Syngene International Ltd.

Key Highlights of Syngene International Ltd.

• Its parent company, Biocon Ltd., is an innovation-led, entirely integrated biopharmaceutical company
• Start-ups, pharma/biotech, agrochemical, chemicals, nutrition, and animal health enterprises are among the clients served by the company
• While it has a global focus, over ~70% of the clients are from the U.S.
• Syngene launched the AI-Enhanced Relay-Based Drug Discovery for DMTA Cycle Optimization
• Syngene International Ltd. (SIL) announced an equity dividend of ₹1.00 per share in FY22

CRO Industry Highlights

• The pre-clinical Contract Research Organization (CRO) market was valued at ₹6,084 billion in FY22
• The industry is projected to grow at a CAGR of 12.1% to reach ₹13,554 billion by 2029
• IQVIA is the largest player in the CRO industry, with a 12.4% share in the market, followed by Laboratory Corporation of America Holdings
• The industry is expected to incline towards outcome-based contracts, which currently make up ~10% of the total contracts
• The primary growth driver is the increase in R&D expenditure worldwide

The Next Big Thing in CRO Industry

Syngene International Ltd. (NSE: SYNGENE) is a comprehensive research & development, and manufacturing firm that serves the international pharmaceutical, biotechnology, food, consumer goods, and specialty chemical industries. The company’s end-to-end services cover a range of modalities, including oligonucleotides, small and big molecules, and antibody-drug conjugates (ADCs). Among the various sectors that SIL supports, the worldwide pharmaceutical, biotechnology, nutrition, animal health, consumer products, and specialty chemical industries are the ones that predominantly use scientific services. It worked with over 400 clients from varied industry sectors last year. Syngene’s team, expanding over 4,700 scientists, has the expertise and resources to produce outstanding research rapidly, robust data management, and I.P. security. This reduces the cost of innovation and improves time-to-market.

Journey

First-generation businesswoman Ms. Kiran Mazumdar Shaw, Non-executive Chairperson, promoted the company. She was also a promoter of Biocon Ltd, the parent company. She has 44+ years of experience in the biotechnology industry. The Company became a subsidiary of Biocon on March 30, 2002, when 99.9% of the Equity Shares of the Company were transferred to Biocon. Since that time, Biocon has served as the company’s parent. Bristol-Myers Squibb and Syngene entered a long-term deal in 2006–2007 to establish an exclusive research center with space for more than 400 experts. On July 21, 2011, Syngene International and Endo Pharmaceuticals USA signed a contract to expand their partnership in creating innovative biological therapeutic agents for cancer treatment. In partnership with Syngene International, Abbott, one of the major healthcare organizations in India, opened its first nutrition research and development facility on June 4, 2012. Syngene International bought Biocon’s whole stake in Clinigene International Limited during the year under review. Clinigene International Limited, a division of Syngene International that offers clinical research and clinical trial services, was merged with Syngene International in 2015. The Human Papilloma Virus (HPV) assay, a test system increasingly utilized for cervical cancer screening, was developed and validated by the company in 2019–20. By adding a new dedicated laboratory facility of 50,000 square feet and increasing the number of scientists working under the agreement by 40%, Syngene expanded its partnership with Bristol Myers Squibb in FY21. Syngene International collaborates with the National Institute of Mental Health and Neurosciences (NIMHANS) through the Biocon Foundation to address the growing mental health issues among the urban population.

CRO Industry

A company that manages complex clinical study and trial commitments, drug discovery, clinical development, and new product commercialization for sponsor companies, mainly in the biotechnology, pharmaceutical, as well as medical device industries, is referred to as a contract research organization (CRO). These businesses provide clinical trial management, pre-clinical research, clinical research, commercialization, and pharmacovigilance, among other research services. These are contracted out, also referred to as on a fee-for-service basis.

• The industry is growing due to novel therapeutic modalities, the emphasis on customized medicine, and the development of biopharma firms.
• Demand for CRO services is anticipated to rise as pharma and biopharma companies increasingly outsource R&D in response to mounting pressure to reduce costs and boost productivity.
• Developments in data-driven technologies, including data mining, artificial intelligence, and digital health, are fostering industry expansion.
• The market size of the CRO industry is anticipated to be $163.5 billion by 2029, growing at a CAGR of ~12.1% from an estimated $73 billion in 2022.
• The rise of the Indian CRO market is fueled by the rapidly growing oncology research industry, the rising pharmaceutical industry, and initiatives by the Indian government. Additionally, the proliferation of CRO climatic testing settings, the implementation of international laws, and the protection of intellectual property rights all significantly contribute to the industry’s expansion.
• The Indian Union Cabinet has approved changes to the Foreign Direct Investment (FDI) policy that will allow FDI up to 100% under the rules established by the Indian government to produce medical devices in the pharmaceutical industry. These government efforts and increased investment in the medical devices sector have fueled the growth of the Indian CRO market.

