferation. Serious side effects related to the gastro-intestinal tract were observed as well. These examples should be enough for us to conclude that just because a drug enters the market first does not mean it will have an upper hand, especially when it has unpleasant side effects.
With that in mind, I am not surprised to see hurried insider buying taking place at Synergy. Synergy's Chairman, Gabriel Cerrone, raised a lot of eyebrows by purchasing Synergy shares worth $317,250. Mr. Cerrone currently owns 631,230 shares at Synergy and has been the company’s Chairman since July 2008. The company announced a net loss of $9.9 million in November 2012 and total cash of $37.4 million. Synergy is a relatively small company when compared to its closest competitor, Ironwood, which has a market cap of almost $1.1 billion.
Moreover, the fact that Mr. Cerrone is buying shares at Synergy instead of selling them suggests that he is hoping to make a lot of money in the future. That hope stems from the success of plecanatide in clinical trials. Plecanatide has the potential to tap into a largely underserved market. Sales could potentially reach $2 billion annually.
At the moment, Synergy appears to be a promising investment candidate. Investors looking for exposure in the pharmaceutical sector should consider buying this stock.
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