Fooled by Randomness | Healthcare & Pharma | Aditya Khemka | Sajal Kapoor | Prince - YouTube
Must listen to understand CDMO Space & Its Growth triggers. Views by Sajal Kapoor & Aditya Khemka.
May jump to around 1hr 10min for view on BIOSECURE ACT & its effect on Indian CDMO, CHINA+1…
Seems to me you too researched a lot on Syngene and CDMO what’s your personal opinion and view
@Pallabs …Thanks for an in depth analysis…please also give(if possible) brief comparison between Neuland, Laurus and Syngene in terms of their CDMO business past /present/future.
Thanks in advance.
Disclosure: Invested in Syngene , Neuland and Laurus.
Hi…
My assessment of the CDMO space is, it’s an upcoming trend in Pharma Sector, like a sub-sector. Pharma is evolving from a small chemical-based medicines to biology-based medicine, like CRISPR, Cell & Gene Therapy, CAR-T, monoclonal antibodies, which is also evident from the fact that, “The FDA approved significantly more biologic NMEs in 2022 than small molecule NMEs (24 compared to 17).” & " Over the past 10 years, the number of molecules in the R&D pipelines has more than doubled, with growth rates for small(chemical) and large(biological) molecules are around 5% and 12% CAGR resp."
What gives me confidence in the CDMO space is, Biologics manufacturing is increasingly relying on biopharmaceutical CDMO. The percentage manufactured exclusively in-house, for example, declined from 57.6% in 2006 to only 29.7% in 2023. Over one-fifth (20.3%) of pharma respondent indicated they will offshore a majority (over 50%) of their biomanufacturing operations to India, China, or another lower cost country over the next five years. The number of CDMOs in the past three years alone has expanded by around 20%. The reason is, COST & LABOUR. For reference, the labour cost in Syngene is 25-26%, which is ~35% of operating cost which is a significant cost. It is cheaper & more time efficient to do R&D outside US/EU. For example, on average biosimilar development takes just 3-5 years in India verses 7 years in the West and costs on average 10X less.
Now, what happened during COVID is, due to govt push & lured by the higher profitability scenario, many VCs jumped into this space. And the number of companies with active R&D pipelines globally has grown from nearly 4800 in 2020 to over 5500 in 2023 of which 67% of overall contribution to Pharma Pipelines is by Emerging Biopharma while large pharma has contributed 23%. Now the situation is, government is no longer interested in pushing the R&D in pharma. Funding from VCs has also dried, which usually go to the emerging/startup biopharma companies. Plus, the big pharma is operating against backdrop of continuing inflationary pressures, rising capital costs, patent expiries, ongoing Federal Trade Commission (FTC) transaction scrutiny etc.
In the absence of new funding, the small emerging pharma is left with limited cash which is expected to over in next 12-18 months. Hence, there is frugalness with spending. One more thing is, these emerging small biotech companies has limited capabilities to scale up the R&D themselves. Hence, they are very much dependent on the outsourcing for commercialising their molecule. I am of the view that, in the next 12-18 months we will see M&A in the biotech space and also since big pharmaceutical companies are sitting on $700 billion for acquisitions and investment.
With China the situation is, labour cost is rising & there is distrust with the Chinese company regarding IP protection. Plus, there is growing need to diversify the supply chain. Sajal Sir commented in the above video that, German regulators are afraid to go visit CHINA for auditing CDMO companies due to China’s Espionage laws. Even US FDA auditors were not allowed to do the auditing of the manufacturing units there. In absence of that, the certification will expire and import from CHINA will be stopped. The BIOSECURE Act is like nail in the coffin for Chinese CDMO. Multiple MNC pharma have closed their R&D centers in China. But they are leveraging China’s R&D workforce via other routes, such as co-development or licensing deals. Also, China’s innovation in biopharma sector relies on returnee scientists. However, if sino US relationship does not improve, there might be less scientists interested in going back to China to work in China’s biopharma industry.
Why INDIA?.. In my view India has two unique advantages, Skilled low-cost labour & Respect for the International laws & IP protection. The 2022, marked a watershed moment in India’s rise in reputation of biologics production – notably, Covid vaccines, the Serum Institute, Bharat biotech, Biocon and, on the CDMO side, Syngene helping transform the country’s reputation. We are already the pharma capital of the world.
The opportunity size as per various industry estimates is,
Global CDMO market was valued at $224.6 billion in 2023 & is projected to grow at 6-7% over next five-six years. While Goldman Sachs in its latest report has projected 11-12% growth in global CDMO. Indian CDMO market is expected to grow at a CAGR of 14.67% from $19.63 billion in 2023 to $44.63 billion by 2029.
On the domestic front various companies are expanding or plan to expand in the CDMO space. Like, Murugappa group company Tube Investments of India is planning to spend 285Cr for setting up subsidiary in CDMO. Such reputed group entering into a space where they don’t have prior history indicates towards the opportunity size. Nirma group is also trying to enter CDMO which is a new industry for them.
