Earnings Update Healthcare August 15, 2013 h (SYN) Rating: Buy Andrew S. Fein 212-356-0546 afein@hcwco.com Continue to View Trimesta Deal in Multiple Sclerosis as NT Value Driver: Reiterate BUY and $4 PT Stock Data Price 8/14/2013 $1.46 Exchange NYSE MKT Price Target $4 52 Week Low $1.34 52 Week High $2.55 Market Cap (MM) Shares Outstanding (MM) $65.0 44.7 3 Month Avg Volume (000s) 55.6 Balance Sheet Metrics Total Cash / Share $0.15 Total Debt (MM) $0 Earnings Data ($) FY - Dec 2012 (A) 2013 2014 Q1 (Mar) (0.04) (0.05)A Q2 (Jun) (0.06) (0.06)A Q3 (Sep) (0.06) (0.05) Q4 (Dec) (0.35) (0.06) Full Year EPS (0.49) (0.22) (0.26) Revenue ($ M) FY - Dec 2012 (A) 2013 2014 Q1 (Mar) - - - Q2 (Jun) - - - Q3 (Sep) - - - Q4 (Dec) - - - Full Year Revenue - - - We reiterate our BUY rating and $4 PT. In our view, the near-term catalyst of a potential partnership for Trimesta in Multiple Sclerosis this year and positive Phase II efficacy data in 1Q:14 are major drivers for the SYN. Beyond this we expect initiation of a clinical study for SYN- 004 in C.difficile infection next year to provide further longer-term upside to the stock. Trimesta Phase II study in combination with copaxone in relapsedremitting Multiple Sclerosis (MS) fully enrolled and data expected in 1H:14. We believe SYN is likely to partner this program this year with big pharma, ahead of Phase II data expected in 1Q:14. Notably, SYN does own a patent covering the co-administration of Trimesta with Teva s Copaxone thus, a deal with either Teva (as an IP extension strategy) or a generic manufacturer of Copaxone would seemingly be very logical. We also believe there is mechanistic rationale for the Copaxone synergy as Copaxone stimulates immune response in MS patients. We expect the partner to advance this program into Phase III and approval, leaving SYN to focus on advancing the C. difficile infection program into the clinic next year. SYN-004 for C. diff. infection to provide longer term upside. SYN- 004 is a 2 nd generation oral β-lactamase enzyme to preserve GI microflora and prevent opportunistic C. diff. infection. C. diff. infection is a growing problem in healthcare facilities and has overtaken MRSA as the most frequent hospital acquired infection. It is estimated that the cost of C.diff. treatment is $35,000 per patient, and adds $8BN in additional healthcare costs per year in the U.S. alone. We look for SYN-004 to enter the clinic in 2014. We believe the potential monetization of Trimesta will allow SYN to shift more aggressively into an anti-infective focused company, likely resulting in easier branding of the company to the investment community and potential multiple expansion stemming from association with a basket of stocks that has yielded outsized performance. SYN, in collaboration with Intrexon (XON Not Rated) is developing monoclonal antibodies for the treatment of pertussis (whooping cough) and Acinetobacter infections, SYN-005 and SYN- 001 respectively. These programs are partnered with Intrexon, as part of three programs under the collaboration. also has an agreement with the University of Texas at Austin for antibody research for the pertussis program. While we assign no value to these programs due to the very early stage, we look for these to add longer term value as the research and development progresses. We believe SYN may also derive benefit from additional appreciation for this collaboration following XON s recently completed and hugely successful IPO. Recall that XON owns approximately 18% of SYN. (continued on next page) For definitions and the distribution of analyst ratings, and other disclosures, please refer to pages 6 7 of this report.
