BIOCON LTD: GROWTH IS IN IT'S DNA !!!

Scrip Code: 532523 / BIOCON

CMP:  Rs. 831.00; Market Cap: Rs. 16,620 Cr; 52 Week High/Low: Rs. 846.80 / Rs. 395.30

Total Shares: 20,00,00,000 shares; Promoters : 12,13,57,446 shares – 60.68 %; Total Public holding : 7,86,42,554 shares – 39.32 %; Book Value: Rs. 202.74; Face Value: Rs. 5.00; EPS: Rs. 46.82; Dividend: 100.00 % ; P/E: 17.74 times; Ind. P/E: 27.59; EV/EBITDA: 11.75 times. Total Debt: Rs. 2,477.70 Cr; Enterprise Value: Rs. 17,970.70 Cr.

   

BIOCON LTD: The Company was incorporated as Biocon India Private Limited on November 29, 1978 and is based in Bengaluru. Biocon Limited is a biopharmaceutical company, which is engaged in the manufacture of pharmaceuticals, medicinal chemical and botanical products. The company came with an IPO in February 2004 with an offer of 1,00,00,000 equity shares of Rs. 5 each at Rs. 315.00 per share, raising Rs. 315 Cr. It got listed on April 7, 2004 at Rs. 425 and made high of Rs. 506.70 with a low of Rs. 425 on listing day. The objects of the issue were to achieve the benefits of listing on the Stock Exchanges and raising capital for financing to setting up new facilities to augment our capacities for submerged fermentation and chemical synthesis operations & for the other corporate purposes. The company gave bonus in April 2008 in ratio of 1:1, and has not given any in its shares. The Company operates through two segments: Active pharmaceutical ingredients (Pharma), and Contract Research And Manufacturing services (CRAMS Contract Research). It is engaged in manufacture of biotechnology products for the pharmaceutical sector, and also engaged in research and development in the biotechnology sector. The Company is also engaged in providing contract research and manufacturing services to overseas customers in the field of synthetic chemistry and molecular biology and undertakes clinical research activities on discovering new biomarkers and is discovering new diseases subsets and data-based on pharmacogenomics. Biocon’s presence straddles in four main therapeutic areas: Diabetology, Cardiology, Nephrology and Oncology and plans to introduce two new divisions, Comprehensive Care, and Immunotherapy. It offers a portfolio of bio similar insulins, recombinant proteins and monoclonal antibodies. Its products include Insugen, BASALOG, BIOMAb EGFR, Abraxane, CANMAb, ALZUMAb, ERYPRO, BLISTO, Cytosorb and Cimivir. In research services, Syngene International Limited (Syngene) is engaged in the business of custom research in drug discovery while the other fully owned subsidiary Clinigene International Limited (Clinigene) is in the clinical development space. Syngene is a now a listed entity in Indian Capital Market. In December 2009, Biocon acquired the Active Pharma Ingredients (API) undertaking from IDL Speciality Chemicals Ltd., a subsidiary of Gulf Oil Corporation Limited. BIOCON Ltd is locally compared with Alpa Laboratories Ltd, Panacea Biotech Ltd, Hester Bioscience Ltd, Wockhardt Ltd, GlaxoSmithKline Pharma Ltd, Jubliant Life Sciences Ltd, Wyeth Ltd, Lyka Labs Ltd, Cadila Healthcare Ltd, Novartis India Ltd, Syngene International, Vivo Biotech Ltd, Celestial Biolabs and Globally with Anavex Life Sciences Corp of USA, Bayhill Therapeutics, Inc. of USA, Cephalon Inc of USA, Halozyme Therapeutics Inc of USA, Immunex of Denmark, Myriad Genetics, Inc of USA., OncoMed of USA, Proteolix of USA, Tanox , Xoma Corporation, Taconic of Denmark, QPS of Austria, Baxalta (Shire) of Austria, Pfizer of Belgium, Sanofi Genzyme of Belgium, Ergomed of Bosnia, Allergan of Bulgaria, Lonza of Cezch Republic, Novozymes of Denmark, Novo Nordisk of Denmark, Medix Biochemica of Finland, Graftys of France, Allecra Therapeutics of Germany, Bioaxis Healthcare of Greece, Omixon of Hungary, Pinewood (Wockhardt) of Ireland, GlaxoSmithKline Pharma of UK.