Clinical trial regulation has undergone a substantial change in India. Trials are a crucial part of innovation; therefore, the government should take advantage of this by working to make the standards and processes easy to comprehend.

Business Model

Syngene offers services to firms in the pharmaceutical, biotechnology, nutrition, animal healthcare, consumer goods, and specialty industries. It specializes in a wide range of services. More than 70% of the clients the company serves are from the U.S., but it serves clients worldwide. It has more than 25 years of expertise in developing, manufacturing, and discovering molecules. As of FY21, it had 402 active clients and partnerships with 8 of the top 10 pharmaceutical firms. The company attracted more than 100 new clients this fiscal year while also increasing repeat business from current clients, demonstrating the value of long-lasting relationships.

Syngene’s Adaptable Models

Specialized R&D Labs:

It consists of long-term strategic collaborations spanning at least five years and a dedicated scientific and support team focused on client projects.

FTE (Full-Time Equivalent):

It consists of a set number of scientists who work exclusively on client projects. The contracts are often renewed yearly.

Service Fee (FFS):

It consists of working with clients to supply flexible, on-demand staff and research infrastructure that meet the agreed-upon standards. Long-term or short-term engagements are both possible.

Syngene’s Services

Dedicated Services for R&D:

Offers exclusive access to research teams, equipment, and project management to fulfill the client’s R&D objectives. It has a dedicated multidisciplinary scientific team.

Discovering Services:

From target discovery to the delivery of therapeutic candidates for future development, they are engaged in early-stage research. Recombinant DNA engineering, cell line creation, Next Generation Sequencing, and protein sciences are capabilities for large compounds, while chemistry, biology, safety assessment, and research informatics are capabilities for tiny molecules.

Development Services:

cGMP-compliant manufacturing of clinical supplies, registration batches for small molecules, and activities from pre-clinical to clinical trials, including drug substance and drug product development and related services to demonstrate the safety, tolerability, and efficacy of the chosen drug candidate.

Manufacturing Services:

cGMP compliance facilities, a cutting-edge API manufacturing campus, and biologics manufacturing facilities are used to manufacture tiny and big molecules for commercial supplies. To suit consumer demands, Syngene provides to combine and matches any of the business models. By providing incorporated services and growing its clientele, the business wants to be a “one-stop-shop” for its customers. The transformation from a CRO to Contact Research and Manufacturing Services is the company’s main priority (CRAMS).

Differentiating Strategies

• Highest-Quality Integrated Services:
  Syngene’s high recall value results from its data integrity culture and high-quality integrated services. Eight of the top ten clientele have been with the business for the preceding eight years, reinstating established loyalty. Baxter, Abbott, and Bristol-Myers Squibb Company (BMS) are among the business’s three most prominent clients. The main factor contributing to the industry’s high recall value is the fact that CROs frequently provide a wide range of integrated capabilities that enable clients to extend and deepen their interaction across several services.
• Flexible & Economical Model:
  The Company has always believed in giving its clients access to cutting-edge facilities, the best scientists, dedicated R&D labs, FTE, FFS, and the ability to mix any of those mentioned above to meet each client’s specific needs. Syngene is one of the few CDMOs working with co-localized capabilities across drug discovery, manufacturing, and development, all in one site. This results in significant cost efficiencies in addition to speeding up drug development timelines for their clients. It’s not difficult to identify the reasons. Syngene has benefited from co-location by being able to handle projects centrally without being constrained by logistical/shipping delays or reliance on external deliverables.
• Strong Client Relationships:
  Syngene’s client base has grown from 293 to 402 over five years, a 37% absolute growth. This is attributable to the company’s sales strategy of pursuing new clients. For its potential clients to visually tour their cutting-edge facility, SIL has also launched the “Instatour” capability. In terms of client outreach, creating online trade shows and scientific conferences increased interaction and participation. Along with adding new functionality and analytics to its website, which serves as the main presentation of Syngene’s capabilities, the company has also increased its emphasis on digital communications, such as science webinars, digital marketing, email campaigns, and social media.

