Rating Matrix Syngene International...

March 3, 2016

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Well poised to monetise research capability... Incorporated in 1993, Syngene International (SIL) is the contract research organisation (CRO) arm of Biocon. SIL provides a gamut of integrated, end-to-end services to develop novel molecular entities (NMEs) or new drugs encompassing discovery, development and pilot manufacturing under one roof through a flexible business model to pharma and other companies. SIL delivers services through a combination of scientific talent, globally accredited systems and compatible R&D infrastructure. The company enjoys high recall value due to its integrated service offerings coupled with consistent performance and high data integrity ethos. We initiate coverage on the company as it is one of the few integrated global CROs with strong track record and good visibility. Global pharma landscape conducive to incremental R&D outsourcing Global pharmaceutical players are facing structural issues from the impending patent cliff, shrinking product pipeline, rising R&D costs and growing competition. At the one end, these companies are shrinking in size due to loss of blockbuster exclusivities while, at the other end, new product approvals by the USFDA are also on the rise. Hence, to maintain the structural balance and improve probability of success they are inclined to outsource a substantial part of the R&D work. Similarly, the innovative/virtual companies that are extensively working on new products and which may not have the required capital/manpower also tend to outsource a substantial part of their R&D. As per a Frost & Sullivan report, global pharma R&D spend in CY14 was at ~US$140 billion of which the outsourced pie was estimated at US$40-45 billion. Integrated business model; customer stickiness to the core SIL’s revenues grew at ~28% CAGR in FY11-15 to | 860 crore due to a sharp increase in new client addition and scaled-up revenues from existing clients led by integrated service offerings, high data integrity ethos and continuous endeavour to move up the value chain. The capabilities have been vindicated by proven customer stickiness as eight of the top 10 global pharma companies have been availing the services for the last five years. The proposed foray in contract manufacturing (CMO) services from FY17E will further strengthen its service offering to clients. Compelling non-generic option with proven capabilities In the crowded Indian pharma space dominated by generic exporters, SIL stands out as an atypical candidate with new molecular entity (NME) focus. The company is well poised to capture opportunities in the global CRO space due to strategic outsourcing by global Innovators in the backdrop of structural challenges like impending patent cliff, controlling costs and keeping new product introduction flow intact. Its proven capabilities have been backed by robust financials that have been fairly consistent, thanks to regular customer addition and stickiness of existing customers. This is also due to continuous broadening of services offering by SIL since inception. We ascribe a target price of | 445 based on 24x FY18E EPS of | 18.5. Exhibit 1: Key Financials (Year End March) FY14 FY15 FY16E FY17E FY18E

Revenues (| crore) 699.5 859.9 1090.2 1336.5 1587.7

EBITDA (| crore) 214.4 281.1 360.9 456.3 550.7

Net Profit (| crore) 134.8 175.0 226.6 297.1 371.0

EPS (|) 6.7 8.8 11.3 14.9 18.5

RoCE (%) 17.8 19.5 21.3 24.1 25.0

RoE (x) 20.4 20.7 21.8 23.0 23.1Source: Company, ICICIdirect.com Research

Syngene International (SYNINT)| 390

Rating Matrix

Rating : Buy

Target : | 445

Target Period : 15-18 months

Potential Upside : 14%

YoY Growth (%) (|crore) FY15 FY16E FY17E FY18E

Revenues 859.9 1090.2 1336.5 1587.7

EBITDA 281.1 360.9 456.3 550.7

Net Profit 175.0 226.6 297.1 371.0

EPS (|) 8.8 11.3 14.9 18.5

Current & Target Multiples

FY15 FY16E FY17E FY18E

PE (x) 44.6 34.4 26.3 21.0

M.Cap/ Revenues (x) 9.1 7.2 5.8 4.9

EV to EBITDA (x) 27.4 21.6 16.9 13.7

P/B (x) 9.2 7.5 6.0 4.9

ROE (%) 20.7 21.8 23.0 23.1

RoCE (%) 19.5 21.3 24.1 25.0

Stock Data

Particular

Bloomberg/Reuters Code

Sensex

Average Volumes (6 months)

Market Capitalisation

Debt (FY15)

Cash (FY15)

EV

52 week H/L 436/295

Equity capital

Face value | 10

| 116 crore

| 7809 crore

| 199.1 crore

SYNG IN

Amount

| 7770 crore

| 155 crore

24465

203894

Comparative return matrix (%) 1M 3M 6M 1Y

Syngene Int. -1.7 11.1 20.6 NADivi's Laboratories -16.7 -17.4 -19.6 10.5

Price movement

200

240

280

320

360

400

440

Feb-16Feb-16Dec-15Nov-15

|

12,000

15,000

18,000

21,000

24,000

Price (R.H.S) Nifty (L.H.S)

Research Analyst Siddhant Khandekar [email protected] Mitesh Shah [email protected] Nandan Kamat [email protected]


Company background Incorporated in 1993 as a subsidiary of Biocon, Syngene International (SIL) is a leading contract research organisation (CRO), which supports R&D programmes of global innovative companies. SIL offers outsourced services to support discovery and development for organisations across industrial sectors like pharmaceuticals, biopharmaceuticals, neutraceuticals, animal health, agro-chemicals, etc. It currently caters to 221 global players including Bristol-Myers Squibb (BMS), Abbott and Baxter, among others. SIL’s services encompass a range of R&D activities from NME discovery, development to pilot manufacturing. Over the years, it has evolved from a discovery chemistry and discovery biology-focused CRO to an integrated provider of discovery and development services for NMEs across a range of domains including small molecules (chemical drugs) and large molecules (biologics). SIL manages a pool of 2122 scientists including 258 PhDs and 1665 scientists with a master’s degree, to ensure timely execution of projects, cost effectiveness and quality of projects, confidentiality and protection of intellectual property. The company owns two state-of-the-art research facilities spread over 900,000 sq ft in Bengaluru certified by major regulatory bodies. The company currently conducts laboratory and manufacturing activities at two primary facilities -

• Biocon SEZ, Bommasandra, Bengaluru • Bommasandra Industrial Area, Bengaluru

Apart from this, it is in process of establishing a new commercial-scale facility in Mangaluru (SEZ) to manufacture novel small molecules for innovator companies as it plans to foray into commercial manufacturing for customers. The company intends to evolve from a CRO into a contract research and manufacturing services (CRAMS) organisation with commercial-scale manufacturing capabilities. This is in keeping with SIL’s plan to leverage its existing relationships with clients and provide forward integration on the discovery and development continuum.