On the global stage, Thermo Fisher, had acquired Patheon in 2017 to add CDMO offerings & bought PPD, a major Contract Research Organization. Larger strategic consolidations have picked up in the past year, with a number of notable deals including Pfizer-GBT, Amgen-Horizon, GSK-Bellus, Merck Prometheus, and Pfizer-Seagen.
I think that, Pharma is going through transformation. Earlier due to technological constrains most of the novel drugs were from chemical entities. Going forward, we would see increasingly, new drugs are coming from biological entities. The advantages/disadvantages of the chemical drug is significantly different from biological drug.
There is commentary in the CPHI Annual Report-2023 linked above, which I also find insightful that is,
“While pandemic and geopolitical pressures have subsided, inflation, higher interest rates, a capital supply/demand imbalance in emerging pharma, and a clogged IPO funnel have marshalled in a period of softening demand for services generally across the industry. Resultantly, emerging pharma generally have migrated towards cash preservation mode. There are signs of an improving VC funding environment, but this needs to coincide with increasing pharma M&A and a more healthy IPO environment. We believe softer demand, particularly from emerging pharma and in earlier phases of development, will extend for a period of 12-18 months.”
Thanx…
P.S. While reading please keep in mind that, there might be biasness towards INDIA & Indian CDMO Space.
@VALUE2017 I like all the three companies, excellent management, long history, positive cashflow. Syngene is an Integrated player, earlier it was in only in research & development. Now they are also venturing into the manufacturing space. Liberala is an example. Laurus & Neuland, I still have to evaluate.
What’s the view regarding syngene with opaque management and no so forthcoming in guidance regarding molecules in pipeline.
Q4 Fy24 Concall
~ Current Operational Performance:
^ In 2024, revenue from CRO has largely remain flat YoY while CDMO has seen 25% growth.
Business Structure
^ If you’re going to take and transfer some work out of China, the easiest and the most fungible, certainly the quickest, is just the research part of it, so discovery research contracts. Just because of their very nature, they tend to be short-term or annual FTE contracts. Once you move into development, it’s a bit stickier, and of course then product manufacturing, whether it’s API or drug product, is much less agile and not easy to move.
Business Changes
^ Plans to invest around USD60 million in capital expenditures, primarily in research services and development and manufacturing services, half of this is expected in research services, around 40% is planned for the CDMO business, and remaining includes investment in digitization and ESG initiatives.
Guidance
^ We anticipate high single digit to low-double digit growth on a constant currency basis for the year.
^ The effective tax rate is expected to increase to around 23% in the current fiscal year.
Remark
^ Startup biotech funding hit a road bump.
^ For big pharma company, biosecure act will cause slow & steady diversification from China.
^ Demand may come back in H2Fy25.
Goldman Sachs CDMO Report Apr 2024
ANNUAL REPORT 2024
^ The global CDMO market (comprising small and large molecules) was valued at USD 82 bn in 2023 and is expected to grow at a CAGR of 14% to reach a market size of USD 208 Bn in 2030.
^ Development and Manufacturing Services revenue grew by 26%.
^ All the existing mAbs manufacturing capacity is utilized. The new facilities acquired from Stelis will be available for business in the second half of FY25.
^ In the biologics development laboratories, the focus was on piloting high-yielding cell lines.
^ We anticipate stabilization in demand growth from small- and medium-sized biotechnology clients based in the US from second half of FY25, as the funding environment normalizes.
^ Biotechnology funding remains robust, with 2023 levels comparable to pre-pandemic figures from 2019 and exhibiting a long-term CAGR of 6%. While 2023 has been challenging for biotech funding, Jan to March 2024 funding levels were the highest in previous 14 quarters, similar to funding levels in 2021.
^ The global pharmaceutical market for human health is shifting towards large molecule drugs and expected to grow at a 12% CAGR from 2022 to 2026, contrasting with 2% for small molecules. Consequently, demand for biologics manufacturing capacity is rising at a 9% rate, but only 2% will be met by in-house expansions.
^ Commissioning of Automated Central Compound Management Facility, a first-of-its-kind in India. This state-of-the-art facility acts as a repository for all compounds synthesized by Syngene. The CCM can store between half to one Mn compounds in controlled environments.
Present status of funding in CRDMO Src: AR 2024
Funding is back to pre-covid level. Management is expecting it to go upwards from here on.
CREDIT REPORT Nov 2023
^ Over the past 2-3 years, Syngene has undertaken high capex towards commercialisation of the API manufacturing facility in Mangaluru & research centres in Hyderabad.
^ The company has organic capex plans of Rs 500-600 crore annually towards adding laboratory space for future expansion of the R&D business and capability additions across other services.
^ Syngene will remain exposed to risks related to stabilisation and ramp-up in production and services. However, its history of timely project completion provides comfort.
^ Any time or cost overrun in the planned capex will be a key monitorable.
VALUATION
Disc: Holding & hopeful on the future.
The Mangalore facility will take time to start contributing, they will start with pilot projects there in the medium term as a precursor to getting large contracts in the long term.
Complete exit for me post holding since 2020 realizing this is not better than a mutual fund return for longer term and current valuations are not in attractive.
