Building K And 24-Hour Operations Will Improve Efficiency

Key Takeaways

• Capacity expansion and 24/7 operations enhance production, reduce costs, and bolster revenue growth in response to rising demand for peptides and oligonucleotides.
  
• Strategic investments and innovations in API production and U.S. market expansion are expected to sustain revenue growth and optimize margins in expanding pharmaceutical sectors.
  
• Heavy investment costs, cash flow dependency on prepayments, and customer concentration risk could strain Bachem's financial stability and net margins.

Catalysts

Provides products for research, clinical development, and commercial application to pharmaceutical and biotechnology companies.

• The significant capacity expansion, including the construction of new manufacturing facilities such as Building K and extensions in Vista and Torrance, is likely to lead to increased production capabilities and support revenue growth as the company scales up to meet rising demand for peptides and oligonucleotides.
  
• The company is focused on operational excellence initiatives, including global shift work extensions to 24/7 operations, which are expected to enhance efficiency and reduce cost of goods sold (COGS), positively impacting net margins.
  
• Growth in the commercial API business, supported by long-term contracts and a strong pipeline of 170 products, positions Bachem to secure sustained revenue growth, possibly benefiting earnings from new market demands and developments in the pharmaceutical sector.
  
• Continuous investments in process innovations to enhance chemical synthesis for peptides and oligonucleotides are expected to optimize operations, translating into improved EBITDA margins as production becomes more efficient and less resource-intensive.
  
• Expansion of the company’s reach in the U.S. market, as seen with investments in medium
• to large-scale peptide manufacturing, coupled with the ongoing establishment in lucrative sectors like obesity and diabetes drugs, should bolster revenue and earnings as those markets expand.

Bachem Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bachem Holding's revenue will grow by 22.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.9% today to 18.9% in 3 years time.
• Analysts expect earnings to reach CHF 211.4 million (and earnings per share of CHF 2.76) by about March 2028, up from CHF 120.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.6x on those 2028 earnings, down from 36.1x today. This future PE is lower than the current PE for the GB Life Sciences industry at 31.2x.
• Analysts expect the number of shares outstanding to decline by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.23%, as per the Simply Wall St company report.

Bachem Holding Future Earnings Per Share Growth

Risks

• The significant infrastructure investments, especially the higher-than-expected costs for Building K, which have risen from CHF 550 million to CHF 750-850 million, could lead to increased financial pressure, impacting net margins and financial stability.
  
• The reliance on large-scale customer prepayments to finance operations indicates a dependency on customer collaboration that, if disrupted, could strain cash flow and lead to liquidity issues.
  
• Increased inventory levels, partly financed by customer prepayments, suggest potential inefficiencies or slow-moving stock that could tie up capital and negatively affect net margins.
  
• Foreign exchange fluctuations, particularly concerning the strength of the Swiss Franc against other currencies, could impact revenue and profit margins if unfavorable shifts occur.
  
• The heavy reliance on a few top customers for a significant portion of its revenues, as the top 5 customers now make up 44% of sales, poses a risk to revenue stability if these customers were to reduce or cease orders.

Valuation

• The analysts have a consensus price target of CHF75.571 for Bachem Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF100.0, and the most bearish reporting a price target of just CHF55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF1.1 billion, earnings will come to CHF211.4 million, and it would be trading on a PE ratio of 29.6x, assuming you use a discount rate of 4.2%.
  
• Given the current share price of CHF57.95, the analyst price target of CHF75.57 is 23.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.