Syngene International - Infosys of Pharma (parallel of IT outsourcing to CRAMS business)
CRO (Contract Research Organizations) and CDMO (Contract Development & Manufacturing Organizations) are all different types of Outsourcing of Pharma business. Indian companies have advantage due to abundant access to ample supply of Biotech graduates/PhD holders. This is similar to IT outsourcing to Indian companies due to availability of low cost IT Engineers in India.
Company Overview
Syngene International Limited is an integrated research, development and manufacturing organization providing scientific services – from early discovery to commercial supply. Syngene innovative capabilities for novel molecular entities (“NMEs”) cater to a wide range of industrial sectors, including pharmaceutical, biotechnology, nutrition, animal health, consumer goods and speciality chemical companies.
Syngene International Limited was incorporated in 1993 as a subsidiary of Biocon. It is India’s leading Contract Research Organization (CRO) and it primarily supports R&D program of global innovative companies .
What’s fueling the growth of CRAMS business (Contract research and manufacturing services)
Because of the unpredictability of the drug development pipeline, sizing a plant to maintain maximum capacity is challenging. Therefore, most pharmaceutical companies outsource part of their manufacturing to CRAMS players.
Outsourcing also helps to reduce risks associated with surges in capacity needs without tying assets during slower periods. In addition, smaller companies often do not have the resources or capital to invest in process development and manufacturing facilities, and thus tend to outsource more of their manufacturing costs. This helps to reduce costs, increase development capacity, increase financial metrics (like Earnings, ROCE, ROE, etc.) and focus on core profit making activities rather than on manufacturing.
Then there’s another risk of drug failure during the discovery process which may lead to idle production capacity of the Pharma companies. So having partnership with CRAMS player helps in reducing the risk for pharmaceutical companies that would otherwise need to invest in both the manufacturing equipment and facilities
Market Overview
Contract research market - The global contract research organization (CRO) services market is projected to grow at 7.6% CAGR from 2019-25 to reach a value of $61bn by the end of this period, according to a research report from Global Market Insights.
Pharmaceutical and biopharmaceutical companies are the primary end-users of contract research services, estimated to account for 54% revenue share in 2018, companies in the realms of medical devices, consumer products, cosmetics, speciality chemicals and agrochemicals are also working with CROs for product innovation.
Global healthcare CRO market - While research and development investments are increasing to meet the growing demand for new drug molecules for various therapeutic areas, the R&D model has witnessed a major shift over the past decade. CROs have emerged as a strategic alternative to in-house research and development as they help pharmaceutical and biopharmaceutical companies to control their R&D costs, manage stringent regulatory requirements, take strategic decisions based on research progress and outcomes, increase the speed-to market of their life-changing drugs and focus on their core competencies. CROs, through their ability to adapt and integrate advanced technologies and their teams of highly qualified scientists, can accelerate the development of a compound. This eliminates the client companies’ need to maintain their own R&D space, equipment and manpower. Consequently, CROs have become the partner of choice for companies of all sizes, from global giants to smaller enterprises.
Contract manufacturing organizations - Global data estimates that dose CMO contract revenue in 2018 was USD 21.4bn, representing a growth of 6.4% over the 2017 revenue of USD 20.1bn . This is the highest year-on-year growth since 2012 and represents a continued recovery from the low growth rate of 3.0% recorded for 2015.
Biologics market - In 2018, only two of the top ten largest selling drugs were small molecules and biologics drove 80% of sales. Looking ahead, as biologics lose their patent protection, biosimilars are taking their place.
According to Grand View Research, the global biopharmaceutical CMO and CRO market size is expected to reach USD 37.8bn by 2025, 7.7% CAGR. Mammalian cell line-based bioproduction systems held the largest market share in terms of revenue in 2018 .
Tailwinds
Biologics - A big opportunity
High Switching Cost, may lead to sticky revenue growth
Valuation kicker
API plant - operating leverage
Revenue kicker (Rs 900 crore potential) - this is 45% upside to the current annual revenue of Rs 2000 crore. This will also boost financial ratios - ROE, ROCE, etc.
Rising outsourcing -
50-60% of the small molecule manufacturing is outsourced
Low cost outsourcing hub
Porter Analysis
Threat of substitute - Low: technology investments, capabilities & capacities, sticky business, high budget especially cost of scientists
Threat of new entry - Low: huge investments, high regulations, long term customer partnership, reliability
Bargaining power of buyers - Medium to Low: niche technology investments, intellectual properties
Bargaining power of suppliers - Low to Medium: difficult to switch, sticky business, regulatory compliance
Industry rivalry - Low to Medium: high regulations, sticky business, regulatory compliance
Value creation model of Syngene
Business model
Financials
Revenue growth 22% CAGR over last 10 years and 19% over last 3 years
Profit growth CAGR is 28% over last 10 years and 7% over last 3 years
Return on Equity (ROE) is 18-20% every year for last 10 years
Company Debt-to-Equity ratio is 0.32. ROCE is 16.6%, which is lower as compared to previous 25% in 2013-2016 time period, majorly driven by recent capex, which increased Total Asset of the company however the capex is yet start contributing on the Return. In longer term, ROCE is expected to increase to 25% range.
CFO is higher than Operating Income, which shows that company is efficiently managing working capital and able to convert earnings to cash flow.
Syngene also got strong balance sheet with 32% of total assets as cash & equivalents and short-term investments. Long-term debt is only 8% of the total assets.
Syngene has increased CFO over the years which helps in funding Capex from internal sources and repayment of Debt. It has negative CCC which indicates that it earns heavy advances from customers (~15% of Revenue) which helps in maintaining Working Capital.
It receives advances before rendering the services. Hence, this itself explains the excellent operational efficiency.
Valuation
Syngene is currently (Dec 2020) is available at P/S ratio of 12.4 (Market Cap = Rs 25,584 cr and Annual Sales LTM = Rs 2,064 cr). With API plant coming in production, projected Annual sales will be Rs 3000 cr, which will result in P/S of 8.5.
In comparison, competition like Wuxi Biologics is currently available at P/S ratio of 76. Similarly, Samsung Biologics is at P/S ratio of 78.If we take Revenue increase of 20% CAGR for next 10 years, Revenue will be Rs 12,383 cr by 2030. With Net Income margin of 25%, Earnings will be Rs 3,095 cr. If exit PE in 2030 is 50 (currently it is 72.5), then we are looking at Market Cap of Rs 154,750 (vs current Market Cap = Rs 25,584 cr). This is CAGR of 19.7% over next 10 years — investment return.