Revenue break-up

SIL derives ~95% of its revenues from exports. In terms of classification on a contractual basis, it derives ~36% of revenues from long term dedicated contracts with a contractual commitment of five years and more. In this case, the company offers a dedicated, customised and ring-fenced infrastructure in line with client’s requirements. These dedicated centres are generally multi-disciplinary, full time engagements, which support the R&D requirements of clients. The remaining 64% come from full time equipment (FTE) and fee for service (FFS) contracts. In FTE contracts, the company does billing based on the number of scientists deployed. In this case, there is an agreement with clients for minimum utilisation of a specific number of scientists dedicated to their work. The scope of services and deliverables under FTE contracts generally evolves over time. The FTE contracts are generally renewable annually. FFS contracts are mostly short-term in nature. In FFS contracts, the agreement is for fixed price for agreed services within a defined scope.

Shareholding pattern (Q3FY16)

S hareholdersPromoter

FII

DII

Others 8.5%

H olding (% )

74.6%

16.2%

0.8%

Source: Company, ICICIdirect.com; Research Scientist pool

11971384

16171810

2122

0

500

1000

1500

2000

2500

FY11 FY12 FY13 FY14 FY15

No.

of S

cien

tists

Scientists

Source: Company, ICICIdirect.com; Research Geography wise sales break-up (FY15)

Domestic5%

Exports95%

Source: Company, ICICIdirect.com Research Sales break-up (FY15)

Others (FTE+FFS)

64%

Dedicated36%

Source: Company, ICICIdirect.com; Research


Exhibit 2: Verticals overview

Dedcated Centre FTEs FFS

Long term, FTE based contractsLargely FTE based engagements, typically renewed annually

Largely FFS based services (both short and long term)

Integrated servicesDiscovery chemistry, discovery biology and in-vivo services

Preclinical studies, Stability, formulation, CMC and Clinical supplies, Clinical development

Currently, three in place: BBRC, ANRD and BGRC High renewal rates

High renewal rates inmanufacturing services

Dedicated infrastructurecustomised to client’s requirements Multi-client infrastructure

Both fixed and time and material contracts Time and material contracts Fixed price contracts36% of sales 64% of sales

Source: Company, ICICIdirect.com Research The company has developed long-term relationships with many clients, including three long-duration multi-disciplinary partnerships, each with a dedicated research centre, with three of the world’s leading global healthcare organisations Bristol-Myers Squibb Company (BMS), Abbott Laboratories (Singapore) Pte Ltd (Abbott) and Baxter International Inc. (Baxter). BMS – The first dedicated centre was set up for BMS in 2009 and engages over 400 of scientists. It has recently extended the BMS dedicated centre engagement to 2020. Abbott - In 2012, it set up a dedicated research centre for Abbott. The Abbott Nutrition R&D centre engages about 30 scientists focused on maternal, paediatric, neo-natal nutrition and diabetes care in line with emerging market needs. Baxter – Dedicated centre developed in 2013. The Baxter Global Research Centre has a multidisciplinary team of about 150 of scientists who work on product and analytical development, preclinical evaluation in parenteral nutrition and renal therapy.

Exhibit 3: Timeline Period Event

1994 Initiated operations as a CRO with services in chemistry & biology

1998 Granted 100% export oriented unit (EOU) status by the Government of India

1999 First operational expansion in R&D by way of expansion of lab space to over 23,000 sq ft

2000 Clinigene International incorporated as 100% subsidiary of Biocon to provide clinical research services to domestic and multinational companies

2001 Forayed into chemical development with dedicated manufacturing facility

2003 Moved to Biocon Park, a 90 acre biopharmaceutical SEZ with operations spread over [65,000 sq ft]

2007 Bristol Myers Squibb (BMS) and Syngene sign first long term contract to set up its first dedicated R&D centre

2007 Expansion of research facilities at Biocon SEZ to 148,000 sq ft

2007 Crossed an annual turnover of over | 100 crore in FY07

2009 Dupont Crop Protection and Syngene extend partnership for R&D services

2009 Expansion of manufacturing services with new plant, which is cGMP compliant

2009 Initiate operations in safety assessment and large molecules development services

2011 Endo Pharmaceuticals, Syngene collaborate to develop novel biological therapeutic molecules against cancer

2012 Abbott and Syngene collaborate to establish Abbott's nutrition research and development centre in India and our second R&D centre

2012 Certification of clinical facilities by ANVISA

2012 Acquires 100% stake in Clinigene International from Biocon

2013 Crosses annual turnover of over | 500 crore in FY13

2013 Baxter International Inc. collaborates with Syngene to establish ‘Baxter Global Research Center’, our third dedicated R&D centre

2014 Bristol Myers Squibb and Syngene extend collaboration for its dedicated R&D centre till 2020

2014 Establishes 75,000 square feet centre to provide stability and analytical services

2015 Clinigene International was amalgamated with Syngene Source: Company, ICICIdirect.com Research

Recent deals of company (| crore)

Date Deals Deal Value ValutionOct-12 Sold 7.7% Shares to GE Capital 125.0 1625.5Sep-14 Bought back GE's Capital Shares 215.4 2800.8Sep-14 Sold 10% stake to Silver Oak 380.0 3800.0Jan-15 Competed sale to Silver Oak 380.0 3800.0Jul-15 IPO (10% shares of company) 550.0 5500.0


