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Synergy Pharmaceuticals Loan Terms and Stock Dilution Securities Class Action

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In announcing a $300 million loan, the complaint for this class action claims, Synergy Pharmaceuticals failed to disclose its terms and other conditions that were important to investors, making the announcement misleading and a violation of the Securities Exchange Act of 1934.

The class for this action is all persons who acquired the common stock of Synergy between September 5, 2017 and November 14, 2017.

During the class period, Synergy Pharmaceuticals had only one FDA-approved drug, Trulance, a treatment for constipation.

The company intends to be a go-it-alone inventor, maker, and seller of drugs, without partnership deals with larger companies, so that it can keep all profits from the drugs it creates. However, this method delays the company’s ability to achieve profitability, the complaint says, so that it must fund itself through stock offerings or loans.

On September 5, 2017, the company announced that it had secured a $300 million dollar loan from CRG Partners III, LP, which provided an immediate $100 million in cash to the company, a second $100 million tranche on or before February 28, 2018, and a third $100 million tranche in the thirteen months following.

CFO Gary Gemignani praised the loan as “non-dilutive” while “fund[ing] our current plans for the Company through 2019 when, based on our current assumptions, we expect to be cash flow breakeven.”

According to the complaint, these statements assured investors that the company could keep going through 2019, it had enough cash for its business objectives, and it had a manageable cash burn rate, without needing to raise additional capital or diluting shareholders’ interest with additional stock offerings.

What the company had not revealed, the complaint says, is that the terms of the loan rendered these impressions false:

  • The loan would not fund the company’s operations through 2019.
  • To access the second tranche of funding, the company was required to have a cash balance of $128 million, which it did not have.
  • The only way the company could raise the money was through issuing more stock, meaning that the loan would require dilution of existing shares.
  • The company would not be able to meet the conditions to obtain the third tranche of the loan.

According to the complaint, the truth emerged on November 9, 2017, when Synergy filed a Form 10-Q for the third quarter of 2017, attaching the CRG loan papers as an exhibit. Not only did this reveal the terms of the loan; it also revealed that the cash used for operations over the previous nine months was roughly double what it had been the previous year.

A few days later, the company filed a Registration Statement and Prospectus for a secondary offering of approximately 22 million new shares of stock.

These actions led to falls in the company’s stock price. 

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