by Suhani Adilabadkar

Syngene International delivered a lacklustre performance for the June quarter FY20 with its PAT taking a double dip along with revenue moving on a flat terrain. India’s first contract research organization (CRO), Syngene provides end-to-end discovery and development services, catering to global pharma companies in biotechnology, animal health, consumer goods, nutrition and specialty chemicals.

Headquartered in Bengaluru, Syngene boasts more than 360 clients, collaboration with 8 of the top ten companies in the world and holds more than 400 patents with clients. The company has entered into a voluntary licensing agreement with Gilead to manufacture Remdesivir for distribution in India and other countries too. 

Quick Takes 

• Syngene reported flat revenues at Rs. 420 crore, operating profit grew 2.6% YoY and PAT declined 19.6% YoY in Q1 FY21.
• The company lost three weeks in Q1 FY21, recording only 50% of its normal revenues and operating at 70% levels. 
• Syngene has entered into a voluntary licensing agreement with Gilead to manufacture Remdesivir for distribution in India and other countries as well.
• The company is continuing with its mega capex plan of $ 550 mn amid the pandemic, expected to be completed by the end of FY21.
• There has been a near 40% jump in client base over the past five years from 256 in FY16 to about 362 clients in FY20. Clients such as Bristol-Myers Squibb have extended their collaboration till 2026, Baxter till 2024 and BMS till 2026. 

A Challenging June Quarter Marks the Start of the FY

Syngene reported flat revenues at Rs. 420 crore in June quarter FY20. In a challenging quarter, flat revenue growth was maintained by continuing growth in discovery services and steady traction in its dedicated centre business. Operating profit stood at Rs. 124 crore in Q1 FY21 against Rs. 121 crore in the same period last year, rising 2.6% YoY.

Operating margins expanded 81 bps, driven by a change in sales mix towards discovery services which consumes lower levels of raw material and operational efficiencies in material management. Operating margins were reported at 29.6% in the June quarter FY21 compared to 28.8% in the corresponding quarter of FY20.

Net Profit or PAT stood at Rs. 58 crore in Q1 FY21 against Rs. 72 crore in the same period last year, declining 19.6% YoY. Commenting on June quarter results, Mr. Jonathan Hunt, CEO and MD, Syngene International said, “We delivered flat revenue year-over-year but with a better-than-expected performance on the profit line. Our operations are back to near normal and we expect to return to growth in the second quarter, assuming no material deteriorations in the current operating environment”. 

Weathering Covid Impact

Syngene International, a subsidiary of Biocon Ltd, established in 1993 is India’s first CRO with more than 25 years of unparalleled experience in novel molecule discovery, development and manufacturing services. The company has been growing revenue and PAT at a CAGR of 19% over the past five years.

Considered to be overvalued at the time of its stock market debut in 2015, Syngene stock has since returned more than 200%. After a slow start in June quarter FY20 in revenue terms, Syngene picked up growth for the rest of the year and ended FY20 by crossing the Rs. 600 crore milestone for the first time in company’s history.

PAT grew 20% YoY with operating margins of 33.54% in Q4 FY20. Though fourth quarter came out strong even with lockdown initiated in the last fortnight of month of March, management indicated Covid-19 impact on June quarter FY21. In fact, Syngene management guided for flat revenues and 25% YoY drop in PAT for June quarter FY21. The company lost three weeks in Q1 FY21 recording only 50% of its normal revenues, operating at 70% levels. 

Completion of Capex Plan and Growth Signals

While June revenues came out in line with company estimates, the company bettered its PAT guidance with 19% decline in bottom-line instead of earlier guidance of 25% fall. The company is currently operating at 90% capacity. Syngene is a pure play services business with its business segregated into three main verticals, dedicated centres providing customized services or dedicated infrastructure as per client requirements, then discovery services which conducts the entire target to drug selection process; and development services encompassing preclinical development, formulation development and manufacturing services for small molecules and biologics.

The company provides outsourced services to pharma companies facing numerous regulatory, operational challenges, rising R&D costs and pricing pressure in the progression of new drug discovery. In the present Covid ridden environment with China disruption impacting global pharmaceutical industry, Indian companies like Syngene with API and biologics manufacturing capability are on a strong footing.

The company is also in the goods books of the analyst community for a host of reasons, firstly a superior integrated service offering, one of the best margins in the business globally and an elite client portfolio that includes GSK, Sanofi, Unilever, Merck, Amagen, Johnson & Johnson, Bayer, Baxter to name a few.  

The company has also been witnessing continuous contract renewals and client additions over the past few years. There has been a near 40% jump in client base over the past five years from 256 in FY16 to about 362 clients in FY20. Clients such as Bristol-Myers Squibb have extended their collaboration till 2026, Baxter till 2024 and BMS till 2026. 

But what has enthused the street is the continuation of its mega capex plan of $ 550 mn amidst Covid-19, initiated in FY16, expected to be completed by the end of FY21. Syngene aims to become a ‘one stop solution’ for its clients and thus has been spearheading its multi-year capex plan spread across API manufacturing plant in Mangalore, biological facility in Bengaluru, setting up a new research facility covering 152,000 sq. ft. within its main campus in Bengaluru and R&D expansion in Genome Valley, Hyderabad.

Syngene’s biological facility is a disposables-based manufacturing facility with multiple 2,000L bioreactors and a microbial manufacturing facility dedicated to manufacturing biologic products for global markets commissioned in FY18, while the API facility is expected to commence operations from Q4 FY21. With its capex plan nearing completion, strong order book visibility for the next two quarters and double-digit growth guidance for FY21, the stock made a new 52-week high last week. The stock has gained 11% after June quarter results were announced, despite the muted numbers.