USFDA Inspections

Period USFDA facility Inspections

2010 Clinical and Bio- analytical facilities of CIL

2013 Control Testing Laboratory

2014 Syngene API manufacturing facility



CRO Industry: Big ideas Big data CRO revolution Contract research organisations (CRO) offer outsourced services to support discovery and development for R&D driven organisations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, neutraceuticals, animal health, agro-chemicals and cosmetics. CRO services cover the entire gamut of R&D activities from new molecular entity discovery and development through pilot manufacturing. Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D activities. CROs arose in the 1980s, mainly in the US, Europe and Japan, to meet the needs of innovative companies to improve their R&D productivity and operational agility. More recently, CROs have been founded in developing countries based on their unique capabilities like educated, trained and productive scientists at reasonable cost with lower overhead and maintenance cost. The emergence of CROs also coincided with the passing of the Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch and Waxman Act) in the US. This act expedited and streamlined both generic drug approvals and patent litigation involving generic drugs. Before this act, generic players had to follow the same trials and procedures as innovators. Hence, getting approvals from the USFDA was very difficult. After Hatch & Waxman, generic approvals got momentum and innovator companies started witnessing stiff generic competition. In this backdrop, to manage the R&D budget, a new trend of outsourcing emerged. CROs offer clients an opportunity to manage costs, have flexible operations and realise efficiencies in R&D and related functions. As an industry, CROs have expanded their service offerings over time to meet the growing needs of full-service outsourcing across the full spectrum of R&D and related activities. In practice, however, most CRO service providers specialise to some degree based on the needs of their clients and the market in which they operate. CRO service providers typically compete in various segments of discovery, development and manufacturing. CRO services: (1) Discovery - Discovery covers the process from target identification to target validation to lead generation and lead optimisation. The focus at this stage is to narrow down thousands of compounds to a few hundred, promising possibilities for further R&D. Scientists generally begin with basic research on the physiological target and develop hypothetical mechanisms of action, which could potentially bring about the desired outcome. Following basic research, researchers look for a lead compound. (2) Development - After the NME discovery stage narrows down thousands of compounds to few promising possibilities, these molecules enter the development stage. The development stage spans preclinical and clinical testing in addition to drug substance and drug product development. (3) Commercialisation - process development and early stage manufacture, commercialisation manufacturing and post-marketing follow-up.

CROs offer outsourced services to support discovery and development for R&D driven organisations across industrial sectors

CROs emerged in the 1980s, mainly in the US, Europe and Japan, to meet the needs of innovative companies to improve their R&D productivity and operational agility

CROs facilitate cost management, flexible operations and efficiencies in R&D and related functions

CRO service providers typically compete in various segments of Discovery, Development and Manufacturing

The emergence was also coincided with the passing of Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch and Waxman Act) in the US


Exhibit 4: Drug discovery and development process

Source: Harris Williams &Co., ICICIdirect.com Research Exhibit 5: CRO services

Source: Company, ICICIdirect.com Research Exhibit 6: CRO services – Vertical explanation

Source: Company, ICICIdirect.com Research Exhibit 7: Discovery process

Stage I Stage III Stage IVHit to Lead Candidate Selection Development

Process20 scaffold synthesis & diverse library of

5000 compounds for each scaffold5000 Lead compounds

20 lead compounds

5 lead compounds Candidate Selection

Candidate Development

Screening In-vitro Further in-vitro In-vivoDevelopability assessment

Lead OptimisationStage II

Source: Company, ICICIdirect.com Research


Major services offered by CROs

Discovery chemistry: Discovery chemistry is the process of designing novel chemical entities with potential application across a wide variety of sectors. For example, a pharmaceuticals-focused organisation would aim to discover molecules targeted at a specific disease area. Discovery biology: Discovery biology supports both small and large molecule discovery research. In case of small molecules, it plays an important role in target identification and validation and participates in the lead selection process. On the other hand, for large molecules, the discovery biology team is responsible for therapeutic molecule generation, protein engineering, screening and lead selection. Chemical development: The chemical development platform supports the development of a process for manufacturing a small molecule, facilitating an NME’s transition from the laboratory to a manufacturing set-up based on increasing volumes. Formulation: As a molecule moves forward through the discovery and development continuum towards clinical evaluation in humans, a drug substance has to be converted to a drug product (also known as a formulation), which is customised to the specific mode of administration. Safety assessment: The main objective of safety assessment department is to assess the hazard potential of drugs and other products in animals and in vitro (lab testing) cell systems, which are used as surrogate species for extrapolation of data to humans. These activities are part of the pre-clinical studies conducted to determine the suitability of a drug before they are tested in humans. Clinical services: Clinical services encompass a broad range of activities most notably clinical trials, bioavailability/bioequivalence (BA/BE) studies, bioanalytical testing, central lab services, medical writing, biostatistics and data management services and pharmacovigilance services. Stability services: Stability testing forms an integral part of the drug development process, which helps establish the shelf life of the product. The purpose of stability testing is to provide evidence on how the quality of an API and formulation varies with time under the influence of a variety of environmental factors. Large molecules development: The large molecules development platform supports the development of a process for manufacturing a novel biological entity as it transitions from the laboratory to a manufacturing set-up based on increasing volumes. Manufacturing: A successful discovery and development process culminates into commercialisation of the molecule for the targeted application. However, this stage is underpinned by the performance of the drug in clinical trials. The drug supplies needed to support these trials are known as developmental supplies and have to be produced in a cGMP facility.

Discovery chemistry is the process of designing NCE with potential application

Discovery biology supports both small and large molecule discovery research

Chemical Development supports the development of a process for manufacturing of small molecules

Drug substance has been converted to a drug product (formulation)

Safety assessment department assess the hazard potential of drugs and other products in animals and in vitro (lab testing) cell systems

Clinical services encompass a broad range of activities notably clinical trials, BA/BE studies, etc

Stability testing helps establish the shelf life of the product

Large Molecules development transitions from the laboratory to a manufacturing set-up based on increasing volumes

Discovery and development process culminates into the commercialisation of the molecule for the targeted application


As per Frost & Sullivan estimates, the global R&D expenditure for the pharmaceutical industry in 2014 was ~US$140 billion. The global CRO market for discovery services was estimated to be US$14.7 billion in 2014 and is expected to reach US$22.7 billion in 2018, reflecting a CAGR of 11.5% (2014-18), according to the IQ4I Report. The global CRO market for development services was estimated to be US$28.8 billion in 2014 and is expected to reach US$44.6 billion in 2018, reflecting a CAGR (2014–18) of 11.6%, according to the Frost & Sullivan Report. Although the CRO industry has grown substantially in recent years, the opportunity to further penetrate the potential outsourcing markets provides an opportunity for the industry to increase its share of global R&D expenditure. Exhibit 8: Global CRO Market (US$ billion, %)

19.6, 45%

14.2, 33%

7.7, 18%

1.9, 4%

North America Europe Asia Pacific RoW

Source: Company, ICICIdirect.com Research, Frost and Sullivan Report, IQ4I Report Exhibit 9: Factors driving outsourcing of R&D

Others4%

Company is Virtual30%

to reduce Company size

5% Lifecycle Management

6%

Temporary lack of Capacity

14%

To focus on Core Competency

41%


Focus on core competencies

According to a survey by RolandBerger Strategy Consultants, pharmaceutical companies identified marketing, sales and clinical development as core competencies. Hence, these companies are inclined to outsource other functions such as discovery and pre-clinical development.

