By Suhani Adilabadkar

Syngene (which is in 11 stock screeners) the contract research Arm of Biocon, made its debut in July 2015. Though analysts labelled it ‘over-valued’, the Rs. 550 cr IPO was oversubscribed 31 times. With an initial listing of Rs. 295, Syngene stock has given more than 100% returns. Syngene International, India’s leading contract research and manufacturing organization provides end-to-end discovery and development services catering to global pharma companies in biotechnology, animal health, consumer goods, nutrition and specialty chemicals.

With $200 Mn capex plan, Syngene is future ready to evolve from a pure CRO play into commercial manufacturer and complete its “drug discovery to manufacture” value chain.

Quick Takes

• Syngene reported its highest ever quarterly revenues at Rs. 467 cr rising 20% YoY and 11% sequentially in Q3 FY19.

• The company has been reporting CAGR of 24% and 22% for PAT and Revenue respectively over the past five years.

• FII and DII holding in the company has gone up 375 basis points YoY as on December 2018.

• Forward integration through upcoming API manufacturing facility and Biologics business are major future growth drivers.

December quarter FY19

Syngene reported its highest ever quarterly revenues in December quarter at Rs. 467 cr against Rs. 388 cr same period previous year. Revenues growing 20% YoY and 11% sequentially were mainly driven by Discovery Services, Biological business and favourable currency movement of 6% in Q3 FY19.

Operating Profit stood at Rs. 140 cr growing 11% both YoY and on quarterly basis. Operating Profit Margin at 30.40% declined 249 basis points  YoY impacted by increased material and power cost due to sales mix and higher employee cost and depreciation rising 24% and 22% YoY respectively in December quarter FY19. PAT or Net Profit came out at Rs. 87 cr, up 6% YoY whereas quarterly growth was stronger at 11% in Q3 FY19. Net Profit Margin of 18.56% against 21.12% corresponding quarter previous year was dented by higher tax outgo which rose 26% YoY as Syngene unwinds SEZ tax holiday benefit in some parts of its business.

With respect to third quarter results, CEO Mr. Jonathan Hunt said, “We are making good progress on our strategic priorities. The reported financial performance is both robust and in line with our plans. Our focused investments in safety, operational efficiency and sales and marketing are starting to show results. I think that positions us well for further future growth”.

Configuring Syngene

Higher complexity in new drug discovery, rising R&D costs and pricing pressure has led to a flourishing global Contract Research Industry. Global pharma companies facing numerous regulatory and operational challenges outsource their research and development activities to CROs to streamline their operating cost models converting their fixed cost into variables driven by high innovation and strong regulatory compliance.

Syngene International incorporated in 1993, started its journey as a discovery chemistry focussed CRO and later widened its services across the entire Discovery-Development Commercialisation value chain. In its current state, the company has segregated its services into three main verticals, Dedicated centres providing customized services or dedicated infrastructure as per client requirements constituting one third of its revenue basket.

Then comes Syngene’s core forte, Discovery Services which conducts the entire target to drug selection process contributing 25% of the revenue mix. And lastly, Development Services with a largest chunk of 40% revenue share encompassing preclinical development, formulation development and manufacturing services for small molecules and biologics.

This being the operational ground, the company has been reporting CAGR of 24% and 22% for PAT and Revenue respectively over the past five years. And the growth factors still remain intact as the company makes progress with its capex plans of $200 Mn spread over FY16-19. Syngene has completed its commitment of $135 Mn capex as on December 2018 mainly towards expansion of Bangalore facility amounting to $80 Mn and the remaining $55 Mn for the upcoming commercial API manufacturing facility at Mangalore expected to be operational by the end of FY 2020. In addition to this already earmarked capital outlay, the company also plans an additional investment of $100 Mn for the next 3-4 years.

These robust capex plans seem to be in conjunction with company’s future prospects evident from its visible growth symptoms. As a result, FII and DII holding in the company has gone up 375 basis points YoY as on December 2018.

Long Term Growth Symptoms

First and Foremost, Syngene’s long term strategy to complete its ‘drug discovery to manufacture’ value chain.  By setting up API manufacturing facility, the company would achieve forward integration on its drug discovery and development continuum leveraging on its existing client relationships. Syngene would thus become ‘one stop solution’ for its clients integrating long term growth in its business model. The next growth indicator is the biologics business which by 2020 would be about one third of the entire global pharmaceutical industry. The company witnessed excellent traction in biologics business in FY18 and has commissioned its disposables-based mammalian manufacturing facility with multiple 2,000L bioreactors and a microbial manufacturing facility dedicated to manufacturing biologic products for global markets. Biological business received a big boost as the company signed services, manufacturing and supply contract with Zoetis, the largest global animal health company.

Another major growth factor is its client base and consistent renewal of client collaborations, namely with global names such as Bristol-Myers Squibb, Baxter, Amgen, Merck and Herbalife. For instance, Bristol-Myers Squibb’s Syngene collaboration goes back to 2007 and has recently been extended till 2026.

 Continuing with strategic client collaborations, a new laboratory infrastructure for Baxter was commissioned during the quarter. Merck extended its contract till 2019, a Japanese specialty company signed a multi-year manufacturing agreement to manufacture a novel chemical entity, Zoetis contract has strengthened Syngene’s non-life sciences and animal health sector business. And lastly, Discovery services received a strong impetus through GSK multiyear contract focussing discovery of new drug candidates through Syngene’s discovery services platforms.   

Coming to absolute numbers, the client base has jumped 70% over the past four years from 186 in 2014 to 316 in 2018.

Syngene International is one of the largest CROs in Asia now with its presence in the entire drug discovery continuum also benefits from high quality, low cost scientific workforce available in the country vis-à-vis its global peers. Apart from these structural growth factors, the global R&D spend of about $155 bn with more than 70% being outsourced annually is the biggest profitability driver. No doubt, the global CRO market has grown at a CAGR of 12% over the past four years. But for Syngene long term investors, sustainability will come easy, just by ‘putting science to work’.