Inside Syngene - Annual report 2020 excerpt

What Syngene is all about?

Syngene is a contract research organisation providing integrated research solutions spanning the discovery, development and manufacturing continuum for small and large molecules, antibody drug conjugates (ADCs), and oligonucleotides. Syngene’s broad technological capability and deep scientific expertise make it an ideal partner for biopharmaceutical and other allied companies seeking integrated drug discovery services.

Syngene Services

The Company now has four business divisions: Dedicated R&D Centers; Discovery Services; Development Services; and Manufacturing Services.

The Dedicated R&D Centre model provides ring-fenced infrastructure, scientific expertise and support personnel exclusively dedicated to handling a client’s research program. The Discovery Services division offers all disciplines associated with early research, from target identification and high throughput screening to delivery of drug candidates for development. The Development Services division focuses on activities from pre-clinical to clinical trials for validating the safety, tolerability and clinical efficacy of the selected drug candidates. The Manufacturing Services division delivers clinical supplies, regulatory batches, and supplies for initial commercialization of small molecules. The Company also has a state-of-the-art biologics manufacturing facility.

Ongoing activities across Syngene

It has executed 8 integrated drug discovery projects across both small and large molecules. Also launched new integrated program along the drug discovery continuum.

New capabilities - The biologics discovery and preclinical research capabilities in CAR-T therapy, an innovative cell-based approach to treating cancer were expanded. Several projects covering hypothesis testing and validation of new biological targets as well as the exploration of novel mechanisms related to CAR-T therapies are underway.

A standalone histopathology service was initiated within Safety Assessment to cater to the various pathology service requests from clients. This unit was further enhanced by the addition of new technical capabilities to conduct hemocompatibility tests, safety pharmacology studies, various in vitro tests, and other complex analysis.

the Research Informatics unit developed an Artificial Intelligence (AI) platform for multiparameter optimization of small molecules. It also developed a digital platform for target dossiers that is efficient, searchable, and available in real-time for the client and a reaction search portal for chemical development that digitizes the client’s projects, enables chemistry searches, and provides a faster response to requests for proposal (RFPs).

Discovery Services

A new integrated microbiology laboratory that will serve as a dedicated facility for large molecules, covering a full suite of tests is being established. Another major development is a germ-free mouse facility to study the effect of probiotics in health and disease.

services continue to be accessed primarily by companies in the life science sector, also seeing increased demand from clients in other non-life science sectors.

Development Services

Development Services division includes offerings for drug substance, drug product, toxicology and analytical solutions, along with a clear understanding of quality and regulatory guidelines at each phase of the product lifecycle. Seamless integration of these disciplines has enabled company to establish a successful model for delivering on Chemistry, Manufacturing and Control (CMC) projects.

Set up a new GMP-compliant dedicated facility for the development of animal health products equipped to deliver clinical supplies including registration batches. The facility can deliver hard and soft chewable oral solid drugs for animals. Through this facility, company has delivered registration batches which have been approved by the USFDA for commercial use.

Multiple requests for handling of high potency active pharmaceutical ingredients (HPAPI) received in the year reflect the increasing trend of using HPAPIs to develop more effective, better targeted medicines.

As a one-stop shop, company offer services for drug discovery and development, clinical supplies and launch batches. Company is broadening its competencies beyond API manufacturing with a new fill-finish facility for injectables for clinical batches covering both small and large molecules. The pilot phase is currently underway.

Other major capability enhancements include: installation of accelerating reaction calorimetry to ensure process safety when scaling up production; digitization of the Human Pharmacology Unit (HPU) to improve data management and documentation of volunteer data and trial data; installation of a throughput screening platform for reaction screening to enhance the output of the reaction; and establishment of a special molecule testing facility to strengthen the stability and analytical unit.

Client profiles in the area of animal health, in particular, were strengthened by entering into two new strategic collaborations, including that with Merck KGaA.

Dedicated R&D Centre

Currently, Syngene have Dedicated Centre for Amgen Inc., Baxter Inc., Bristol-Myers Squibb (BMS), and Herbalife respectively.

