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Syngene International Capturing the Outsourced R&D opportunity A proven track record, a strong parent and growing business opportunities
There were about 211 clients end March 2015. These ranged from multinational corporations to start-ups, including seven of the top 10 global pharmaceutical companies by sales in 2014. The laboratory and manufacturing facilities in Bengalaru is spread over more than nine lakh sq. ft. About 2,100 scientists work under one roof in this facility, which is India's highest pedigree of total number of scientists across multiple disciplines, in one roof. The flexible business model is customized to clients' requirements. The fee-for-service (FFS) model charges fees at various stages of delivery of services. The full-time-equivalent (FTE) model is outcome- driven. Or the fee model can be a combination of both. All fixed costs of labs and infrastructures plus variable costs of scientists and other skills are built in the revenue model. Thus,an average Ebidta margin of around 32% has been maintained for the past four years. About 95% of total revenue come from international markets, predominately in US $ currency and from countries such as the USA, the EU and Japan. Capital expenditure plan of about $200 million has been lined up for the next three-four years. Around US$100 million will be spent on adding new capabilities to help tap emerging opportunities, while the rest US $100 million will be spent on setting up a greenfield manufacturing facility at Mangalore for the contract research and manufacturing services (CRAMS) business. The entire funding will be met through a combination of internal accruals and some term loans, if required. Objects of the Issue The issue of 2.20 crore equity shares of face value of Rs 10 each, i.e., 11% of the share capital is an offer for sale by the promoter shareholder Biocon. Post offer, Biocon will hold 74.5%. The object of the issue is to achieve the benefits of listing equity shares on stock exchanges, enhance visibility and brand image among existing and potential customers and provide liquidity to the existing shareholders. Biocon will use the proceeds to meet its capital expenditure requirements and to fund the ongoing research of its new biosimilar product portfolio that comprises several late-stage projects that need investment for global clinical trials Strengths The global CRO market for discovery was estimated to be about US $ 14.7 billion in 2014 and is expected to reach US $ 22.7 billion in 2018, reflecting a CAGR of 11.5% There are integrated service offerings across multiple domains, with a proven track-record of successful delivery, reliability, cost efficiency and client satisfaction The costs of failure in innovations and R&D are very high globally. A shift from fixed costs to variable cost model, clients flexibility and decrease in overall costs of R&D are some of the key drivers that have made the business model so successful and will be the leading catalysts for growth going forward. There is infrastructure of labs and scientists that can be leveraged by developers and MNC companies for the CRO business. There is proven track record of 20 years and the business model, facilities (gross block of more than Rs 930 crore end March 2015) and dedicated team are difficult to replicate in the near term. Bristol-Myers Squibb Co (BMS), from nearly 32.2% of total sales is derived, has extended its outsourcing agreement till 2020. There is also a dedicated centre for BMS activities. CRAMS are yet to start. However, three CRAMS contracts have been entered into with large MNCs for the molecules developed. The Manglore facility is aimed for this exercise. The CRAMS business is expected to start in less than three years and have Ebidta margins equivalent of the current business. The upside will be gains that arise due to productivity and scale with the MNC developers. Exposure to custom synthesis is more compared with other CROs, which depend on clinical trials. This will give an edge in CRAMS market Weaknesses The CRAMS space in India faces bottlenecks due to lack of regulation and number of MNCs have rolled back their trials given to Indian CROs. There is absence of regulation over human clinical trials in India. This remains a concern for CRAMS in India. The business is dependent on continuous willingness and ability of clients and industry players, particularly MNCs, to outsource their spend on R&D. Due to changes in available resources, consolidation of companies, spending priorities, institutional budgetary policies and regulations, fluctuations of outsourcing of R&D budgets can happen, which can adversely affect business operations. Of the total of about 211 clients, top 10 clients accounted for about 71.7% of the revenues in the fiscal year ended March 2015 (FY 2015). There is too much dependency on too few players for revenues and any loss or significant decrease in business of one or more of them could adversely affect business. The business is exposed to currency volatility and changing international regulations and policy framework. The tax rate will slowly inch up to MAT from existing low teens Valuation Sales and net profit have grown at a CAGR of 27% and 35% over the period FY 1203-FY 1503. Net sales stood at Rs 859.90 crore and PAT Rs 175 crore in FY 2015. At the lower price band of Rs 240 and higher price band of Rs 250, the offer price discounts FY 2015 earnings by 27.4 times and 28.6 times, respectively. There are no listed entities in India comparable with Syngene.
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