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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*As the author of this blog I disclose that I do not hold SYNGENE INTERNATIONAL LTD in my any of the portfolios.
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