• Robust Human Capital:
  Because of its sizeable scientific talent pool, technical expertise, and innovative capabilities, Syngene leverages the power of science and serves its clients. The company makes significant investments in employee training and development programs at all organizational levels to ensure that the workforce aligns with the company’s aims, ethos, and culture while keeping up with the rate of change and the scope of increasing operations. The number of employees has increased by 39% in the last five years. Compared to 14% in FY21, the company had 22% more women in managerial positions in FY22.

SWOT Analysis

Strengths

• Superior Segment Penetration:
  Syngene International Ltd. has achieved intense penetration in the Biotechnology & Drugs industry owing to its diverse product suite and comprehensive market reach capabilities. This has allowed the business to diversify its sources of income.
• Strong Parentage:
  Biocon owns a 70.4% stake in Syngene, which means the parent will provide financial assistance based on need. The two businesses’ business models are different: While Syngene conducts contract research for pharmaceutical, biotechnology, nutrition, agrochemical, animal health, and consumer products businesses, Biocon manufactures and markets biopharmaceutical formulations. With robust revenue growth and increased profitability, Syngene will continue contributing one-third of Biocon’s consolidated sales and profit. Due to the underwhelming performance of Biocon’s other sectors, it contributed 45% of the parent’s operating profit in fiscal 2018.
• Sound Financial Risk Profile:
  As of March 31^st, 2022, adjusted gearing was 0.24 times, and with robust reserve addition, it should improve over the next few years. Debt protection criteria were satisfactory, as seen by the 35.2 times interest coverage in the 2022 fiscal year. With the ramp-up of facilities in Bengaluru and Mangalore and efficient cost-control methods, the operating margin is anticipated to maintain 30–31% over the medium term. Healthy internal accrual and liquidity will support the financial risk profile.

Weaknesses

• CAPEX Risks:
  In the fiscal year 2022, Syngene invested 600–650 crores of rupees. Scaling up activities and their contribution to revenue and profitability would be crucially attributable to commercializing the active pharmaceutical ingredient (API) manufacturing plant in Mangalore and new research centers in Hyderabad. APIs will be sold to innovators to satisfy their business requirements for launching novel compounds. Risks associated with the stability and ramp-up of production and services at the recently commercialized plants will continue to be a concern for Syngene.
• Regulatory & Competition Risks:
  The contract research sector is highly competitive due to its low entry requirements. Several significant international pharmaceutical companies contract India for their research needs. As a result, new contract research organizations (CROs) might enter the market, hence escalating competition and limiting the pricing flexibility of existing companies like Syngene. In addition, CROs in China and Eastern Europe, which might offer a broader range of services, compete with the company.

Opportunities

• Local Collaboration:
  Partnerships with regional firms may open new growth prospects for Syngene International Ltd. in global markets. While Syngene International Ltd might bring global procedures and execution knowledge to the table, the local companies only have local competence.
• Rapid Economic Growth:
  Since the US economy is growing faster than any other developed economy, Syngene International Ltd will have the chance to increase its presence in the US market. Syngene International Ltd already possesses the expertise necessary to compete in the US market.
• Possibilities in the Online World:
  As client services move online, Syngene will be able to provide additional products in the biotechnology and pharmaceutical sectors.

Threats

• Competition Upsurge:
  Despite still being at the forefront of product innovation in the Biotechnology & Drugs sector, Syngene International Ltd is fighting against fierce rivalry from domestic and foreign rivals.
• Market Challenges:
  For Syngene International Ltd, saturation in the urban market and unproductivity in the rural market are significant obstacles in the Biotechnology & Drugs sector. The delayed rate of product acceptance in rural markets is another factor. Due to the great distances and inadequate infrastructure, serving rural consumers is more expensive for Syngene International Ltd. than serving urban customers.

Michael Porter’s 5-Force Analysis

1. Barriers to Entry:

The CRO industry is subject to demanding regulatory requirements, including audits by health agencies. It’s not only laudable for other companies to pass the evaluations but also presents a barrier for new businesses looking to enter the market, as even well-known names in the pharmaceutical industry fail to pass inspections. As a result, admission is difficult. Additionally, because human resources are the true asset of such organizations, the investment necessary to have a skilled team and up-to-date infrastructure comes with a significant CapEx demand. As a result, it is expensive for new competitors to enter this market.