Investment Rationale:

Biocon started as a niche player with its unique expertise in fermentation technology to build global leadership in manufacturing and supply of statins. Over time, the statin business was commoditised, but the company leveraged its expertise in fermentation to build its presence in high-entry barrier biosimilar space. The company has accelerated its biosimilar development efforts to emerge as a front-runner in the race to launch biosimilar products in regulated and developed markets. The company has four biosimilar products (Insulin Glargine, Trastuzumab, Pegfilgrastim, and Adalimumab) in late stage clinical trials intended for approval in developed markets (US and EU). Besides having a front-end product business, Biocon also successfully nurtured and developed contract research and manufacturing business, which was recently listed on the bourses as Syngene International. By virtue of its strong client relationship and full service offering in the contract research and manufacturing space, Syngene continues to grow at a notably fast pace at more than 20 %. The characterisation capabilities that the company has developed by virtue of its developmental efforts on the biosimilar front is being leveraged for filing of Abbreviated New Drug Application (ANDA) application on complex chemical drugs products like Copaxone. The company so far has made 7-8 ANDA applications and is looking for 5-6 filings each year. The company potentially runs a cost advantage on these products by virtue of Global scale in APIs of these products. Biocon is aspiring to reach US$1bn in annual revenues by FY19 and believes that a large part of the potential growth will came from sale of biosimilars, and there will be growth in branded formulations business and research services business. The biotechnology sector of India is highly innovative and is on a strong growth trajectory. This sector, with its immense growth potential, will continue to play a significant role as an innovative manufacturing hub. The sector is one of the most significant sectors in enhancing India's global profile as well as contributing to the growth of the economy. India is among the top 12 biotech destinations in the world and ranks third in the Asia-Pacific region. India has the Second-highest number of US Food and Drug Administration (USFDA) approved plants, after the USA and is the largest producer of recombinant Hepatitis B vaccine. Out of the top 10 biotech companies in India (by revenue), seven have expertise in bio-pharmaceuticals and three specialise in agri-biotech. The Indian biotech industry holds about 2 % share of the global biotech industry. The biotechnology industry in India, comprising about 800 companies, is growing at an average rate of about 20 %. The Indian biotechnology sector is expected to grow from the current US$ 5-7 billion to US$ 100 billion by 2025, growing at an average rate of 30 %. Biopharma is the largest sector contributing about 64 % of the total revenue followed by bioservices at 18 %, bioagri at 14 %, bioindustry at 3 %, and bioinformatics contributing to 1 %. With the country offering numerous comparative advantages in terms of R&D facilities, Knowledge, skills, and cost effectiveness, the biotechnology industry in India has immense potential to emerge as a global key player. India constitutes around 8 % of the total global generics market, by volume, indicating a huge untapped opportunity in the sector. Outsourcing to India is projected to spike up after the discovery and manufacture of formulations. Hybrid seeds, including GM seeds, represent new business opportunities in India based on yield improvement. India currently has a marginal share in the global market for industrial enzymes that is estimated to reach about US$ 4.4 billion by 2015. Hence, there is an opportunity in focused R&D and knowledge-based innovation in the field of industrial enzymes, which can innovatively replace polluting chemical processes into eco-friendly processes that also deliver environmental sustainability. India has all the ingredients to become a global leader in affordable healthcare. If there is an annual investment of US$ 4.01 billion to US$ 5.02 billion in the next five years, the biotech industry can grow to US$ 100 billion by 2025, with a 25 % return on investment, and set a growth rate of 30 % year-on-year. For Biocon, the