For development-stage biotechnology companies, the moment of truth eventually arrives. At some point, they must prove that key drugs show high levels of efficacy and safety in the all-important Phase III clinical trials. The stakes are sky high as the data can make or break the company.

 

#-ad_banner-#​Synergy Pharmaceuticals, Inc. (Nasdaq: SGYP), a small biotech firm developing a couple drugs with blockbuster potential, will be reaching that point soon. For shareholders, it could be a time of great reward or bitter disappointment. But I’m leaning toward the former.

 

In the second and third quarters of 2015, Synergy plans to release data from a pair of Phase III trials of its most-promising drug, plecanatide, a once-daily oral medication that could eventually be used to treat a number of gastrointestinal disorders. In these two trials, however, it’s being evaluated in chronic idiopathic constipation, a diagnosis made in cases of constipation with no identifiable cause.

 

Poor or inconclusive findings would be a major setback. And they’d likely trigger a huge drop in Synergy’s stock, which is already off more than 40% over the trailing twelve months.

 

I doubt that’ll happen, though, considering how well plecanatide has performed in earlier trials. And even if it did, Synergy wouldn’t necessarily be finished as a promising growth stock. For one thing, plecanatide could still pan out as a treatment for irritable bowel syndrome with constipation, an indication that could be confirmed by a Phase III study that’s just getting underway. A second such trial is planned for the second half of 2015.

 

The most likely scenario for plecanatide in my opinion: The drug is proven safe and effective for both ailments.

 

This would open up a huge, potentially multi-billion-dollar market for Synergy. In the U.S. alone, an estimated 13 million adults suffer from irritable bowel syndrome with cramps and another 34 million  have chronic idiopathic constipation.

 

What’s more, plecanatide could quickly become the top treatment for both conditions. Although its chief rival, Ironwood Pharmaceuticals, Inc. (Nasdaq: IRWD), already has a competing product called linaclotide on the market, so far plecanatide looks to have the edge due to a more favorable side effect profile.

 

With plecanatide, the rates of diarrhea and of patients stopping treatment because of severe diarrhea are 9.7% and 3%, respectively, compared with 16% and 8% for linaclotide. Although there are no guarantees, subsequent trials are expected to confirm this advantage, thus positioning plecanatide as the treatment of choice if it’s approved by the FDA.

 

Phase II data, reported in May 2013, provide a good sense of the drug’s efficacy, which is equivalent to linaclotide’s. Among 951 patients with chronic idiopathic constipation who received plecanatide or a placebo, the plecanatide group was significantly more likely to report having at least one additional bowel movement per week.

 

The treatment worked best at the highest dose tested — 3 milligrams. Of the patients who received that dosage, 52% had at least one more bowel movement per week, compared with 43% of the 0.3-mg group, 50% of the 1.0-mg group and 37% of the placebo group.

 

Plecanatide also appeared to offer quick relief. Nearly 70% of the 3-mg group had a bowel movement within 24 hours of the first dose.

 

Researchers reported similar safety and efficacy in a Phase II trial of plecanatide for irritable bowel syndrome with constipation in  October 2014. Importantly, the drug also significantly improved abdominal pain, a common and often severe symptom of irritable bowel syndrome.

 

Synergy is also in Phase II testing with SP-333, a once-daily oral medication found safe and effective for opioid-induced constipation. This is a common side effect in terminally ill patients taking opioids for pain relief. There are plans to evaluate SP-333 as a treatment for ulcerative colitis, inflammatory bowel disease and other gastrointestinal conditions, too.

 

In August 2012, Synergy acquired FV-100, an oral medication for shingles that performed well in a recent Phase II trial. Soon after the acquisition, Synergy transferred FV-100 to ContraVir Pharmaceuticals, Inc. (OTC: CTRV), which was formed and spun off for that purpose. In return, Synergy shareholders received ContraVir stock, which has seesawed to more than a 180% gain since it began trading over the counter in February.

 

As you might expect, Synergy has all the financial challenges of a development-stage drug company including a lack of revenue, mounting R&D costs and a high cash burn rate. It also carries substantial debt, $200 million of privately-placed senior convertible notes that are due in 2019, but could be redeemed sooner if the holders lose confidence in Synergy’s prospects for success.

 

The firm has also regularly raised capital by issuing more stock, which dilutes existing shareholders. In just the past three years, the number of shares outstanding has doubled to 97 million.

 

Risks To Consider: Although it seems unlikely, Phase III trials of plecanatide could fail. If that happens, then I’d fully expect Synergy’s stock to crash.

 

Action To Take –> If you’re a risk taker, consider establishing a small position in Synergy Pharmaceuticals. With key trial results due out soon and the odds of success seemingly in the firm’s favor, the prospects for some large capital gains in the near future look good.

 

It’s hard to say how much this year’s plecanatide trials could boost Synergy. For a little context, Synergy is currently valued at $300 million, while rival Ironwood, which already has an approved drug on the market, sports a $2 billion valuation. Look for that gap to narrow if plecanatide is approved for one or several indications.

 

The consensus target price for Synergy is $8.38, more than 2.5 times the current price of around $3.10.

 

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