The global R&D expenditure for the pharmaceutical industry in 2014 was ~US$ 140 billion of which CRO discovery services was estimated to be US$ 14.7 billion and CRO development services was estimated to be US$ 28.8 billion

Pharmaceutical companies identified marketing, sales and clinical development as the core competencies


Smaller specialty companies/start-ups (virtual pharma companies)

Emerging venture-backed and virtual pharma companies have limited resources, infrastructure and experience in drug discovery and development. Hence, to gain greater access to capital, these firms may increasingly have the resources to outsource discovery and development services to CROs. These organisations tend to seek a broader range of services from CROs than traditional pharmaceutical companies.

Cost management – Moving from fixed to variable cost management

Rising costs of R&D, profit pressures arising from patent expirations and the need for greater flexibility have reduced the willingness of pharmaceutical companies to incur large fixed costs associated with large scale R&D programmes. Outsourcing allows clients to convert a portion of their R&D budgets from fixed to variable cost, giving them greater flexibility to shift strategic and development priorities in response to market conditions.

Innovative / virtual companies working on new products and which may not have the required capital / manpower tend to outsource substantial part of their R&D

Rising costs of R&D, profit pressures arising from patent expirations and the need for greater flexibility tend to convert a portion of their R&D budgets from a fixed to a variable cost


Investment Rationale Well poised to cash on growing global pharma R&D outsourcing trend Global pharma players are facing structural issues from impending patent cliff (exhibit 11), a drying product pipeline and rising R&D costs (Exhibit 12). At the one end, these once mighty giants are shrinking in size due to loss of blockbuster exclusivities. However, at the other end, the new product approvals by the USFDA are also on the rise paving the way for increased competition. Hence, to maintain the structural balance and improve probability of success these are inclined to outsource substantial part of the R&D work. Outsourcing allows innovators to convert a portion of their R&D budgets from fixed to variable cost, giving them greater flexibility to shift strategic and development priorities in response to market conditions. Also, a sharp increase in new startup innovative companies lacking infrastructure and funds always prefer to outsource most of their research work. Besides the obvious outsourcing benefits, SIL offers the India cost arbitrage.

Exhibit 10: Impending patent cliff in the US

19.016.0

19.1

35.0

26.6 24.527.3

23.0

14.1

26.622.1

4.6 4.5

0.05.0

10.015.020.025.030.035.040.0

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

Patent Expiries (US$ billion)


Exhibit 11: High R&D spending despite muted revenue growth

7.4

10.9

4.2

11.3

5.55.1

-4.6

-1.4-0.3

16.0

17.5 17.5

17.0

16.2

16.817.0

16.7

18.1

-6.0-4.0-2.00.02.04.06.08.0

10.012.014.0

2006 2007 2008 2009 2010 2011 2012 2013 2014

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

Revenue Growth (%) R&D as % of revenue

Source: Company, ICICIdirect.com Research; Note: Top 20 Global Pharma companies

Exhibit 12: Annual and cumulative new drug approvals (NDA)

29 29 24 26 36 19 20 18 25 26 23 31 39 26 412958

82108

144 163 183 201226

252275

306345

371412

050

100150200250300350400450

CY00

CY01

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

No.

Annual


Exhibit 13: Drugs under development

5995

6198

6416 6994

7360

7406

7737 92

17

9605

9737

9713 1045

2

1130

7

1230

0

1047

9

02000400060008000

100001200014000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

No.

No. of products in R&D pipeline

Source: Company, ICICIdirect.com Research, Pharmaprojects, Jan 2015, Citeline

Exhibit 14: CRO business growth projection (US$ billion)

14.7 22.73.8

4.615.8

24.79.2

15.2

01020304050607080

2014 2018EDiscovery Services Preclinical Services

Clinical Trials (Phase I –IV) Clinical Services


Exhibit 15: Asia CRO growing faster than RoW (US$ billion)

4.27.5

10.5

15.2

0

5

10

15

20

25

2014 2018EAsia RoW


11.5% CAGR 11.5% CAGR

9.7% CAGR

15.5% CAGR

To maintain the structural balance and improve probability of success global pharma companies are inclined to outsource substantial part of the R&D


Increase in start-ups/innovative companies – key driver for CROs Total 30% of global R&D outsourcing revenues comes from new innovative startups and emerging venture-backed life science firms (Exhibit 18). Total global innovative companies count has gone to 3286 in 2014 from 1198 in 2000 (Exhibit 17). These firms are focusing on a limited range of products generally have limited resources, infrastructure and experience in drug discovery and development. Hence, these organisations tend to seek a broader range of services from CROs than traditional pharmaceutical companies. Investments in the US life science sector covering most of such companies rose ~30% with ~US$ 9 billion invested in 789 deals in 2014 (Thomson Reuters).

Exhibit 16: Rise in number of innovative companies with active pipeline

1198 13

13 1503

1576 1621

1633

1769 19

65 2084

2207 2387 27

05

2745 29

84 3286

0500

100015002000250030003500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

No of Companies

Source: ICICIdirect.com Research; Research, Pharmaprojects, Jan 2015, Citeline

Exhibit 17: Factors driving outsourcing of R&D

To focus on Core

Competency41%

Temporary lack of Capacity

14%Lifecycle Management

6%

to reduce Company size

5%

Company is Virtual30%

Others4%


Indian CRO advantages - cost arbitrage, skill availability, geographical shift

Historically, India has offered a significant cost advantage and skilled personnel. However, as global pharma outsources more R&D functions, outsourcing to India is increasingly seen as a strategic move to garner quality and value, rather than just a tactical decision to lower costs. Availability of skilled resources: India possesses a critical mass of highly skilled scientists with demonstrated expertise in areas like drug discovery chemistry and a labour force that is continuously growing due to increasing number of PhDs from top institutions. Lower labour costs: According to Frost & Sullivan, the cost of conducting clinical trials in countries, like China, India and Indonesia, is 25-40% less expensive than in western countries.

Strong infrastructure: India has advanced technology and IT expertise, a growing pool of doctors and improving hospital infrastructure with access to a growing pool of talent trained in global clinical trials.

Geographical shift in preference: Countries in Eastern Europe and Latin America have been traditional markets for a major part of outsourcing. For the last many years, the trend is gradually shifting to Asia and, particularly, to countries like India. Higher employee costs, drain of talented scientists and graduates, geo-political turmoil and environmental issues are some of the reasons for a gradual shifting of the CRO/CRAMS base out of these regions.