small molecules segment accounts for 42 % of the turnover and comprises Active Pharmaceutical Ingredients (API) like statins, immune-suppressants and specialty APIs and also includes generic formulations business. This vertical is witnessing pricing pressure in some products. The company is exploring fewer opportunities but with higher profitability in this segment such as moving into formulations and filing own ANDAs, 505 (b) (2) filings, etc. It has already filed seven or eight ANDAs cumulatively. These include complex generics and injectable. It is expected that the small molecules segment can grow at a CAGR of 13.5 % to Rs. 1,787 crore in FY16-18E. The biologics segment includes novel biologics and biosimilars, including rh-insulin, insulin analogs, monoclonal antibodies and recombinant proteins. This segment accounts for 12 % of the Biocon turnover. Biocon is mainly focusing on following therapies -diabetology, oncology and immunology. The company has invested heavily in this space over the last two or three years, especially the Malaysian facility. The progress, so far, is encouraging with launches in emerging markets, Glargine launch in Japan and filing arrangements in the EU and US. Biologics is expected to grow at a CAGR of 40 % in FY16-18E. Biocon’s research arm SyngeneInternational Ltd contributes 32 % to its turnover. Syngene is the contract research organisation (CRO) arm of Biocon with proven capabilities. The company caters to 256 clients including eight out of global top 10 global players. This segment has been consistently growing at 20 %+ rate. Syngene provides variable cost alternative like full-time equivalent (FTE) and fee-for-service (FFS) to the traditionally fixed cost, in-house, resource intensive business model of R&D focused organisations. The company has developed long-term relationships and has multi-year contracts with its clients, including three long-duration multidisciplinary partnerships with Bristol-Myers Squibb (BMS), Abbott Laboratories (Singapore) and Baxter International. The company also provides clinical research and clinical trial services through its subsidiary Clinigene. In August 2015, Syngene had raised Rs. 550 crore through IPO. Recently, it has been the major growth driver for the company as biopharma segment has seen some slow down. It is expected that the revenues from it to grow at a CAGR of 25 % in FY16-18E. The branded formulations business includes the finished dosage business in India and overseas including UAE. It constitutes 15 % of the Biocon turnover. It comprises Indian domestic formulations. Biocon owns 80+ brands encompassing therapies like diabetology, oncology, nephrology, cardiology, immunotherapy, comprehensive care and bio-products. Four of its biosimilar products (Trastuzumab, Pegfilgrastim, Adalimumab and Insulin Glargine) have already reached the critical milestone of global Phase III clinical trials. The company is also planning to start US and EU filings from FY17 with Mylan. Biocon entered into a partnership with Mylan for six biosimilar programs (Trastuzumab, Pegfilgrastim, Adalimumab, Bevacizumab, Etanercept and Filgrastim) and three insulin analog programs (Glargine, Lispro and Aspart). Biocon’s Japanese partner Fujifilm Pharma (FFP) has launched Insulin Glargine in Japan. The company has received approval for its Insulin Glargine from the Japanese regulator in March 2016. Insulin Glargine BS Injection Kit (FFP) has been developed and manufactured by Biocon and is being commercialised by FFP in Japan. Among therapies, diabetology is the largest therapy, which accounts for 60% of branded formulations. Some of its unique launches are INSUPen (insulin delivery device), Biomab (novel biologic for oncology) and Alzumab (novel biologic for Psoriasis). The pipeline includes CANMAb (biosimilar version of oncology product Herceptin). This segment constitutes 15 % of overall sales. Biocon is India’s premium biopharmaceutical company, which has demonstrated industry-leading capabilities in developing the most complex biosimilar products. The company is a frontrunner in the race to introduce biosimilar products for developed markets. In recent weeks, Biocon’s stock price has run up notably in anticipation of growth presented by the launch of biosimilars in regulated markets. And it is believed that Biocon will continue to post growth in coming future.

