(This commentary originally appeared on Real Money Pro on Friday. Click here to learn about this dynamic market information service for active traders.)
Investors anxiously await the outcome of the Republican efforts to vote on the repeal and replacement of the Affordable Care Act in the House. It looks like the vote will come down to the wire, if it takes place at all. As I have written several times, failure to move this piece of legislation forward would have negative consequences for the prospects for tax and regulatory reform. This would likely cause a decent selloff in the market, as well.
While that drama is going on in Washington, it is once again time for Friday's Biotech Mailbag. We have a couple of questions from readers I will touch on today.
1. What should I do with my Flexion Therapeutics (FLXN) holdings?
Yesterday, the stock of Flexion surged by a third to just over $26.00 a share on rumors that the French drug giant Sanofi (SNY) had approached it with a buyout offer in the "mid $30s." This was reported in FiercePharma, which has been a decent source for this sort of speculation in the past. It also seems a good time to pick up Flexion, as its main drug candidate Zilretta looks like it is heading for approval in early October for the treatment of osteoarthritis of the knee. In addition, after being a bridesmaid in the chase for Medivation (MDVN) and Actelion, among other recent acquisitions, Sanofi is under pressure to see some success on the M&A front.
However, this certainly is not a done deal, or even a confirmed rumor. While I like FiercePharma, it is not as reliable as Bloomberg or Reuters for this sort of thing. A Wells Fargo analyst noted that while Flexion would be a good fit for Sanofi, it seems odd that a buyout offer would materialized just as Flexion's CFO is announcing his retirement. I think you play Solomon here and split the baby. I plan to sell half my holdings on this rally. If no buyout materializes and the stock drops, I can redeploy those funds in Flexion at a lower entry point. The other half I will let ride -- and see if Flexion indeed gets bought out at a higher price.
2. Speaking of buyout rumors, what is happening with Synergy Pharmaceuticals (SGYP) ?
The trading action certainly has been dismal on this name in the first quarter. The stock surged to $7.00 in December, as its main drug candidate, Trulance, was approved for treatment of Chronic Idiopathic Constipation -- and it was subsequently the target of more than one buyout rumor. Since then, the stock has slowly fallen back to $4.50 as no suitor has materialized and investors start to factor in commercialization concerns.
Unfortunately, this is a common trajectory for these types of small developmental companies that are transitioning to commercialization. It can be a bumpy ride as a concern goes from being solely focused on moving candidates ahead in its pipeline to building a sales force and learning to do mundane tasks like marketing. This is why so many small concerns are bought out around this time in their development.
This is the ultimate fate I still see for Synergy, but investors will need to be patient -- as was the case last year with a similar concern, Relypsa (RLYP) , which was eventually acquired for a 60% premium by Galenica (GALN). Trulance should be approved for IBS-C by summer, and there might be some quarterly "window dressing" trading action pushing down the shares recently as well. Patience should still be rewarded in this name -- it is just a matter of when, in my opinion.