Increases in start-ups/innovative companies focusing on a limited range of products generally have limited resources, infrastructure and experience in drug discovery and development. Hence, these organisations tend to seek a broader range of services from CROs

Outsourcing to India is increasingly seen as a strategic move to garner quality and value, rather than just a tactical decision to lower costs


Integrated business model, customer stickiness to the core SIL’s revenues grew at 27.8% CAGR in FY11-15 to | 860 crore mainly due to a sharp increase in new client addition and scaled-up revenues from existing clients led by integrated service offerings, high data integrity ethos and continuous endeavour to scale up the value chain. The client base has grown to 221 in FY15 from 103 in FY12. A sharp increase in clientele was mainly due to offering of complete basket of services from discovery, development and pilot manufacturing under one roof through flexible business models (exhibit 18) customised to client’s requirements. Also, a flexible business model allows SIL to meet the discovery and development needs of a wide range of clients, from small biotechnology companies to large pharmaceutical companies. The company has been able to take advantage of India’s large, low-cost scientific talent pool to deliver its services to multinational companies at competitive rates, especially when compared with costs for comparable services in developed countries.

Exhibit 18: Global peers in CRO space

CompanyResearch Models

Discovery Services Chemistry Bioanalysis Toxicology Phase I Phase II Phase III

Central Lab Imaging Phase IV Consulting

CSO / Commercialization

Charles RiverCovanceICONLab CorporationPAREXELQuest DiagnosticsQuintilesWuXiSyngene

Early Stage (Pre-Clinical) Late Stage (Clinical) Other (Peri-Approval)

Source: HarrisWilliams & Co.; ICICIdirect.com Research; Note: Syngene doing clinical trials in India

Journey from cluster play to integrated player The company’s client engagement begins with a single service (component play) to a set of services (cluster play) to an integrated play where the company engages its client across multiple platforms. Also, it provides dedicated centres for clients customised to their specific requirements. This transformation of client relationship from component to cluster to integrate to a dedicated play is accompanied by a shift in focus from cost arbitrage to R&D productivity to innovation as the client gains more confidence in the company’s ability to deliver and support them through their discovery and development process.

Exhibit 19: Integrated platform Customer Focus

Cost Arbitrage R&D Productivity Innovation

Multiple Services

Single Service Small/ Short Term Scale/Predictability Larger/ Long Term

Cluster Plays

Integrated Plays

Dedicated Plays

Compatibilities/ Complexity

Component Plays


Client Addition

103

152 165

221

0

50

100

150

200

250

FY12 FY13 FY14 FY15

No.

of C

lient

s

Total Clients


Journey from Cluster Play to Integrated Player

Parameters 2002 2015

Infrastructure 20000 sq. ft Over 900000 sq. ft

People 100+ 2800+

Sales ~| 22 crore ~| 1000 crore

Chemistry

Early Biology

Simple Biology Lab

Investment US$ 5 million US$ 150 million

End-to-end Discovery, Development & Manufacturing

Capabilities


Service platform initiation

Year Service Platforms

1994 Discovery Chemistry

1994 Discovery Biology

2000 Clinical Services

2001 Chemical Development

2009 Safety Assessment

2009 Large Molecules Development

2009 Dedicated Centers

2010 Formulation Development

2014 Manufacturing (CMO)



Customer stickiness and high recall value Due to its integrated service offerings coupled with consistent performance and high data integrity ethos, Syngene has enjoyed high recall value, which is reflected in the fact that eight out of top 10 global pharma companies have been engaged with the company for the past five years. The company has also established dedicated centres for its three major clients BMS, Abbott and Baxter. BMS has recently extended this engagement with Syngene to 2020. We expect revenues to grow at CAGR 22.7% to | 1587.7 crore on the back of continuous client addition, increase in realisation from existing clients on the back of extended services offering. Initiating CMO services- add on driver for long term growth The company has signed commercial contracts for late stage products with existing clients. Of this, two molecules have already been commercialised and the company has started supply of intermediaries for these products. The company’s existing facility at Bengaluru would initially support SIL’s CMO business. It has also started developing the new CMO facility at Mangalore at a capex of US$100 million. This novel CMO business would extend the company’s services to existing customers. The CMO business is expected to start meaningful contribution from FY17E. In addition, the company is in the process of setting up a new unit for biologic manufacturing in Bengaluru. We believe the CMO business would be an add-on driver for the company over medium to long term. Other key strengths of SIL Strong pool of scientists to support long clientele The company has a pool of 2,122 scientists, including 258 PhDs and 1,665 scientists with a master’s degree across multiple disciplines. Also, its leadership position provides a significant competitive advantage in attracting and retaining high-quality scientists required to successfully execute its innovative business model and differentiate its service offerings from competitors. The company is led by a dedicated and experienced executive management team that has a median of 20 years of experience across global clinical research, pharmaceutical and life sciences industries. The company’s average attrition rate is ~14%, while the attrition rate at PhD level is just ~6%.

Exhibit 20: Scientist pool in sync with revenues

387

700

9921197

1617

182

2122

66.1131.6

206.5

323.1

550.0

22.5

859.9

0

500

1000

1500

2000

2500

FY03 FY05 FY07 FY09 FY11 FY13 FY15

No.

of S

cien

tists

0.0100.0200.0300.0400.0500.0600.0700.0800.0900.01000.0

| cr

ore

Scientists Revenues


Due to its integrated service offerings coupled with consistent performance and high data integrity ethos, Syngene has enjoyed high recall value

The company has signed commercial contracts for late stage products with existing clients. Of which, the company has already started supply of intermediaries for two molecules. CMO business is expected to start meaningful contribution from FY17E

The company has a pool of 2,122 scientists, including 258 PhDs. and 1,665 scientists with a Master’s degree across multiple disciplines


Time tested infrastructure with major approvals

The company owns the largest CRO facility in India, spread over 900,000 sq ft, in Bengaluru. The facility has been accredited with major regulatory compliance. It operates laboratory and manufacturing facilities to standards that are consistent with the requirements of its large global clients. In the last three years, the USFDA has cleared five audits without 483 observations.

Dedicated centres for customised, ring-fenced infrastructure

One of the offerings by the company includes dedicated centre. The company has established dedicated centres for three of its major clients BMS, Abbott and Baxter. These dedicated centres are a part of SIL’s long term collaborations (usually five year and more) with these clients to provide customized and ring-fenced infrastructure. These dedicated centres are generally multi-disciplinary, FTE-based engagements, which support the R&D requirements of its clients. SIL’s first dedicated centre was set up for BMS in 2009 and engages over 400 scientists. BMS has also recently extended this engagement with SIL to 2020. For Abbott and Baxter, SIL has set up dedicated research centre in 2012 and 2013, respectively. The Abbott Nutrition R&D dedicated centre engages about 30 scientists focused on maternal, paediatric, neo-natal nutrition and diabetes care for emerging markets. The Baxter dedicated global research centre has a multidisciplinary team of about 150 of scientists who work on product & analytical development, preclinical evaluation in parenteral nutrition and renal therapy.