2Q:13 in numbers. Net loss for the quarter of $2.5MM or ($0.06) per share was generally inline with our forecast of $2.1MM or ($0.05) per share. The company ended the quarter with $6.9MM in cash (vs. $10MM at year-end 2012 and $8.5MM at the end of 1Q:13). Valuation & Risks. We arrive at our 12-month target price of $4 by a sum-of-the-parts analysis for Trimesta and SYN-004. We value SYN portion of 2020 Trimesta royalty payments at $56M by applying a standard 6x multiple to U.S. royalties of $87.5M discounted back at 50%. We value SYN-004 in C. difficile at $124M by applying a 6x multiple to 2022 U.S. sales of $702M discounted back at 60% (due to the earlier development stage of this program). To this we add mid-2014 cash of -$1.9M. Risks for include the inability to successfully partner Trimesta, clinical failure while pursing further clinical development of SYN-004, and failures within the company s preclinical stage pipeline. Additionally, as with all micro-cap biotechnology companies, there is a risk that the company will seek additional dilutive financing to fund operations. Overview is a biotechnology company founded in 2001 focused on the development of drugs for the treatment of serious infectious diseases. The company s lead program, Estriol is in two Phase II studies for MS, one to determine efficacy in relapsed-remitting disease, and the other to evaluate effects on cognitive function. We look for a big pharma partnership this year for this program, ahead of the Phase II data expected in 1Q:14. The company is also developing SYN-004, an oral β-lactamase enzyme for the treatment of Clostridium difficile infections, a growing worldwide problem for patients receiving broadspectrum antibiotic therapy in hospitals. Data from 1 st generation molecules showed safety and efficacy, and we look for this program to enter the clinic in 2014. Beyond these, has preclinical programs partnered with Intrexon, for the development of monoclonal antibodies for whooping cough (pertussis) and Acinetobacter infections. Although early, these could provide longer term upside to the story once we see proofof-concept data. We believe has the potential to significantly enhance the treatment landscape for MS and recommend investors buy into the stock ahead of a big pharma partnership this year and Phase II data expected in 1Q:14 as a near-term catalyst for the stock. Upcoming Events and Timing Potential partnership with big pharma in 2H:13 for Trimesta in MS Initiation of 2-week proof-of-concept study for pertussis antibody program in non-human primates in 2H:13 Initiate a Phase I study for pertussis in 1Q:14 2
Expect Phase II Trimesta data in 1Q:14 and presentation at the American Neurological Association meeting in April 2014 Initiation of SYN-004 clinical study for C. Diff. infection in 2H:14 Completion of Trimesta cognition trial in MS in mid-2015 3
, Inc. Quarterly Earnings Estimates ($ in thousands, except per share data) 1Q 2Q 3Q 4Q 2012A 1Q 2Q 3QE 4QE 2013E 1QE 2QE 3QE 4QE 2014E 2015E Revenue: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Expenses: General & Administrative 960 268 678 1,255 3,161 665 1,258 850 1,100 3,873 925 975 975 1,125 4,000 4,500 Annual Growth (%) 89% -31% 369% 25% -12% 23% 39% -22% 15% 2% 3% 13% Sequential Growth (%) -72% 153% 85% -47% 89% -32% 29% -16% 5% 0% 15% Research & Development 386 547 763 10,591 12,287 1,118 1,203 1,100 1,200 4,621 1,200 1,400 1,600 1,800 6,000 7,500 Annual Growth (%) 268% 190% 120% 44% -89% -62% 7% 16% 45% 50% 30% 25% Sequential Growth (%) -42% -39% -1288% -89% 8% -9% 9% 0% 17% 14% 13% Stock Based Compensation 508 908 395 40 1,851 457 109 375 375 1,316 450 450 450 450 1,800 1,900 Total Operating Costs & Expenses 1,854 1,723 1,836 11,886 17,299 2,240 2,461 2,325 2,675 9,810 2,575 2,825 3,025 3,375 11,800 13,900 Pro Forma Operating Income/(Loss) ($1,346) ($815) ($1,441) ($11,846) ($15,448) ($1,783) ($2,461) ($1,950) ($2,300) ($8,494) ($2,125) ($2,375) ($2,575) ($2,925) ($10,000) ($12,000) Operating