2. Bargaining Power of Suppliers:

To ensure prompt supply deliveries and strict adherence to quality and regulatory rules & compliances, Syngene has a specialized team of Supply Chain Management (SCM) experts with the knowledge and experience to work directly with their worldwide supplier base. This helps the company have an upper hand and reduces the bargaining power of suppliers.

3. Bargaining Power of Buyers:

The buyers have moderate bargaining power because 74% of Syngene’s clients are from the U.S. and are not accustomed to the subcontinent’s high inflation rates. Therefore, it won’t be possible to raise the price suddenly. However, because the business has positioned itself to be cost-competitive globally, it has little room to pass along rate increases or other costs to its customers.

4. Rivalry among Competitors:

The CRO sector is today fragmented due to the small number of CROs in India and the large number in the U.S. The rivalry is now on a global basis as opposed to domestically. The CRO market is getting more and more competitive every day. The full-service capabilities and global reach of larger organizations are expanding due to a trend of mergers and acquisitions. Hence, there is fierce competition among competitors.

5. Threat to Substitutes:

In recent studies, most respondents stated that a company’s decision to end cooperation with a CRO was due to a CRO’s lack of quality. As a result, when selecting a CRO to outsource its operations to, it is indispensable to take into account the service quality, as well as the credibility and level of experience. A customer is more likely to end a relationship with a CRO owing to a lack of quality than the cost associated because the company is already saving higher costs by outsourcing its R&D operations. There is hence a low chance of substitution.

Branding

An immersive, interactive virtual tour of Syngene’s top-notch facilities and capabilities called Syngene InstaVisit is its latest branding initiative. The platform enables altering perspective and zooming in as they take customers on a guided tour inside Syngene’s laboratories.

Syngene has strategically engaged in a “Kavach” business effort to improve worker safety. This multi-year initiative strives to instill a safety culture throughout the firm, including staff members, partners, clients, and suppliers. To realize this vision, Syngene has made safety a shared responsibility that includes adhering to SOPs and safety procedures on par with business success. Utilizing personnel with the necessary skill sets, mindsets, and behaviors will allow the organization to concentrate on risk reduction in operations. The company, in partnership with the Bangalore City Police, has financed counseling and rehabilitation support for women and children who need police support to safeguard the safety of women and children from the underprivileged sections of society. The program offers short-stay, rehabilitation, legal aid, vocational training, and school support.

Financial Analysis

1. Revenue

Revenue for FY22 saw a sizable increase of 18% from the previous financial year. The company’s revenue has grown at a CAGR of 12% in the past five years. The development and manufacturing services also maintained robust performance as they caught up on delayed projects owing to supply chain delays and other Covid-related disruptions—the improvement in discovery services and dedicated centers brought on this growth. Syngene’s comprehensive drug discovery platform, also known as “SynVent,” drew in new customers and helped the company grow its clientele. As a result, the revenues exceeded what the corporation had anticipated.

2. RoE & RoCE

SYNGENE’s RoE Ratio decreased by -16.36% over the prior fiscal year. In the previous five years, the RoE Ratio’s lowest value of 12.00 was recorded in March 2022. The RoE Ratio had its most significant value in the last five years in March 2020. The decline is primarily due to the company’s subpar earnings growth of 5.99% over the previous three years, higher interest costs, lower other income, and a higher tax rate. Marginal growth in total expenses also played a role in this. SYNGENE’s ROCE Ratio decreased by 11.47% from the preceding Financial Year and at a CAGR of 5% in the past five years. The main reason remains to be the increase in expenses.

3. EBITDA

The EBITDA margin for FY22 is roughly in line or slightly declining against the margin reported in FY21. The Company’s EBITDA declined at CAGR of 1.2% over the past five years. This is due to the cost of raw materials rising by about 300 basis points, partly due to a shift in the mix with more early-stage manufacturing projects and fluctuations in currency exchange rates. This is a much-needed improvement that will hasten Syngene’s future growth.

4. PAT

Up to FY16, PAT margins remained essentially constant and grew. However, due to a fire that occurred in FY17, which harmed 10% of the company’s total revenues and consequently hurt the company’s profitability, there was a decline in margins from FY17 to FY19. But SIL continues to be a cash-rich, fundamentally sound business with growing worldwide appeal. Following a modest increase in FY20 due to a reduced effective tax rate, accelerated depreciation of the Mangalore facility affected the earnings once more in FY21 and FY22.