Exhibit 21: Key customers


The company owns largest CRO facilities in India, which spread over 900,000 sq. ft., located in Bengaluru. These facilities have cleared by all the major authorities

The company has established dedicated centre for three of its major clients BMS, Abbott and Baxter


Financials Revenues expected to grow at a CAGR of 22.7% over FY15-18E

Revenues grew at a CAGR of 27.8% in FY11-15 to | 860 crore mainly due to a sharp increase in the client base and steady orders from its top 10 clients. The company’s top 10 clients account for 70% of total revenues. We expect revenues to grow at a CAGR of 22.7% to | 1587.7 crore in FY15-18E on the back of continuous client addition and enhanced revenues from existing large clients on the back of incremental service offerings. Exhibit 22: Revenue growth drivers

416.7 75.5

205.0 162.7 859.9

1587.7

83.4

388.7161.6

94.1

0.0

400.0

800.0

1200.0

1600.0

2000.0

Revenues(FY12)

BMS Top 10(ex-BMS)

Others Revenues(FY15)

BMS Top 10(ex-BMS)

Others CMOs Revenues(FY18E)

| cr

ore


Exhibit 23: Revenues trend

321.9416.7

550.0699.5

859.9

1090.2

1336.5

1587.7

0200400600800

10001200140016001800

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

(| c

rore

)

Revenues


Exhibit 24: Revenue break-up

183 208 235 259 299 320 342146 184 250 351

473 592740

88158

214250

297337

38263

94

0200400600800

10001200140016001800

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

(| c

rore

)

BMS Top 10 (ex BMS) Other CROs CMO business


EBITDA margins expected to expand 200 bps in FY15-18E

EBITDA margins have improved 262 bps to 32.7% in FY11-15 mainly due to increase in productivity and incremental orders. We expect SIL to improve its EBITDA margins by ~200 bps in FY15-18E mainly due to improvement in product mix and rupee depreciation.

27.8% CAGR

22.7% CAGR

Revenues expected to grow at a CAGR of 22.7% to | 1587.7 crore over FY15-18E on the back of continuous client addition and enhanced revenues from existing large clients on the back of incremental service offerings

EBITDA margins expected to expand ~200 bps over FY15-18E mainly due to improvement in product mix and rupee depreciation


Exhibit 25: EBITDA & EBITDA margins

99.0137.1

168.5214.4

281.1

360.9

456.3

550.7

30.8

32.9

30.6 30.7

32.733.1

34.134.7

0

100

200

300

400

500

600

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E(|

cro

re)

25

27

29

31

33

35

(%)

EBITDA EBITDA Margins (%)


Net profit expected to increase 28.5% CAGR in FY15-18E

Net profit grew at 59.3% CAGR in FY11-15 to | 175 crore mainly due to a strong operational performance and lower interest cost. We expect net profit to increase at 28.5% CAGR in FY15-18E mainly on the back of a robust operational performance. Exhibit 26: Net profit trend

27.2

71.0102.1

175.0

226.6

297.1

371.0

134.8

0

50

100

150

200

250

300

350

400


(| c

rore

)

Net Profit


Healthy return ratios

The RoE improved 839 bps to 20.7% in FY11-15 mainly due to a better operational performance. The RoCE also improved 786 bps to 19.5%. We expect RoE to improve ~240 bps to 23.1% in FY15-18E mainly due to a further improvement in the operational performance. Exhibit 27: DuPont Analysis Du Pont Analysis FY15 FY16E FY17E FY18ETax burden (%) 86.0 86.0 85.0 84.0Interest burden (%) 101.9 100.6 101.3 101.5EBIT margin (%) 23.2 24.0 25.8 27.4Asset Turnover (X) 0.9 1.1 1.1 1.2Leverage (X) 1.1 1.0 1.0 0.8ROE 20.7 21.8 23.0 23.1


59.3% CAGR

28.5% CAGR

Net profit expected to increase at 28.5% CAGR over FY15-18E mainly on the back of robust operational performance

ROE expected to improve ~240 bps to 23.1% over FY15-18E mainly due to further improvement in operational performance


Exhibit 28: Return Ratios

11.7

18.319.6

17.819.5

21.3

24.123.9

20.4

25.0

12.3

19.7 20.721.8

23.023.1

0

5

10

15

20

25

30

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E(%

)RoCE (%) RoNW (%)


Leverage free balance sheet; robust cash flow to support Capex

The company’s net debt/equity (net D/E) has reduced to 0.2x in FY15 from 0.6x in FY11. Similarly, in the past five years it has generated cumulative free cash flow of ~US$200 million post capex on capacity expansions, technological upgradation and maintenance. Majority of the capex in the past three years was incurred to develop dedicated facilities for Abbott and Baxter. Over the next two to three years, the company plans to incur ~US$200 million of capex towards 1) setting up a commercial scale manufacturing centre in Mangaluru (~US$100 million) 2) new research centre (~US$50 million) 3) capacity expansion in its developmental services and cGMP drug substance manufacturing and 4) biologics plant, viral testing services and antibody-drug conjugate (ADCs). We believe the company has sufficient free cash flow to support its near term capex requirements. Exhibit 29: Net debt/equity

0.7

0.3

0.0

0.2 0.10.1 0.1

0.2

0.00.10.20.30.40.50.60.70.80.91.0


(X)

Debt / Equity

Source: Company, ICICIdirect.com Research Exhibit 30: Fixed assets turnover ratio

0.60.7

0.9 0.9

1.1 1.11.2

1.0

-0.1

0.1

0.3

0.5

0.7

0.9

1.1

1.3

1.5


(X)

Fixed Assets Turnover Ratio


Exhibit 31: Free cash flow

38.172.7 71.6 58.0

201.2

258.6199.2

-123.9

-150

-100

-50

0

50

100

150

200

250

300


(| c

rore

)

FCF


Over the next two to three years, the company plans to incur ~US$200 million of capex mainly towards commercial scale manufacturing centre in Mangaluru, new research centre and capacity expansion


Risk & concerns High dependency on limited customers

The company earns over 70% of its revenues from top 10 clients including ~30% of revenues from BMS. Any change in priority leading to a significant alteration in contractual arrangements either 1) by way of decline in volume of work or 2) reduction in price at which the services have been offered, can lead to substantial revenue loss.

Client consolidation

In a growing trend of global pharma consolidation, if the priorities of the resultant entity are changed, there can be a loss of business in existing projects. This may severely affect the business prospects.