Outlook and Valuation: 

Biocon Limited is India’s largest and fully-integrated, innovation-led biopharmaceutical company. As an emerging global biopharmaceutical enterprise serving customers in over 100 countries, it is committed to reduce therapy costs of chronic diseases like autoimmune, diabetes, and cancer. Through innovative products and research services it is enabling access to affordable healthcare for patients, partners and healthcare systems across the globe. It has successfully developed and taken a range of Novel Biologics, Biosimilars, differentiated Small Molecules and affordable Recombinant Human Insulin and Analogs from Lab to Market. Some of its key brands are INSUGEN® (rh-insulin), BASALOG® (Glargine), CANMAb (Trastuzumab), BIOMAb-EGFR (Nimotuzumab) and ALZUMAb (Itolizumab), a first in class anti- CD6 monoclonal antibody. It has a rich pipeline of Biosimilars and Novel Biologics at various stages of development including Insulin Tregopil, a high potential oral insulin analog. Biocon’s Herceptin derives about US$2bn in sales from Herceptin in international markets. It is believed that not all of Herceptin sales in international markets will be immediately accessible for biosimilar players because of different intellectual property or IP situations and regulatory bars across geographies. There are ways that biosimilars can look to play the emerging market potential. One is to cannibalise the existing market pie and the other is to expand access by discounting the prices to a level where affordability is significantly enhanced. For now, Biocon will discount its biosimilar by 60 % and get an 8 % share of the available pie i.e. 50 % of international markets’ sales and also expand the market by 20 % from the current level. This translates into incremental sales of US$75mn in international markets. Biocon’s has unexpired patents protecting Lantus, Biocon may enter the market only after a settlement with Sanofi and can reach the market in second-half of 2018. It is expected to have double-digit royalty payment from Biocon/Mylan to Sanofi. Biocon should be the third entrant after Eli Lilly and Merck. And there is a very low probability that pharmacists may be allowed to substitute Lantus with biosimilars. In a best-case scenario, pharmacy substitution for Lantus may be allowed for vials. However, the vial market is reducing every year and with the launch of Toujeo the cannibalisation of vial market (most of which is in US) will accelerate significantly. The recent run up in the stock price has discounted a greater proportion of the potential opportunity, but the risks are underappreciated. Direct competition from other biosimilar players and next generation molecules from innovators casts major uncertainty over realization of potential benefits in the near to mid-term. The investments that have been made so far are significant and the business would require further investments. This would limit free cash flow generation. Over the next 3-4 years, the larger part of the opportunity for Biocon will be driven by emerging markets, while regulated markets will have limited contribution. A better way to play the potential opportunity presented by the biosimilar space would be a large cap pharma company that is poised well in the biosimilar space. On financial side, Biocon during Q1 FY17 reported consolidated net profit of Rs. 166.60 Cr an increase of 31.97% from Q1 FY16. It reported its consolidated revenue for the quarter which rose by 17.94 % to Rs. 982.40 Cr. During Q1 FY17, Biocon reported consolidated EBIDTA of Rs. 304.00 Cr up by 28.98 %. During Q1 FY17, it reported its consolidated Profit before tax to Rs. 232.00 Cr. EPS of the company stood at Rs. 8.33 a share during the quarter, as against Rs. 6.31 per share over previous year period. Biocon’s gross R&D spend stood at Rs 92 Cr in Q1 FY17, reflecting the progress of Generic Formulations, Biosimilars and Novel programs. Net Sales and PAT of the company are expected to grow at a CAGR of 12 % and 13 % over 2015 to 2018E respectively. There’s significant capex towards biosimilar manufacturing and foray of Syngene into Contract manufacturing will limit free cash flow generation. With encouraging developments on biosimilars front in last six months have hogged the limelight especially the approval & launch of Glargine in Japan and presentation of Trastuzumab data to ASCO. And launches in emerging markets are also getting momentum. These developments are testimony to Biocon’s progress. With the Malaysian facility getting ready for global filings, it is believed that the future bodes well for it on the biosimilars front. It will also provide an extra lever for growth besides Syngene and branded formulations. Strong performance of the company during the quarter has been driven by an all- round growth of its business across Small Molecules, Biologics, Branded Formulations and Research Services. Biologics business delivered a growth of 53 % driven by the sales of biosimilars in emerging markets. The submission of Pegfilgrastim, Biocon’s first biosimilar filing in EU, is a critical milestone this quarter. Biocon Insulins business made a mark with the launch of Insulin Glargine in Japan. In addition the company received regulatory approvals from MoH, Malaysia, for rh-Insulin and Glargine which will enable commercialization of these products. Biocon is on track for filing some of its Biosimilars and Generic Formulations in the developed markets later this year. On SOTP (sum-of-the-parts) basis, the value of BIOCON alone comes at Rs. 534.40 per share valueing 22 x its FY18E EPS of Rs. 24.30. The valuation of the Syngene taking valueing Biocon's at 74.60 % stake comes to Rs. 372.26  per share. And valuing the whole gives us the value of BIOCON of Rs. 906 per share. At the current market price of Rs. 831.00, the stock is trading at a PE of 27.97 x FY17E and 24.93 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 29.70 in FY17E and Rs. 33.33 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.   