5. Debt to Equity

Syngene has successfully reduced its debt-to-equity ratio from 0.47 to 0.24. The corporation has stopped taking out as much external commercial borrowing (ECB) as it had previously to finance its CAPEX goals. Syngene is making sure right now that it satisfies its desired CAPEX needs while keeping its Debt-to-Equity ratio low.

Risk Analysis

1. Exchange Rate Risk:

Most of Syngene’s revenue comes from the US, and some expenses are also paid in foreign currency. Therefore, changes in the exchange rate could result in a significant financial loss because the company is exposed to foreign exchange risks. The company uses several derivative contracts to hedge this risk. By hedging 50% to 100% of exposure for the next 24 months and up to 100% for long-term fixed-price contracts, “foreign exchange future” risks are addressed.

2. Technical Risk:

Since contract research involves using recently created technologies, it is essential to protect the security and confidentiality of digitally stored data. This data is vulnerable to security lapses and cyber-attacks. Additionally, due to the COVID-19 situation, all workers are now required to work from home, necessitating the company’s adoption of better and more modern I.T. security measures to protect its sensitive data.

3. Clientele Risk:

Lack of customer growth and business expansion may lead to missed opportunities, business stagnation, and asset return on investment decline. The business is increasing its investment in building a powerful commercial organization to target new customers.

Environmental, Social, and Governance

Environmental

Although each campus has implemented a variety of environmental protection initiatives, three crucial areas are the focus of organized planning and activity:

Energy: 97% of the energy used on the Bangalore SEZ campus in FY 2021–22 was generated using green energy. Through the adoption of electric-powered bicycles and cars for transportation inside the campus, a total energy reduction of 1,890,000 kWh (2.4%) and the avoidance of 28.68 MT of CO2 equivalent was accomplished during the year.
Water: Freshwater is a scarce resource that is crucial to several activities. To adopt a zero-discharge policy, reuse and reduce water, rainwater harvesting, wastewater and effluent management are followed at Syngene.
Waste: All Company facilities adhere to all applicable local requirements and laws. Additionally, a specialized storage facility is employed to safely and effectively separate and manage operational waste while incinerating non-recyclable hazardous trash to prevent contamination.

Social

Educating Underprivileged Children in Rural India: During the program’s second year, multiple interventions were implemented to provide these students with high-quality science education when other aspects of their education had halted due to the epidemic. More than 59,000 virtual and in-person learning opportunities were provided to more than 3,200 children in 21 government schools in Anekal, Bangalore.
Driving Tech-enabled Healthcare Innovations: Syngene is expanding and strengthening the capacity of the current public healthcare system, boosting operational effectiveness, and improving the patient experience by inventing tech-enabled healthcare solutions and integrating them within it.
Protection of Women and Children: Syngene collaborates with the Bengaluru City Police in Bangalore, India, on the Parihar initiative to conduct a program that promotes awareness of women’s rights and child safety while fostering a secure environment for both.

Governance

The company has a good balance of independent, non-executive, and executive directors. The committee reviews the need for changes to its size and composition regularly. There are three related parties on the board. None of the other Directors are related. Although Syngene sees promising growth prospects, there is still uncertainty in the Indian economy. Accordingly, the company has chosen to keep surplus money on hand rather than distributing dividends to concentrate on preserving a solid cash and liquidity position in the event of unanticipated circumstances.

Impact of Covid-19

As of March 31st, 2021, operating margins were 32.71%, a decline of 90 basis points YoY. This was due to the unpredictability brought on by an unexpected second wave of the COVID-19 pandemic in India. Thus, to prioritize funds and retain liquidity, the Board of Directors chose not to pay dividends for FY21. Operating sales increased 15% to ₹758 Cr for the fourth quarter of 2022 and 19% to ₹2,604 Cr for the entire year ending March 31st, 2022, indicating a return to normalcy. The primary drivers of this revenue growth were continued success across discovery services, dedicated centers, manufacturing services, ongoing client acquisitions, contract renewals, and an increase in biological contributions, not COVID-19.

End Note

The CRO market is expected to grow due to rapid technological advancement, globalization of clinical trials, and increased demand for CROs for research activities. The overall revenue from operations for Syngene’s seems to have grown admirably in FY22. Due to the rising demand for CRO and CDMO services, the organization is motivated to explore new scientific skills, I.T./digitization, and commercial operations. It was also successful in reducing its debt significantly. The new marketing and sales strategy – SynVent, proved very profitable for the organization.
Will the company maintain its history of customer-driven innovation with the escalating competition and rapid growth of technology?

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