Baxter Global Research Centre (BGRC)

Baxter Inc. and Syngene started their strategic collaboration in 2013 to work together on product and analytical development, pre-clinical evaluation in parenteral nutrition and renal therapy. The contract has been extended in both scope and duration. The contract includes R&D of medical products and devices for patients across the world. During FY20, the BGRC team successfully cleared a USFDA audit exclusively for BGRC with no inspectional observations (483s). The collaboration was further expanded in size and scope with addition of scientists in the domains of regulatory gap analysis, nutrition compatibility and analytical testing. Four new stability chambers were also added during the year. Syngene’s continued focus on quality and operational excellence helped it achieve all project commitments and KPIs agreed with the client.

Biocon Bristol-Myers Squibb Research & Development Centre (BBRC)

In 2007, Syngene and Bristol-Myers Squibb entered into a strategic alliance centred on novel research in small and large molecules. The Biocon Bristol-Myers Squibb Research & Development Centre (BBRC) was commissioned the same year. The collaboration has produced nine drug candidates for further study and advanced new compounds for first-in-human studies. The contract has been regularly renewed.

Herbalife Nutrition Research & Development Centre

In 2016, Herbalife chose Syngene as its strategic research partner to provide support on product development, sensory evaluation and testing, scientific content writing, project management, formulation development, analytical services, stability studies and other related services.

Syngene Amgen Research & Development Centre (SARC)

In 2016, Syngene entered into a strategic multi-year collaboration with Amgen Inc. Under this collaboration, the focus is on medicinal and process chemistry, biologics, bioprocess, drug metabolism, pharmacokinetics, bioanalytical research and pharmaceutical development.

Manufacturing Services

1. Small Molecule Manufacturing

2. Biologics Manufacturing

Before going through the finanacial data, let's delve into more important question, The Outlook of the company from present situation?

Being the India's leading CRAM player, received strong demand for research services and ramp-up of high margin discovery services and API which will benfit the company in gaining the market share as well increasing the global footprint & clientele. Large global pharma, biotech companies, new startups in life science sector are some of the customers which are partnering with the Syngene.

Over the past 12 months, the Company has served more than 360 clients across a range of sectors.

It has also strengthened its capability in biologics manufacturing, in line with its goal to become the partner of choice for commercialization of innovative therapies.

It is on path to build new on-line channels to develop a way of engaging with new clients around the world.

Also, aiming to maintain all the operating units at a state of 'Anytime Audit Readiness'

Which goes on to show how business is cautios of providing the quality of services to its customer. This year, in a new development, it received approval from the Ministry of Health of the Russian Federation for compliance with current Russian GMP standards. Additionally, its viral testing facility received GLP certification from the National GLP Compliance Monitoring Authority, making it India’s first and only GLP-certified viral clearance study service provider. Over the course of year, Syngene cleared audits from both clients and regulators from across the globe, including the USFDA, European EMA, Japanese PMDA, and others.

USFDA compliance provides an entry barrier to the entrants due to its stringent regulation thereby, giving Syngene an opportunity as well as at the same time risk of not adhering to the norms can result into USFDA warning.

Attractive opportunities within all operating businesses of Discovery Services, Development Services, Manufacturing Services and Dedicated Centre as clients seek to keep pace with scientific innovation while increasing speed to market and operating efficiency and controlling their costs. Integrated approach to client service will allow to extend the breadth of relationships with key customers and grow share of their R&D projects.

Various Accomplishment since FY2000

Just a quick glance on the annual turnover shows a 20X growth over a period of 10 year as Rs 1,000 Mn was reported at the end of FY09.

Market Overview

Contract research market – Projected to grow at 7.6% CAGR from FY19-25 to reach a value of USD 61Bn.

While pharmaceutical and biopharmaceutical companies are the primary end-users of contract research services, estimated to account for 54% revenue share in 2018, companies in the realms of medical devices, consumer products, cosmetics, speciality chemicals and agrochemicals are also working with CROs for product innovation.