Income/(Loss) ($1,854) ($1,723) ($1,836) ($11,886) ($17,299) ($2,240) ($2,461) ($2,325) ($2,675) ($9,810) ($2,575) ($2,825) ($3,025) ($3,375) ($11,800) ($13,900) Operating Margin NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM Other Income (Expense): Warrant Expense 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Change in Fair Value of Warrant Liability 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Interest Income (Expense) 0 11 10 6 4 31 2 0 0 0 2 0 Other Income 5 7 10 (7) 15 1 (46) 5 5 (35) 6 6 6 6 24 30 Total Other Income/(Expense) 5 7 10 (7) 15 12 (36) 11 9 (4) 8 6 6 6 26 30 Pro Forma Net Income/(Loss) from Continuing Ops ($1,341) ($808) ($1,431) ($11,853) ($15,433) ($1,771) ($2,497) ($1,939) ($2,291) ($8,498) ($2,117) ($2,369) ($2,569) ($2,919) ($9,974) ($11,970) Net Income/(Loss) from Continuing Operations ($1,849) ($1,716) ($1,826) ($11,893) ($17,284) ($2,228) ($2,497) ($2,314) ($2,666) ($9,814) ($2,567) ($2,819) ($3,019) ($3,369) ($11,774) ($13,870) Net Income/(Loss) from Discontinued Operations 649 (156) (104) (173) 216 0 0 0 0 0 0 0 0 0 0 0 Pro Forma Net & Comprehensive Income/(loss) ($692) ($964) ($1,535) ($12,026) ($15,217) ($1,771) ($2,497) ($1,939) ($2,291) ($8,498) ($2,117) ($2,369) ($2,569) ($2,919) ($9,974) ($11,970) Net & Comprehensive Income/(Loss) ($1,200) ($1,872) ($1,930) ($12,066) ($17,068) ($2,228) ($2,497) ($2,314) ($2,666) ($9,814) ($2,567) ($2,819) ($3,019) ($3,369) ($11,774) ($13,870) Pro Forma EPS (0.02) (0.03) (0.05) (0.34) (0.44) (0.04) (0.06) (0.04) (0.05) (0.19) (0.05) (0.05) (0.06) (0.07) (0.22) (0.27) Net Income/(Loss) Per Share (0.04) (0.06) (0.06) (0.35) (0.49) (0.05) (0.06) (0.05) (0.06) (0.22) (0.06) (0.06) (0.07) (0.08) (0.26) (0.31) Shares Outstanding 32,003,164 33,011,460 33,383,226 34,896,592 34,896,592 44,601,396 44,654,414 44,654,664 44,654,914 44,641,347 44,641,435 44,641,685 44,641,935 44,642,185 44,641,810 44,642,810 Source: Company reports and H.C. Wainwright & Co. Analysis 4
Trimesta in Relapsed-Remitting MS Discount Rate (%): 50% Multiple: 6 Shares Outstanding ('000s): 44,602 Annual Increase (%) 1% Ph II Data Ph III Approval 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E MS Patients 400,000 404,000 408,040 412,120 416,242 420,404 424,608 428,854 433,143 437,474 441,849 446,267 450,730 Relapsed -Remitting (%) 85% 85% 85% 85% 85% 85% 85% 85% 85% 85% 85% 85% 85% Number Relapsed-Remitting 340,000 343,400 346,834 350,302 353,805 357,343 360,917 364,526 368,171 371,853 375,572 379,327 383,121 Penetration (%) 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% # Relapsed-Remitting treated 3,573 10,828 18,226 25,772 33,467 41,313 49,313 57,468 Trimesta Cost/Patient $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 Annual Revenues ('000s) $142,937 $433,100 $729,052 $1,030,880 $1,338,671 $1,652,515 $1,972,502 $2,298,723 Royalty from Partner (%) 12% 12% 12% 12% 12% 12% 12% 12% Annual Revenues to SYN ('000s) $17,152 $51,972 $87,486 $123,706 $160,640 $198,302 $236,700 $275,847 PV of SYN revenues ('000s) $24,898 $50,293 $56,440 $53,204 $46,060 $37,905 $30,164 $23,435 Years Discounted 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5 Price / Share $0.56 $1.13 $1.27 $1.19 $1.03 $0.85 $0.68 $0.53 SYN-004 in C. Difficile Discount Rate (%): 60% Multiple: 6 Shares Outstanding ('000s): 44,602 Annual Increase (%) 6% Ph I Ph II Ph III Approval 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E C. diff. Infections 335,000 354,263 374,633 396,174 418,954 443,044 468,519 495,459 523,948 554,075 585,934 619,625 655,253 # Deaths per annum 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 # C.diff cases for treatment 321,000 340,263 360,633 382,174 404,954 429,044 454,519 481,459 509,948 540,075 571,934 605,625 641,253 Penetration (%) 5.0% 9.0% 13.0% 15.0% 20.0% 25.0% # Patients treated 24,073 45,895 70,210 85,790 121,125 160,313 SYN-004 Cost of Treatment $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Annual Revenues ('000s) $240,729 $458,953 $702,097 $857,901 $1,211,250 $1,603,134 PV of SYN-004 revenues ('000s) $108,898 $129,760 $124,065 $94,748 $83,607 $69,161 Years Discounted 5.5 6.5 7.5 8.5 9.5 10.5 Price / Share $2.44 $2.91 $2.78 $2.12 $1.87 $1.55 Source H.C. Wainwright & Co. 5
