By the strictest of definitions, Synergy Pharmaceuticals (NASDAQ: SGYP) currently resides at the upper range of the micro-cap universe with a market capitalization just south of $300 million. Sometimes, micro-cap investors need to be flexible in their hunt for quality stocks. As recently as April 30^th SGYP closed above $7.00… (flashing a $450 million market cap). While Synergy may quickly move back above the official micro-cap stock cutline, don’t drop this one from your radar…it is a quality stock with immense potential.

High potential/high risk is usually the order of the day when it comes to micro-cap biotech stocks, but Synergy might just be far less risky than meets the eye. The company is engaged in the development of drugs to treat gastrointestinal (GI) disorders and diseases, an arena that is a multi-billion slice of the health care market.

Shares of Synergy are still showing a 32% gain in 2012, but more could be on the way. A quick look at the chart indicates that if the stock rallies above resistance at $5, it could have near-term upside to $6.50 or even back to the $7 level.

SGYP added to three Russell Indices

Beyond the compelling technical outlook, Synergy is about to see some legitimate institutional buying. In late June, Russell Investments added Synergy to the broad-market Russell 3000 Index, the Russell Global Index and the Russell Microcap Index.

This means the fund managers that benchmark their performances to those indexes have to own Synergy and that means the stock should see a near-term pop. Billions and billions of dollars are benchmarked to those three indexes and that’s good news for Synergy.

Synergy is also drawing a lot of attention from analysts.

Summer Street recently initiated coverage of the stock with a “buy” rating and a $9 price target.

Brean Murray chimed in with a “buy” rating and a $13 price target.

Roth Capital got in on the act, rating Synergy a “buy” with a $12 price target.

The average of those three price targets is just over $11, or more than double where Synergy currently trades. A truly bullish assessment of this blossoming biotech comes courtesy of Aegis Capital, which rated Synergy a “buy” with a $25 price target.

Of course, as a biotech stock, Synergy is beholden to just one judge and jury: The Food and Drug Administration (FDA). Synergy is developing a drug called Plecanatide for the treatment of some rather unpleasant conditions: Chronic idiopathic constipation (CIC) and constipation-predominant irritable bowel syndrome (IBS-C).

Given the vast potential of the gastrointestinal drug market in the U.S. and abroad, traders have taken to speculating that should Plecanatide prove successful, Synergy could quickly become a takeover target for a large-cap pharmaceuticals firm.

“Given Plecanatide’s potential to launch into a multi-billion dollar market with a side effect profile more favorable than that of the product Ironwood plans to put on the market, big pharma could be priming to move on the company before the release of results in order to secure what could be one of the better deals out there right now in small pharma-land,” according to Stock House.

Ironwood (NASDAQ: IRWD) is Synergy’s primary rival. That company is nearly five times larger than Synergy by market capitalization.

Public offering stymied price gains

In early May Synergy raised $45 million in a secondary share offering. That offering, priced at $4.50 a share, put a lid on what had become an impressive rally in the stock, but it gave Synergy the funds necessary to keep its eye on the ball.

To be sure, there are catalysts on the horizon that could move the stock before the end of this year. Ironwood’s competing treatment could be approved by the FDA in early September. Should that happen, the carryover effect to Synergy would be palpable and likely send the shares soaring.

Results from Synergy’s 800 patient Phase II/III trial for Plecanatide are expected in the fourth quarter. The truly good news for savvy investors is that many analysts and experts view Plecanatide as vastly superior to Ironwood’s competing offering.

10-bagger? Maybe, maybe not…but a 2x or 3x looks good too!

What Synergy boils down to at the moment is a call option with no expiration trading for less than $5. Obviously, some folks love options because of the benefits of leverage. And that is exactly how Synergy will act if it can unveil good news about Plecanatide. The stock may not be a “10-bagger,” but a double or triple cannot be ruled out, either.

Mike Casson
Executive Editor
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