SOTP VALUATIONS : (FY18E)

Business Subsidiary	Value Per Share (₹)
BIOCON Standalone	534.40
Syngene International (EPS Rs.18.5 x 27PE) Rs. 499.50
Biocon's value in Syngene per share (74.60%)	372.26
TOTAL Value per Share (Rs.)	906.66

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	3,089.81	3,485.40	3,973.35	4,489.89
NET PROFIT (₹ Cr)	497.43	896.10	594.73	666.62
EPS (₹)	24.87	44.81	29.70	33.33
PE (x)	32.52	18.05	27.23	24.26
P/BV (x)	4.95	3.99	3.48	3.05
EV/EBITDA (x)	21.41	18.01	15.40	14.01
ROE (%)	16.16	23.94	13.80	13.38
ROCE (%)	22.55	17.58	17.53	16.78

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RETURN ON CAPITAL

SYNGENE INTERNATIONAL LTD: MAKING YOUR PORTFOLIO HEALTHY !!!

Scrip Code: 539268 / SYNGENE

CMP:  Rs. 417.70 ; Market Cap: Rs. 8,354.00 Cr; 52 Week High/Low: Rs. 402.00 / Rs. 250.00

Total Shares: 20,00,00,000 shares; Promoters : 14,90,92,154 shares – 74.55 %; Total Public holding : 5,09,07,846 shares – 25.45 %; Book Value: Rs. 42.29; Face Value: Rs. 10.00; EPS: Rs. 9.81; Dividend: 00.00 %; P/E: 42.57 times; Ind. P/E: 27.37; EV/EBITDA: 29.10x

Total Debt: Rs. 155.00 Cr; Enterprise Value: Rs. 8,509 Cr.

SYNGENE INTERNATIONAL Limited: The Company was founded on November 18, 1993 and is headquartered in Bengaluru, India. It is a subsidiary of Biocon Limited, a global biopharmaceutical enterprise focused on delivering affordable formulations and compounds. The company was earlier known as Syngene International Private Ltd and changed its name to Syngene International Ltd on March 26, 2007. The company came out with an IPO on July 27, 2015 offering 2,20,00,000 equity shares of Rs. 10 each for Rs. 250 per share raising Rs. 550 Cr. The shares of the company got listed on August 11, 2015 at Rs. 295 making a high of Rs. 310.40 on listing day. The object of offer for sale was to achieve the benefits of listing and enhancing visibility and brand image among existing and potential clients and to provide liquidity to the existing shareholders. Syngene International is India-based contract research organisations (CRO), offering a suite of integrated, end-to-end discovery and development services for Novel Molecular Entities across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies. Their services in discovery and development cover multiple domains across small molecules, large molecules, Antibody-Drug Conjugates and oligonucleotides. Syngene offers customized models as per their client’s requirements. These offerings range from a Full-Time Equivalent to a Fee-For-Service model, or a combination thereof. It also offers discovery chemistry services, including medicinal chemistry, synthetic chemistry, library synthesis, biomolecules, computational chemistry and organic electronic materials, and discovery biology services in the areas of recombinant deoxyribonucleic acid (DNA) engineering, cell line development, hybridoma technology, protein sciences, screening and assay biology, in vivo pharmacology, toxicology and biologicals. The Company also offers safety assessment, large molecule development, chemical development, formulation development, polymer research, integrated discovery and development, and clinical development services. Till Dec 31, 2014, they serviced 195 clients, ranging from multinational corporations to start-ups, including seven of the top 10 global pharmaceutical companies by sales for 2014. Company's long term clients include global healthcare organisations Bristol-Myers Squibb Co. ("BMS"), Abbott Laboratories (Singapore) Pte. Ltd. ("Abbott") and Baxter International Inc. ("Baxter"). Syngene International Ltd is locally compared to Vimta Labs Ltd, Transgene Biotek Ltd, Saamya Biotech (India) Ltd, Veerhealth Care Ltd, Ashco Niulab Industries, Mavens Biotech Ltd, Piramal Phytocare Ltd, ABL Bio Technologies Ltd, RJ Biotech ltd, Biocon Ltd, Siro Clinpharm, GVK Bio, Clininvent, CliniRX, Ecron Acunova and globally with Quintiles Transnational INC of USA, Parexcel International of USA, Pharmaceutical Product Development LLC of USA, Covance Inc of USA, Medpace of USA, PRA Health Sciences of USA, inVentive health Incorporated of USA, Chiltern International of USA, ICON Plc of USA, Quotient Bioresearch USA, Takara Bio Inc of Japan, Morishita Jintan Co Ltd of Japan, Shin Nippon Biomedical Laboratories Ltd, Japan, EPS Corp of Japan .   

