Syngene International : Creating New Benchmarks Through Top-Rated Research And Development

Syngene International is one of India’s leading contract research and manufacturing services (CRAMS) organisations. It offers integrated services across drug discovery and development value chain across multiple technology platforms, and provides research services in medicinal chemistry and biology to innovator pharmaceutical companies. The company furnishes both skills and the capacity to deliver great science, robust data management, IP security and quality manufacturing at speed to improve time-to-market and lower the cost of innovation.

It has 400 clients in the pharmaceutical, biotechnology, nutrition, animal health, consumer goods and specialty chemicals industries, including eight of the top 10 global pharmaceuticals. They are driven by the expertise of a highly qualified team of over 5,200 scientists. Syngene’s research, development and manufacturing operations are based at their campus in Bangalore, supported by two satellite campuses which house enabling functions and the clinical development facility. A new, state-of-the-art discovery research campus has been set up in Hyderabad, which currently accommodates 600 scientists with further phases of expansion planned. 

Their large-scale active pharmaceutical ingredient (API) manufacturing site is located on a dedicated campus in Mangalore, India. Syngene operates dedicated research and development centers for three global clients: Amgen Inc, Baxter Inc. and Bristol-Myers Squibb (BMS). During FY22, these dedicated research and development centres reported a steady performance, primarily driven by five-year renewal of the long-standing contract with Amgen Inc. and expansion of the dedicated research and development centre for BMS. These contract extensions confirm the stability of relationship with these key clients and provide a clear perspective on the future of the dedicated centres. As part of the contract extension with Amgen, Syngene will build and operate a new dedicated laboratory to accelerate advancement of Amgen’s research and development projects. The strategic collaboration with BMS is now effective until 2030 and includes more areas of research and an increase in the number of scientists working on the client’s projects. As of September 30, 2022, Biocon Group holds 64.86 per cent of the shareholding in Syngene International.

Sector Overview

The contract research organisation (CRO) market is expected to grow at a CAGR of 6 per cent with overall market size increasing from USD 21 billion in 2021 to USD 28 billion by 2026. The CRO industry is fragmented as the participants in this industry consist of functional service providers from small companies focusing on one capability to integrated service providers who can provide an end-to-end platform of services from early-stage drug discovery to early development services. Pharmaceutical and biotech companies are focused on creating value through improvements in productivity, as reflected both in accelerating the pace of drug discovery and reducing the cost of therapeutic discovery. 

Partnering extensively with CROs at multiple points in the value chain has proved to be a successful strategy in lowering the cost of innovation and increasing productivity, while retaining select core capabilities and IP in-house. The pharmaceutical industry’s continuous investment in research and development has resulted in rapid growth in number of drugs in research and development pipeline. The number of new drugs approved each year has grown over the past decade. On average, USFDA, approved 51 drugs per year in the last five years (2017 to 2021), compared to 35 drugs per year between 2012 and 2016. More than 60 per cent of new prescription drug approvals in the last five years came from pharmaceutical and biotech companies who prefer to avoid long-term investments and therefore partner with CROs. 

The estimated research and development expenditure by the global pharmaceutical industry stood at USD 188 billion in 2020. This is expected to reach over USD 230 billion by 2026 at a CAGR of 3.6 per cent. Increasing research and development expenditure, molecule pipeline and drug approvals will boost the demand for CRO services. Also, the global small molecule CDMO market is expected to grow from USD 80 billion in 2020 to USD 115 billion in 2026 at a CAGR of 6 per cent. This growth is driven by pharmaceutical manufacturers’ growing reliance on the expertise of CDMOs for the development and manufacturing of innovator active pharmaceutical ingredients (APIs) and high-potency small molecules (HPAPI).

Financial Overview

Syngene International reported outstanding financial results for the quarter ended September 30, 2022. The company continues to see good demand in the main client markets in the US and Europe which helped them deliver strong revenue growth and put it on track to meet their guidance for the rest of the year. Consolidated revenue from operations came in at ₹768 crore in Q2FY23, exhibiting a growth of 26 per cent relative to ₹610 crore reported in Q2FY22. On similar lines, operating profit registered healthy YoY growth of 22 per cent, from ₹190 crore in Q2FY22 to ₹232 crore in Q2FY23. Net profit for Q2FY23 soared by 53 per cent to ₹102 crore as against ₹67 crore in the corresponding quarter last year.

The second quarter results reflect positive performances across all divisions. Discovery services experienced sustained demand and development services benefitted from repeat orders by existing clients, especially in areas of drug substance development and clinical supplies along with setting up collaborations on additional projects. Forward planning with suppliers prevented supply chain disruption and, despite the rising global inflation, cost discipline helped the company maintain EBITDA margins at similar levels as last year. The company has also upgraded its revenue guidance on the back of strong performance in H1FY23.

During FY22, on a consolidated basis, revenue from operations grew by 19 per cent from ₹2,184.30 crore in FY21 to ₹2,604.20 crore. Growth was driven by solid delivery across all divisions. Operating profit for FY22 rose by 15 per cent to ₹848.90 crore compared to ₹736.40 crore in FY21. EBITDA margin for the year was at 31.9 per cent compared to 32.7 per cent in FY21, majorly impacted by lower other income. Profit after tax declined by 2 per cent to ₹395.80 crore, as against ₹404.90 crore in FY21. The company’s diluted earnings per share decreased to ₹9.82 in FY22 as against ₹10.11 in FY21. Discovery services segment grew by 24 per cent on the back of good traction across new and existing clients and added momentum from the integrated drug discovery portfolio. 

Dedicated centres reported a 15 per cent revenue growth. The development and manufacturing services segment grew by 21 per cent year-on-year, benefiting from strengthening technical capabilities in process development for complex chemistry and extending capabilities to include oligonucleotides, polymers and highly potent APIs. This aided the company to build client confidence on scale-up manufacturing for clinical supplies and resulted in repeat orders. SynVent, Syngene’s integrated drug discovery (IDD) platform, continued to expand business from existing clients and attract new clients, particularly from the emerging biopharmaceuticals segment. It made a positive contribution to discovery services during the year as the number of IDD projects increased by ~40 per cent compared to the previous year.

Outlook
Looking ahead, the global market for research, development and manufacturing services in human and animal health, as well as specialty chemicals, are all showing promising growth. While there are many providers of specialist services, few companies offer the breadth of technology and capabilities that are available at Syngene. The company is well-positioned to capitalise the sectoral tailwinds backed by its continued focus on driving integrated drug discovery solutions, technologies and platforms. Also, sustained investment in scientific capabilities, particularly in the field of early phase development, underpins the company’s reputation as a scientific solution provider. 

The company undertook a total capex expenditure of `621 crore in FY22, of which approximately 70 per cent was invested in discovery services where laboratory capacity was added in Hyderabad and the dedicated centres. Around 10 per cent was invested in development services, primarily in completing the clinical scale fill-finish facility and another 10 per cent was invested in the manufacturing business for the addition of a fourth reactor in biologics as well as a microbial development and manufacturing facility. 

In FY22, their net cash balance increased to `732 crore driven by a solid increase in cash profits. With a client base that spans large multinationals and small and medium-sized biotechs, the company has the financial strength and scientific insight to identify and invest in research and development trends in order to meet the needs of clients in a growing market. Along with a healthy balance-sheet and strong liquidity, the company remains focused on increasing capacity utilisation and augmenting capacity to cater to the market and client demand. Hence, we recommend BUY.