New Biologics Facilities And Pilot Programs Will Expand Capabilities

Key Takeaways

• Acquisition and facility utilization in the US aim to enhance capacity, improve margins, and de-risk the supply chain for revenue growth.
  
• New collaborations and advancements in technology are expected to boost the pipeline and margins, strengthening revenue and competitive position.
  
• Syngene faces challenges with declining revenues and profits due to operational costs, tax changes, and macroeconomic pressures affecting earnings and growth.

Catalysts

A contract research and manufacturing company, provides drug discovery and development services in India, the United States of America, Europe, and internationally.

• The acquisition of a state-of-the-art biologics manufacturing facility in the United States is expected to increase capacity and bring Syngene closer to a key market, potentially driving revenue growth and improving net margins by de-risking the supply chain.
  
• Strong pipeline build-up of pilot programs in research services due to the rebalancing of supply chains by large and medium-sized pharma companies, which is likely to contribute to future revenue growth as these are converted into full programs.
  
• Investments in new technologies, such as advanced automation within DMPK operations, are aimed at enhancing scientific excellence and competitive positioning, potentially contributing to margin improvement and revenue growth.
  
• New collaborations in the large molecule biologics segment, including integrated biologics development and manufacturing projects, offer significant potential for future commercial manufacturing, which could lead to increased revenues.
  
• As utilization of new facilities, such as the Unit 3 and the Baltimore site, ramps up, operating leverage is expected to improve, potentially enhancing EBITDA margins over time and positively impacting overall earnings.

Syngene International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Syngene International's revenue will grow by 12.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.6% today to 14.1% in 3 years time.
• Analysts expect earnings to reach ₹7.4 billion (and earnings per share of ₹18.2) by about July 2028, up from ₹5.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹9.7 billion in earnings, and the most bearish expecting ₹5.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 56.3x on those 2028 earnings, up from 54.6x today. This future PE is greater than the current PE for the IN Life Sciences industry at 54.2x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.3%, as per the Simply Wall St company report.

Syngene International Future Earnings Per Share Growth

Risks

• Syngene International's reported profit after tax for the quarter decreased by 3% year-on-year, highlighting potential downturns in earnings and profitability.
  
• The company is experiencing a revenue decline of 24% in small molecule development and manufacturing, primarily due to setbacks related to client clinical programs and reduced annual commercial manufacturing volume demand, which could negatively impact revenue.
  
• Syngene's effective tax rate is expected to increase due to SEZ units coming out of favorable tax holidays, potentially leading to a decline in net margins and overall profitability.
  
• Increased operating costs related to new biologics facilities in India and the U.S. may impact operating EBITDA margins, expected to decline to the mid-20s, thereby affecting net earnings.
  
• Macro environmental variables, such as the recovery of biotech funding and global regulatory uncertainties, pose potential risks that could constrain revenue growth in the medium term.

Valuation

• The analysts have a consensus price target of ₹712.222 for Syngene International 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 ₹825.0, and the most bearish reporting a price target of just ₹570.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹52.4 billion, earnings will come to ₹7.4 billion, and it would be trading on a PE ratio of 56.3x, assuming you use a discount rate of 13.3%.
• Given the current share price of ₹680.75, the analyst price target of ₹712.22 is 4.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.