Investment Rationale:

 SYNGENE INTERNATIONAL LTD is the subsidiary of pharmaceutical major Biocon. It is an internally reputed contract research and manufacturing organization with multidisciplinary skills in chemistry and biology services. It caters to the outsourced research requirements of global pharmaceutical, biotechnology, agrochemical, consumer health, animal health, cosmetic and nutrition companies on a fee-based contractual arrangement. SIL provides a gamut of integrated, end-to-end services to develop novel molecular entities (NMEs) or new drugs. In this process, it works with customers to conduct discovery from target identification to candidate selection , development including pre-clinical and clinical studies, analytical and bio-analytical evaluation, formulation development and stability studies and pilot manufacturing like scale-up, pre-clinical and clinical supplies under one roof. SIL has a client base of 221 overseas customers including large global pharma players like Bristol–Myers Squibb, Abbott and Baxter among others. The company has a team of talented 2,122 scientists including 258 PhDs. It owns a Laboratory and pilot manufacturing facility which is spread over 9,00,000 sq. ft located in Bengaluru. Syngene has state-of-the-art research facilities certified with ISO 9001:2008, ISO 14001:2004, and OHSAS 18001:2007. Its animal facilities are GLP certified by the Indian authorities and AAALAC accredited. Over the last 20 years, Syngene have successfully offered these services to more than 220 clients including start-up companies, large pharma-biotech, agrochemical, chemical, nutrition and animal health companies in the USA, Europe and Asia Pacific including Japan. Syngene has a strong corporate governance framework with a focus on client satisfaction, quality, safety, ethics and integrity. Their ability is to deliver significant value to its customers by leveraging their scientific skills, global mind set and India’s cost competiveness differentiates Syngene as one of the most preferred partners. India has offered a significant cost advantage and skilled personnel. However, as global pharma outsource more R&D functions, outsourcing to India is increasingly seen as a strategic move to garner quality and value, rather than just a tactical decision to lower costs. Contract research organisations (CROs) services span the range of R&D activities from new molecular entity (NME) discovery, development to manufacturing. The growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D activities. The global CRO market for discovery services was estimated at US$14.7 billion in 2014 and is expected to reach US$22.7 billion in 2018, reflecting a CAGR of 11.5 %, according to one report. The global CRO market for development services was estimated at US$28.8 billion in 2014 and is expected to reach US$44.6 billion in 2018, reflecting a CAGR (2014-18) of 11.6 %, according to the Frost & Sullivan Report. As an industry, CROs have expanded their service offerings over time to meet growing needs for full-service outsourcing across the full spectrum of R&D and related activities. In practice, however, most CRO service providers Specialise to some degree based on the needs of their clients and the market in which they operate. A significant portion of R&D budgets are spent on outsourcing services domestically and international which are offered by the CRO industry. This was approximately $25 billion in 2015. As of 2015, this figure is expected to grow at 9 % over the next ten to fifteen years. There are over 1,100 CROs in the world, despite continued trends toward consolidation many CROs are being acquired in recent times or others go out of business. It is a very fragmented industry with the top 10 controlling almost 55 % of the market in 2009. Global pharmaceutical players are facing structural issues such as profit pressures arising from impending patent cliff, drying product pipeline and rising R&D costs. Surprisingly, the new product approvals from the USFDA are on the rise. Hence to maintain the cost balance at one end and maintain the new product introduction at the other, these players are inclined to outsource some of the R&D budget to CROs like Syngene. Also, the need for greater flexibility has reduced the willingness of these players to incur large fixed costs associated with large scale R&D programmes. Due to its integrated service offerings coupled with consistent performance and high data integrity ethos, Syngene enjoys high recall value, which is reflected in the fact that eight out of top 10 clients have been engaged with the company for the past five years. The number of clients for company has increased from 111 in FY11 to 221 in FY15. However, the amount of business from 211 customers is only 30 % as of now. This may be due to low amount of outsourcing to Syngene at this stage. The scope of work may increase depending on the service provided by Syngene going forward. The company currently conducts laboratory and manufacturing activities at two primary facilities-Bommansandra, Bengaluru Bommansandra Industrial Area, Bengaluru. Apart from this, it is in the process of establishing a new commercial scale Facility in Mengaluru (SEZ) to manufacture novel small molecules for innovator companies in pharmaceutical, agrochemical and other industrial sectors. Syngene plans to build on the success in integrated services to “follow” their clients’ molecules across discovery, development and manufacturing. Syngene is well-positioned as a one-stop shop for their clients to advance the R&D programmes from the discovery stage through preclinical and clinical trials and, with the new planned manufacturing facilities to support them through the commercialisation process. Strong team and management along with the strong brand recall value a key strength for Syngene and cost effectiveness will help Syngene retain its market share, looking forwards these factors will help the growth of Syngene and most preferred pick from this sector.