H.C. WAINWRIGHT & CO, LLC RATING SYSTEM: H.C. Wainwright employs a three tier rating system for evaluating both the potential return and risk associated with owning common equity shares of rated firms. The expected return of any given equity is measured on a RELATIVE basis of other companies in the same sector. The price objective is calculated to estimate the potential movements in price that a given equity could reach provided certain targets are met over a defined time horizon. Price objectives are subject to external factors including industry events and market volatility. RETURN ASSESSMENT Market Outperform (Buy): The common stock of the company is expected to outperform a passive index comprised of all the common stock of companies within the same sector. Market Perform (Neutral): The common stock of the company is expected to mimic the performance of a passive index comprised of all the common stock of companies within the same sector. Market Underperform (Sell): The common stock of the company is expected to underperform a passive index comprised of all the common stock of companies within the same sector. Investment Banking Services include, but are not limited to, acting as a manager/co-manager in the underwriting or placement of securities, acting as financial advisor, and/or providing corporate finance or capital markets-related services to a company or one of its affiliates or subsidiaries within the past 12 months. 6
ADDITIONAL DISCLOSURES H.C. Wainwright & Co, LLC (the Firm ) is a member of FINRA and SIPC and a registered U.S. Broker-Dealer. ANALYST CERTIFICATION I, Andrew Fein, certify that 1) all of the views expressed in this report accurately reflect my personal views about any and all subject securities or issuers discussed; and 2) no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressed in this research report; and 3) neither myself nor any members of my household is an officer, director or advisory board member of these companies. None of the research analysts or the research analyst s household has a financial interest in the securities of (including, without limitation, any option, right, warrant, future, long or short position). As of May 31, 2013 neither the Firm nor its affiliates beneficially own 1% or more of any class of common equity securities of. Neither the research analyst nor the Firm has any material conflict of interest in, of which the research analyst knows or has reason to know at the time of publication of this research report. The research analyst principally responsible for preparation of the report does not receive compensation that is based upon any specific investment banking services or transaction but is compensated based on factors including total revenue and profitability of the Firm, a substantial portion of which is derived from investment banking services. The Firm or its affiliates did not receive compensation from for any investment banking services within twelve months before, but may seek compensation from the companies mentioned in this report for investment banking services within three months following publication of the research report. The Firm does not make a market in as of the date of this research report. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data on the company, industry or security discussed in the report. All opinions and estimates included in this report constitute the analyst s judgment as of the date of this report and are subject to change without notice. The securities of the company discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is no guarantee of future results. This report is offered for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be prohibited. No part of this report may be reproduced in any form without the expressed permission of H.C. Wainwright & Co, LLC. Additional information available upon request. 7