Benefits of CRO - CROs have emerged as a strategic alternative to in-house research and development as they help pharmaceutical and biopharmaceutical companies to control their R&D costs, manage stringent regulatory requirements, take strategic decisions based on research progress and outcomes, increase the speed-to market of their life-changing drugs and focus on their core competencies. CROs, through their ability to adapt and integrate advanced technologies and their teams of highly qualified scientists, can accelerate the development of a compound. This eliminates the client companies’ need to maintain their own R&D space, equipment and manpower. Consequently, CROs have become the partner of choice for companies of all sizes, from global giants to smaller enterprises.

Activities that are outsourced to CROs include a wide spectrum of tasks from basic research to late stage development including: assay development, target validation, lead optimization, genetic engineering, hit exploration, efficacy and safety tests in animal models, as well as human clinical trials.

It is important to note that while Syngene has the capability to undertake small size trials, clinical trials do not represent a significant proportion of the current business model.

Contract manufacturing organizations - Pharmaceutical manufacturers are increasingly entering into strategic partnerships with contract manufacturing organisations in order to increase capacity, gain access to sophisticated technologies, and mitigate risk. For instance, in clinical dose manufacturing, there is a high risk of failure associated with pipeline drug products; using the services of a CMO reduces this risk for pharmaceutical companies that would otherwise need to invest in both the manufacturing equipment and facilities.

Biologics Market - The fast pace of growth of the biologics industry versus the insufficient internal capacity of biopharmaceutical companies has spurred them to outsource various parts of product development and manufacturing. The complexity of biologics, both in the development and manufacturing stages, and the specialized skills and equipment required for this, has led to CROs and CMOs becoming an integral part of the biologics industry. According to Grand View Research, the global biopharmaceutical CMO and CRO market size is expected to reach USD 37.8 Bn by 2025, 7.7% CAGR. Mammalian cell line-based bioproduction systems held the largest market share in terms of revenue in 2018.

The global research market can be segmented by therapeutic area. From this perspective, the oncology segment dominates the market in terms of revenue and is anticipated to grow by around 7.5% CAGR during 2019 to 2025.4 Biologics, also known as large molecules, have revolutionized the treatment of many serious diseases. As research and manufacturing activities of biologics are far more complex and expensive than small molecules, these activities are being increasingly outsourced by biopharmaceutical companies.

Syngene Partnering Model

Syngene operates a range of collaboration models from long-term relationships with dedicated R&D centers to contracts based on Full-Time Equivalent (FTE) and Fee-for-Service (FFS) arrangements. Clients can select anyone - or a combination - of these models to deliver their R&D program.

In the FTE model, a defined number of scientific personnel from pre-determined disciplines are identified to work full-time on client projects. These agreements are typically renewed annually. The deliverables and team composition evolve as the project advances. Under the FFS model, the contract is for rendering agreed services within a defined scope. Flexible, on-demand scientific personnel and research infrastructure are deployed to realize the objectives of the client’s R&D project. While client collaborations in Discovery Services are usually FTE-based, engagements in the Development and Manufacturing Services divisions are primarily based on the FFS model.

Dedicated R&D centers

Company's Operational Performance

A key scientific advance during the year was the extension of the company’s cellular and gene therapy research capabilities into CAR-T therapy, an innovative and leading-edge approach to treating cancer. Several projects within Discovery Biology covering hypothesis-testing and validation of new biological targets, as well as the exploration of novel mechanisms related to CAR-T therapies, are underway.

Construction of our API manufacturing facility in Mangaluru has been completed and is currently undergoing qualification testing.

Development Service - Notable scientific achievements during the year included the delivery of registration batches of multiple, modified-release tablet formulations of a drug that treats symptoms of multiple sclerosis for a Russian client — the result of a four-year collaboration. The Company also developed and validated a Human Papilloma Virus (HPV) assay, a test system increasingly being used for cervical cancer screening.

Biological medicines have become an increasingly significant part of the biopharmaceutical pipeline and company R&D budgets are being adjusted accordingly. To capture this shift, Syngene has invested in the latest R&D technology for large molecules and the Company’s Biologics unit is an emerging capability. Two 2KL bioreactors were commissioned during the year and a microbial manufacturing facility is being set up, strengthening the biologics manufacturing capacity.