Outlook and Valuation:

Syngene International Ltd. is a subsidiary of Biocon, an India's largest and Asia's leading biotechnology company with a strategic focus on biopharmaceuticals and research services. Syngene was incorporated in 1993 and is headquartered in Bengaluru, India. The company has now become one of the leading India-based Contract Research Organisations (CRO), offering a suite of integrated, end-to-end discovery and development services for Novel Molecular Entities (NMEs) across various industries including biotechnology, pharmaceutical, agrochemicals, consumer health, animal health, cosmetic and nutrition companies. Syngene has the world class infrastructure. Their laboratory and manufacturing facilities are of high standards as required by the regulatory compliance and are consistent with the requirements of the large global clients. This provides the sustainable competitive advantage to Syngene. Their research facilities and systems are certified with ISO standards. The pre-clinical research facilities are certified with Good Laboratory Practices (“GLP”) certificates and accredited by Association for Assessment and Accreditation of Laboratory Animal Care (“AAALAC”). The clinical facilities are GLP compliant, National Accreditation Board for Testing and Calibration Laboratories (“NABL”), College of American Pathologists (“CAP”) and Central Drugs Standard Control Organisation (“CDSCO”) accredited and have undergone multiple FDA audits. In 2014, they successfully completed an FDA pre-approval inspection of one of their manufacturing facilities. In 2010 and 2013, they also successfully completed EMA audits of their bioanalytical and clinical facilities. Contract Research And Manufacturing Services (CRAMS) organizations provide outsourced services to support discovery and development for R&D driven organisations across various industries like biotechnology, pharmaceuticals, biopharmaceuticals, nutraceuticals, animal health, agro-chemicals, cosmetics and electronics. CRAMS service providers will typically compete in various segments of Discovery, Development and Manufacturing. Global R&D expenditure for the pharmaceutical industry in 2014 was approximately $139 billion, of which $105 billion could have potentially been outsourced. The outsourcing market for discovery, pre‐clinical and clinical segment was stood at around US$43.5 billion by 2014 and is expected to grow at CAGR of 11.5 % to US$67.2 billion by 2018. Geographically, North America and Europe together accounts for around 75 % of the total global outsourcing business. Syngene intends to evolve itself from a CRO based to a Contract Research and Manufacturing Services (“CRAMS”) based organisation with commercial-scale manufacturing capabilities. This can help Syngene to leverage their existing relationships with clients and provide them with forward integration on the discovery and development continuum. Syngene currently manufactures developmental batches of small and large molecules to support clinical trials for multiple clients. In the area of small molecules, it has multiple client-programmes that are in late-stage clinical development. Syngene recently entered into three long-term contracts with two existing clients for commercial manufacturing of their novel small molecules. Currently, one of these molecules is under late stage development, while the other two are at various stages of clinical development. In addition to these contracts, Syngene is also working on attracting new clients for commercial manufacturing opportunities, which will be the key growth driver for the company. Global CRAMS market grew by 15-16 % CAGR over 2010-2015, while Indian CRAMS market during the same period increased by 25-30 % CAGR. Going forward, the Indian CRAMS industry is expected to increase approximately to US$18 billion in 2018 from about US$7.6-7.8 billion in 2013, registering 18-20 % CAGR. The growth would be mostly led by increase in strategic alliances and expanding footprints to major geographies through strategic partnership. The growth rate for Indian CRAMS players slowed down to 5-8 % CAGR during 2009-2011. The industry underwent tough times on account of inventory rationalization and reduction in Research and Development (R&D) budget by multinational pharma companies in the face of global slowdown. Amid slowdown, CRAMS players also faced rising cost pressures, especially with new products not being launched in the market. The cost of developing new drugs is estimated to have reached approximately US$5 billion. However, the growth rate gradually picked up to low double digits in subsequent years. Going forward, it is expected that there could be