CMO business prone to higher USFDA scrutiny

The company has signed commercial contracts for two late stage products with existing clients. Starting the commercialisation business would complete SIL’s chain of business from discovery and development to now commercialisation of products. However, the CMO opportunity would come along with higher risk of USFDA scrutiny. In the event of adverse findings from the agency there is a risk of loss of business.


Valuation In the crowded Indian pharma space dominated by generic exporters, SIL stands out as an atypical candidate with new molecular entity (NME) focus. The company is well poised to capture opportunities in the global CRO space on account of strategic outsourcing by global innovators in the backdrop of structural challenges such as an impending patent cliff, controlling costs and keeping new products introduction flow intact. Its proven capabilities have been backed by robust financials, which have been fairly consistent, thanks to regular customer addition and stickiness of existing customers. This is also on account of continuous broadening of services offering by the company since inception. We expect sales, EBITDA and PAT to grow at a CAGR of 22.7%, 25.1% and 28.5% to | 1587.7 crore, | 550.7 crore and | 371.0 crore, respectively, between FY15 and FY18E. We have ascribed a target price of | 445 based on 24x FY18E EPS of | 18.5.

Exhibit 32: Global peers in CRO space (US$ million) Company (CY14/FY15) Market Cap Revenue EBITDA EBITDA margin (%) PAT P/E (Trailling 12M)

Quintiles Transnational 7,504.5 5,737.6 803.9 14.0 414.1 18.1

Covance Inc NA 2,699.6 473.9 17.6 239.5 NA

PAREXEL International 3,144.1 2,330.3 304.5 13.1 152.9 20.6ICON PLC 3,934.9 1,575.0 337.6 21.4 240.3 16.4Charles River Labs 3,414.2 1,363.3 326.1 23.9 174.9 19.5WuXi Pharma* 3,219.7 674.3 172.7 25.6 110.5 29.1Albany Molecular Research 515.1 402.4 78.5 19.5 32.1 16.0Syngene 1,276.4 140.6 46.0 32.7 28.6 44.6

Source: Bloomberg, ICICIdirect.com Research, *Wuxi market cap as of 10th Dec 2015; conversion rate | 66.0/US$


Exhibit 33: One year forward P/E on rolling basis

200

250

300

350

400

450

500

550

Aug-

15

Aug-

15

Sep-

15

Sep-

15

Oct-1

5

Oct-1

5

Nov

-15

Nov

-15

Dec-

15

Dec-

15

Jan-

16

Jan-

16

Feb-

16

Feb-

16

(|)

Price 28.0x 27.0x 23.0x 21.0x

Source: Reuters, ICICIdirect.com Research

Exhibit 34: One year forward PE comparison with CNX Pharma Index and Divi’s Labs

10

14

18

22

26

30

34

Aug-

15

Aug-

15

Aug-

15

Sep-

15

Sep-

15

Sep-

15

Sep-

15

Sep-

15

Oct-1

5

Oct-1

5

Oct-1

5

Oct-1

5

Nov

-15

Nov

-15

Nov

-15

Nov

-15

Dec-

15

Dec-

15

Dec-

15

Dec-

15

Dec-

15

Jan-

16

Jan-

16

Jan-

16

Jan-

16

Feb-

16

Feb-

16

Feb-

16

Feb-

16

Mar

-16

PE (x

)

Syngene CNX Pharma Divi's Labs


Exhibit 35: One year forward EV/EBITDA on rolling basis s

5000.0

6500.0

8000.0

9500.0

11000.0

Aug-

15

Aug-

15

Aug-

15

Sep-

15

Sep-

15

Sep-

15

Sep-

15

Sep-

15

Oct-1

5

Oct-1

5

Oct-1

5

Oct-1

5

Nov

-15

Nov

-15

Nov

-15

Nov

-15

Dec-

15

Dec-

15

Dec-

15

Dec-

15

Dec-

15

Jan-

16

Jan-

16

Jan-

16

Jan-

16

Feb-

16

Feb-

16

Feb-

16

Feb-

16

Mar

-16

(| c

rore

)

EV 21.7x 21.1x 23.1x 19.0x



Financials Exhibit 36: Profit and loss (Year-end March) FY15 FY16E FY17E FY18ETotal Operating Income 859.9 1,090.2 1,336.5 1,587.7Growth (%) 22.9 26.8 22.6 18.8Raw Material Expenses 239.0 316.2 367.5 428.7Gross Profit 620.9 774.0 968.9 1,159.0Gross Profit Margins (%) 72.2 71.0 72.5 73.0Employee Expenses 201.9 238.7 292.1 346.3Other Expenditure 281.1 360.9 456.3 550.7Total Operating Expenditure 66.8 28.4 26.5 20.7Operating Profit (EBITDA) 281.1 360.9 456.3 550.7Growth (%) 28.4 26.5 20.7Interest 7.9 7.3 6.3 5.8Depreciation 81.4 98.8 111.2 115.7Other Income 11.7 8.7 10.7 12.5PBT after Exceptional Items 203.5 263.6 349.5 441.7Total Tax 28.5 36.9 52.4 70.7PAT before MI 175.0 226.6 297.1 371.0Minority Interest 0.0 0.0 0.0 0.0PAT 175.0 226.6 297.1 371.0Growth (%) 29.8 29.5 31.1 24.9EPS (Adjusted) 8.8 11.3 14.9 18.5


Exhibit 37: Balance sheet (Year-end March) FY15 FY16E FY17E FY18EEquity Capital 199.1 199.1 199.1 199.1Reserve and Surplus 645.8 838.5 1,091.2 1,406.7Total Shareholders funds 844.9 1,037.6 1,290.3 1,605.8Total Debt 155.0 155.0 105.0 105.0Net Deferred Tax Liability 4.9 6.3 9.0 12.1Long Term Provisions 13.2 12.5 11.9 11.3Other Non Current Liabilities 64.7 61.5 58.4 55.5Source of Funds 1,082.7 1,273.0 1,474.6 1,789.7Gross Block 938.0 988.0 1,236.0 1,286.0Accumulated Depreciation 434.7 533.5 644.7 760.5Net Block 503.3 454.5 591.3 525.5Capital WIP 105.1 369.1 336.1 501.1Fixed Assets 608.4 823.6 927.4 1,026.6Investments 146.0 96.0 146.0 196.0Long Term Loans and Advances 114.2 214.2 289.2 289.2Other Non current asets 113.1 127.3 132.7 161.1Inventory 38.4 32.9 40.3 47.9Debtors 179.9 175.8 215.5 256.1Loans and Advances 33.8 33.8 33.8 33.8Other Current Assets 72.0 84.7 98.1 119.0Cash 115.7 73.1 48.4 172.8Total Current Assets 439.8 400.3 436.2 629.6Creditors 69.2 124.4 152.5 181.2Provisions 9.4 9.4 9.4 9.4Other Current Liabilities 260.2 254.6 294.9 322.2Total Current Liabilities 338.8 388.4 456.8 512.8Net Current Assets 101.0 11.9 -20.7 116.8Application of Funds 1,082.7 1,273.0 1,474.6 1,789.7



