Metabolic Capacity Expansion And Peptide Outsourcing Shifts Will Face Headwinds Yet Ultimately Support Upside

Catalysts

About PolyPeptide Group

PolyPeptide Group is a global contract development and manufacturing organization specializing in complex therapeutic peptides for pharmaceutical and biotech customers.

What are the underlying business or industry changes driving this perspective?

• Although the peptide therapeutics market is expected to grow at more than 15% annually with nearly 500 drugs in late stage development, PolyPeptide could struggle to translate its broad Phase III exposure into sustained commercial wins if individual programs are delayed or terminated. This would pressure revenue growth and EBITDA progression.
• Despite strong momentum in metabolics and a near doubling of metabolic sales year on year, an increasingly crowded obesity and metabolic disease field, including generic GLP entrants, may compress pricing on newer contracts and limit future margin expansion.
• While new modular capacity in Belgium, Strasbourg and Malmö is scheduled to come online faster than traditional builds and is largely backed by customer demand, any ramp up hiccups or underutilization would turn higher CapEx and operating costs into a drag on earnings and free cash flow.
• Although innovation such as solvent saving SPPS processes and ultra high capacity resins should improve reactor productivity by a factor of 2 to 3, competitors that rapidly adopt comparable or superior technologies could neutralize this edge and cap long term margin gains.
• While geopolitical shifts and supply chain concerns are currently pushing peptide outsourcing toward Western CDMOs and away from China, a future easing of trade frictions or aggressive price competition from Asian manufacturers could erode PolyPeptide’s capacity driven revenue pipeline and compress net margins.

Assumptions

This narrative explores a more pessimistic perspective on PolyPeptide Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming PolyPeptide Group's revenue will grow by 17.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -9.4% today to 6.2% in 3 years time.
• The bearish analysts expect earnings to reach €37.4 million (and earnings per share of €1.15) by about December 2028, up from €-34.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €77.3 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 31.3x on those 2028 earnings, up from -25.2x today. This future PE is greater than the current PE for the CH Life Sciences industry at 27.5x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.83%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The rapid expansion of large scale SPPS capacity in Braine, Strasbourg and Malmö could outpace sustainable demand once the current imbalance between supply and demand in metabolics normalizes, leaving PolyPeptide with underutilized assets that weigh on revenue growth and compress EBITDA margins.
• The company’s growing dependence on metabolic indications as its primary engine of growth may prove risky if obesity and metabolic drug pipelines experience clinical or competitive setbacks, which would undermine the current high growth trajectory and limit future earnings expansion.
• The shift in revenue mix toward commercial metabolic contracts, which structurally carry higher raw material costs, may cap future operating leverage even as sales grow, resulting in EBITDA margins that fall short of the targeted level approaching 25 percent by 2028.
• Geopolitical tailwinds that currently favor Western CDMOs over Chinese manufacturers could reverse if trade tensions ease or aggressive price based competition returns, eroding PolyPeptide’s pricing power and reducing net margins despite ongoing capacity investments.
• The planned ERP and digitalization program, while strategically important, introduces execution and cost overrun risk, and if implementation complexities disrupt operations or exceed the anticipated cost peak around 2026, this could dilute free cash flow and delay the improvement in earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for PolyPeptide Group is CHF28.87, which represents up to two standard deviations below the consensus price target of CHF34.84. This valuation is based on what can be assumed as the expectations of PolyPeptide Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF44.09, and the most bearish reporting a price target of just CHF28.87.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €602.8 million, earnings will come to €37.4 million, and it would be trading on a PE ratio of 31.3x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of CHF24.8, the analyst price target of CHF28.87 is 14.1% 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.