gradual improvement with expected CAGR 18-20 % on the back of recovery signs witnessed in US markets. Further, global pharma companies are slated to enhance their allocations towards R&D in order to increase their drug pipeline. Increase in fresh orders and new assignments will aid in revival of CRAMS business. India has offered a significant cost advantage and skilled personnel. However, as global pharma outsources more R&D functions, outsourcing to India is increasingly seen as a strategic move to garner quality and value, rather than just a tactical decision to lower costs. Syngene’s expansion plans are well on track to boost the next leg of growth. Syngene plans to spend around $200 million over the next three to four years for setting up a new facility and expansion of existing facility. It has commenced the process of establishing a new commercial facility in Mangaluru to manufacture novel small molecules for innovator companies. It has also expanded its current small molecule manufacturing facilities in Bengaluru to meet the interim manufacturing needs of its clients. Additionally, it is in the process of expanding its large molecule manufacturing Capabilities by establishing a new unit in Bengaluru. Syngene derives 95 % of the revenues from exports. In terms of classification on contractual basis, it derives 36 % of the revenues from long term dedicated contracts with a Contractual commitment of five years and more. The company offers a dedicated, customised and ring-fenced infrastructure in line with client’s requirements. These dedicated centres are generally multi-disciplinary, full time engagements that support the R&D requirements of our clients. The remaining 64 % come from full time equipment (FTE) and fee for service (FFS) contracts. In FTE contracts, the company does billing based on the number of scientists deployed. In this case there is an agreement with the clients for a minimum utilisation of a specified number of scientists dedicated to their work. The scope of services and deliverables under FTE contracts generally evolves over time. The FTE contracts are generally renewable annually. FFS contracts are short-term in nature. In FFS contracts, the agreement is for fixed price for agreed services within a defined scope. Syngene International has financial stability and steady operational cash flows to enable the extension of platforms in line with the present and future needs of clientele. Further, long-term collaborations with certain clients lead to predictable and stable cash flows. The company has strong balance sheet, well adequate to support their new molecular entity (NME) development with dedicated investments in terms of both capabilities and capacities. Syngene’s leverage free balance sheet with sustainable cash flows the net debt/equity (net D/E) has reduced to nil in FY15 from 0.6x in FY11. Also, in the past five years it has generated cumulative free cash flow of Rs. 200 crore post incurring capex on capacity expansions, technological up gradations and maintenance. The major capex incurred in past three years was to develop a dedicated facility for its clients abbott and Baxter. Over the next three years, the company is planning around US$200 million capex towards capacity augmentation in its laboratory services, developmental services and GMP drug substance manufacturing. Company has very sound fundamentals, with 4 year revenue CAGR of 28 %, between FY11- FY15 and PAT CAGR of 59 %. During FY15, revenue grew 23 % YoY, to Rs. 860 crore, 95 % of which came via exports, while EBITDA margin was healthy at 34 %, leading to an EBITDA of Rs. 293 crore, up 32 % YoY. Since the company enjoys many tax concessions in form of SEZ unit and additional depreciation on plant and machinery, income tax rates are very low, and stood at just 14 % for FY15. Thus, net profit of Rs. 175 crore was earned in FY15, translating into net margin and EPS of 20.3 % and Rs. 8.75 respectively. At the current market price of Rs. 405.30, the stock is trading at 38.89 x for FY16E and at 31.05 x for FY17E. Company can pst Earnings per share (EPS) of Rs. 10.42 for FY16E & for FY17E it could be seen at Rs. 13.05. It is expected that the company will keep its growth story intact in the coming quarters also and can be a good pick from this CRO sector. 

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	859.90	1,025.10	1,222.20	1,531.10
NET PROFIT (₹ Cr)	175.00	208.50	261.10	332.60
EPS (₹)	8.75	10.42	13.05	16.63
PE (x)	40.00	33.60	26.80	21.00
P/BV (x)	8.30	7.10	6.00	5.00
EV/EBITDA (x)	16.70	21.61	18.11	14.39
ROE (%)	20.70	21.00	22.20	23.60
ROCE (%)	19.50	20.80	22.50	24.40

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