Strategic priorities

To build capabilities in the area of biopharmaceuticals to serve existing and potential clients better.

Deliver added value from integrated discovery and development projects: to grow integrated drug discovery portfolio by driving internal alignment of services to become the preferred partner for end-to-end projects.

Syngene Value creation Model

Syngene has very well defined model on which there complete business moves and benefits all the stakeholders

Credit Rating

CRISIL has maintained it’s ‘CRISIL AA/positive outlook’ rating on the banking facilities availed by Syngene from various banking/ financial institutions. The rating on the short-term facilities was reaffirmed at ‘CRISIL A1+’. ICRA has also maintained it’s ‘ICRA AA/positive outlook’ rating on the banking facilities availed by Syngene from various banking/ financial institutions. The rating on the short-term facilities was reaffirmed at ‘ICRA A1+’.

Financial Performance Review

strong growth in Discovery Services division. Total revenue grew to Rs. 20,935 Mn in FY20, up 10% from Rs. 19,007 Mn in FY19. Operational costs increased with the opening of our new R&D facilities and higher investments in safety and compliance, both necessary for future business expansion. Syngene continued to safeguard profitability with EBITDA for the year standing at Rs. 6,995 Mn, up 14% compared to Rs. 6,119 Mn in FY19. Profit after tax, excluding the exceptional gain of Rs. 459 Mn related to an insurance claim, was up by 10% to Rs. 3,662 Mn compared to Rs. 3,316 Mn in FY19. EBITDA and PAT margins for the full year, excluding the exceptional gain, were at 33% and 17.5%, respectively.

Discovery Services constituted 32% of revenue, Dedicated R&D Centre constituted 31% while Development Services and Manufacturing contributed the remainder.

Cost and margin overview - material and power expenses as a percentage of our revenue reduced to 27% from 30% in FY19 due to a change in the sales mix in favor of discovery services and impact of one-time pass-through of approximately Rs. 400 Mn recorded in the first quarter of the previous year. The employee cost as a percentage of revenue increased during the year, on account of the strengthening of the leadership and mid-level managerial teams. Also made investments in talent for yet-to-be scaled up businesses such as the R&D facility at Hyderabad, the new research facility in Bengaluru and from the opening of the Mangaluru API manufacturing facility. Despite significant investments in human capital, its gross margins improved by 30bps in FY20.

96% of total sales are denominated in foreign currency, principally USD, resulting in high exposure to the risk of adverse fluctuation in exchange rates. we hedge 100% of exposure over the coming 12 months and between 50% to 70% of exposure over a further 12 months. Also hedge 100% of exposure for long-term fixed price contracts. These hedges are obtained through a combination of various derivative instruments such as ‘foreign exchange forward’ and ‘put option contracts’.

Enjoys 100% tax benefit for 1st 5 year as per tax holiday benefit for facility operating in SEZ, 50% exemption for the next five years and a further 50% exemption for another five years.

With new units going live during the year, the average effective tax rate decreased by 225 basis points to 18%.

With respect to indirect taxes, the GST notification that came out in September 2019 provides exemption on export of Toxicology, Analytical, Stability and Clinical Services. This benefits approximately 10% of business, and as a result, all export services are now exempt from GST.

CAPEX

Total capex done in FY20 – USD 108 Mn (Total Capex base USD 451 Mn) - Of the total capex, 40% was in the commercial API manufacturing facility, 26% in Discovery Services, 11% in a Biologics manufacturing facility and 23% in the Dedicated Centre and Development Services.

100% of the capex during the year was self-funded. Despite this, net cash position increased to Rs. 3,623 Mn as on March 31, 2020 as against Rs. 3,396 Mn as on March 31, 2019.

Subsidiary Company/Joint Venture

Syngene USA Inc. is a wholly-owned subsidiary, incorporated in FY18, to have a firm foothold in the US market and allow easy access to the Company’s clients based in that region. Apart from that no other such subsidiaries/JVs exist.

Screener Data for reference

Fundamental Statistics

Compounding data

References:

Syngene Annual report

Syngene Credit rating report

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