Syngene International: Research holds promise :: Business Line

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Investors with a moderate risk appetite and a two to three year investment horizon can consider subscribing to the IPO of Biocon’s contract research arm Syngene International.

After the offer, the holding of Syngene’s promoter group — Biocon and its associates — will reduce from 85.5 per cent to 74.5 per cent.

Syngene, which is primarily into research services business, provides a combination of stable full time equivalent (FTE) model and value added fee-for-service (FFS). The company has managed to grow revenues and profit by 28 per cent and 45 per cent annually over the last five years. Its operating profit margin expanded by 2 percentage points to 32 per cent in 2014-15.

With a large pool of scientific talent, the company’s ability to scale up its FTE business and the higher margin FFS segment has helped the healthy growth. Under the FTE model, the company has long-term agreement with innovators to provide dedicated research infrastructure and scientific talent pool. The FFS business provides end-to-end services to innovator companies through the product development lifecycle.

Healthy growth prospects

Syngene’s clientele includes pharma multinationals such as Bristol-Myers Squibb (BMS), Baxter and Abbott. This, along with its planned foray into the commercial manufacturing of active pharma ingredient (API) segment should help the company sustain healthy double-digit growth over the next two to three years.

At the upper end of the price band of ₹240-250, the stock discounts its trailing 2014-15 earnings by 28 times. Its comparable peer — China-based contract research company Wuxi Pharma Tech Cayman Inc — trades at around 30 times its trailing earnings.

While the offer is not cheap, the valuation may be justified given the healthy growth prospects over the near to medium term. Three factors will help.

First, Syngene’s two-pronged model of signing up long-term service agreements with multinationals under the FTE model alongside offering end-to-end fee-based services provides better revenue visibility. FTE accounts for about 60 per cent of Syngene’s revenues and fee for service segment accounts for the balance. Recently, Syngene’s contract with BMS, its largest client in the FTE segment was extended up to 2020.

Though dependence on a single client is high, BMS’ share in the company’s revenue has fallen over the last years — from 44 per cent in 2011-12 to 32 per cent in 2014-15, thanks to new client additions.

From 100 clients four years back, Syngene’s clientele has doubled now. The company employs over 2,122 scientists.

Second, Syngene has signed long-term supply agreements with three clients to commence commercial supplies of active ingredient for innovative products that are in the final leg of clinical trials.

Manufacturing boost

If these products get the US drug regulator’s nod, Syngene’s profitability will perk up.

Third, the company is also expanding its infrastructure to cater to the growing demand for research services and API manufacturing.

Syngene’s new research and development centre, which will cater to the increased requirements of molecule discovery research is expected to be operational this fiscal.

The company has signed an agreement with the Mangalore SEZ to set up a commercial scale API facility entailing investment of $100 million.

Syngene also plans to expand the commercial manufacturing capacity at its Bengaluru plant. In all, the company has planned capex of $250 million over the next three years.

These investments should support the company’s growth in the medium term.

Syngene derives almost 95 per cent of its revenue from exports; much of the billing is in US dollars. A further fall in the rupee against the dollar, if it happens, may have a positive impact on Syngene’s profitability.

The company’s clinical trials business — Clinigene — which accounts for less than 10 per cent of total revenues, continues to struggle due to regulatory tightening of clinical trials in India.