Syngene International stock price fell 7% after Q2FY24 results were announced on October 18, 2023. Full year growth guidance was cut by the management which didn’t go down well with the street. The September Quarter 2023 results were strong with revenues and net profit or PAT rising 18.5% YoY and 14% YoY respectively in Q2FY24. Syngene provides a one stop-shop capability from drug discovery to commercial manufacturing for biologics. The company has nearly 30 years of experience with solutions and services covering the entire discovery, development, and manufacturing value chain. Syngene stock price is up 16% over the past one year.
Strong and stable September Quarter 2023
Revenues from operations came in at Rs 910 crore in Q2FY24 compared to Rs 768 crore in the same period previous year. Revenue growth was driven by the development and manufacturing division with commercial manufacturing of biologics being the key contributor.
Operating margins stood at 27.92% falling 27 basis points (bps) YoY in Q2FY24. Speaking on margin contraction, Sibaji Biswas, Chief Financial officer (CFO) at Syngene International said, “The cost of raw materials increased by 34% year on year, primarily reflecting the shift of business mix towards development and manufacturing services, which by nature have a higher material cost component.” In addition to high raw material cost, staff cost also increased 10.4% YoY driven by increase in headcount and annual increment cycle in Q2FY24. Net profit came in at Rs 498 crore in September Quarter 2023 compared to Rs 428 crore in the same period previous year, a rise of 18% YoY.
Modified guidance, US market funding challenges
Syngene’s earlier full year guidance for revenue growth was in the high teens and has now moderated to mid-teens by the management. The change in guidance is due to lower revenue growth expected in the discovery services division. This division conducts early-stage research and is an integrated platform for drug discovery. The other three divisions of Syngene are development services, dedicated research centers and manufacturing services divisions which was mainly responsible for double digit revenue growth in Q2FY24.
The management expects continued demand growth but at a reduced level in the second half of the year mainly impacting Q3FY24 but recovering in Q4FY24. The biologics manufacturing for Zoetis is on track and will continue to deliver strong revenues. Speaking on Zoetis’ contract, Sibaji said, “However, please note that we started to build up revenue from the contract from the second half of last year. So, the year-on-year growth will be modest compared to what we have experienced in the first half of the year.” In Syngene’s small molecules business, several ongoing projects are scheduled to be completed in March quarter 2023 resulting in lower growth in December Quarter 2023. This will lead to mid teen revenue growth for the full year at constant currency in FY24. According to the management, another major reason is softening of demand due to challenges in the US funding environment for discovery services. With high interest rates, cost of capital has increased considerably impacting smaller biotech companies in the US. Syngene’s 15% revenue comes from the US biotech segment. The company has more than 450 active clients ranging from single person entities to the very largest pharmaceutical companies of the world. While the big pharma is massively cash generative and well capitalized, small biotech firms are dependent on venture capital funds for their decision making.
In the post pandemic scenario, capital which had flown into the pharma and biotech sector with Covid-19 uncertainty is now moving back to other sectors leading to a challenging funding environment. However, the management is confident that the US biotech funding environment is now stabilizing. Speaking on the US markets, Jonathan Hunt, CEO, Syngene International said, “It is starting to settle back and the level it is settling back looks very similar to the levels it was pre pandemic. So, a new normal but the normal looks very much like the pre-pandemic healthy, well-funded, dynamic and good for investors.” And the company is confident and optimistic of medium and long term growth prospects for drug discovery services. The company recently acquired 17 acres of non-agricultural land in Genome Valley, in Hyderabad with the aim to bolster its drug discovery capabilities and grow for the next decade. Syngene has outlined capital expenditure (capex) of $ 80 million for FY24. Discovery services has been allocated 60% of total capex and the remaining balance for manufacturing services. According to the management, global contract research organization (CRO) business which was around $26 billion in 2021 is expected to touch $ 50 billion by 2026 growing at a CAGR of 13.5%. After the temporary US funding challenges are over, discovery services will resume growth.