Exhibit 38: Cash Flow (Year-end March) FY15 FY16E FY17E FY18EProfit/(Loss) after taxation 175.0 226.6 297.1 371.0Add: Depreciation & Amortization 81.4 98.8 111.2 115.7Net Increase in Current Assets -133.7 -3.1 -60.6 -69.1Net Increase in Current Liabilities 31.3 49.6 68.4 55.9CF from operating activities 154.0 372.0 416.2 473.6

(Inc)/dec in Investments 206.1 50.0 -50.0 -50.0(Inc)/dec in Fixed Assets -277.9 -314.0 -215.0 -215.0Other Investing Activities -97.3 -116.6 -81.4 -28.7CF from investing activities -169.1 -380.6 -346.4 -293.7

Inc / (Dec) in Equity Capital 173.0 0.0 0.0 0.0Inc / (Dec) in Loan funds 0.1 0.0 -50.0 0.0Dividend & Dividend Tax -133.1 -33.9 -44.4 -55.5Others -0.8 0.0 0.0 0.0CF from financing activities 39.2 -33.9 -94.4 -55.5Net Cash flow 24.1 -42.6 -24.7 124.4Opening Cash 91.6 115.7 73.1 48.4Closing Cash 115.7 73.1 48.4 172.8FCF -123.9 58.0 201.2 258.6


Exhibit 39: Ratios (Year-end March) FY15 FY16E FY17E FY18EPer share data (|)EPS 8.8 11.3 14.9 18.5BV 42.2 51.9 64.5 80.3DPS 6.7 1.7 2.2 2.8Cash Per Share 5.8 3.7 2.4 8.6Operating Ratios (%)Gross Profit Margins 72.2 71.0 72.5 73.0EBITDA margins 32.7 33.1 34.1 34.7Net Profit margins 20.4 20.8 22.2 23.4Inventory days 16.3 11.0 11.0 11.0Debtor days 76.4 58.9 58.9 58.9Creditor days 29.4 41.7 41.7 41.7EBITDA Conversion Rate 54.8 103.1 91.2 86.0Return Ratios (%)RoE 20.7 21.8 23.0 23.1RoCE 19.5 21.3 24.1 25.0RoIC 40.9 66.6 66.1 92.6Valuation Ratios (x)P/E 44.6 34.4 26.3 21.0EV / EBITDA 27.4 21.6 16.9 13.7EV / Revenues 9.0 7.1 5.8 4.7Market Cap / Revenues 9.1 7.2 5.8 4.9Price to Book Value 9.2 7.5 6.0 4.9Solvency Ratios (x)Debt / Equity 0.2 0.1 0.1 0.1Debt/EBITDA 0.6 0.4 0.2 0.2Current Ratio 1.0 0.8 0.8 0.9Asset Turnover (x) 0.9 1.1 1.1 1.2


Appendix Discovery process Discovery covers the process from target identification to target validation to lead generation and lead optimisation. Target identification - A drug discovery programme begins to address a disease or clinical condition without suitable medical products available. It is this unmet clinical need, which is the underlying driver for the project. The idea for a target can come from a variety of sources including academic and clinical research and from the commercial sector. Scientists try to find a protein (receptor) or gene associated with a disease with which a potential drug interacts. Not every target is equally capable of affecting the course of a disease. Target validation - The target validation confirms that interactions with target produce the desired change in the behaviour of diseased cells. It involves intensive in-vitro, as well as in-vivo studies that provide information on the effects of the pharmacological intervention. The result of these efforts helps establish sufficient knowledge so that physiologically relevant model systems could be developed into assays for downstream screening. Lead generation - At this stage, the main goal is to refine targets to try to produce more potent and selective compounds that have properties adequate to examine their efficacy in any in-vivo models that are available. Large libraries of chemicals are tested for their ability to modify the target by means of high-throughput screening (HTS). The search for a molecule that can interact with the target involves scanning thousands of test compounds from compound libraries. Lead optimisation and selection - Lead optimisation and selection aims to identify and synthesise lead compounds, new analogs with improved potency and reduced off-target activities. Effectively, it aims to improve properties of identified leads to support the selection of those compounds with the greatest potential to be developed into safe and effective medicines. The idea is to find a molecule, which will only interfere with the chosen target but not other related targets (high selectivity). Development process After the NME discovery stage narrows down from thousands to a few hundred compounds, these molecules enter the development stage. The development stage spans through preclinical and clinical testing in addition to drug substance and drug product development. Key stages of development Preclinical testing - Exhaustive laboratory and animal experimentation of the preclinical drug candidates happens in this stage for safety and effect to determine whether a compound is suitable for human testing. Clinical trials - Investigational new drug application (INDs) (drug candidates approved by the relevant regulatory body) proceed to clinical trials. Clinical trials are basically studies in humans to determine the safety, efficacy and suitable drug dosage of potential drug candidates.


Major phases in clinical trials Phase I- The compound is tested in a small group (20 to 100) of healthy volunteers to determine the safety of the compound. Phase II – The compound is tested in a larger group (100 to 500) of volunteers who have the disease or condition the compound is designed to treat. The effectiveness of the compound, examination of possible short-term side effects and risks and identification of optimal dose and schedule is analysed in this step. Phase III - Phase III trials test the compound in a much larger group (1,000-5,000) of participants to generate statistically significant information about safety & efficacy and to determine the overall benefit-risk ratio. Bio-analytical testing of clinical trial samples is generated during studies to quantify the safety, efficacy and associated data related to the clinical trial end points. The data generated here helps in evaluating the success or failure of the trial with respect to its predefined objectives.

Exhibit 40: Glossary Term DescriptionADME Absorption, distribution, metabolism and excretion

Assays A test or appraisal to determine components of a substance or object

Bioavailability A subcategory of absorption and is the fraction of an administered dose of unchanged drug that reaches the systemic circulation

Bioanalytical testing Analytical methods used for characterisation, release and stability testing of biotechnological/biological products

Bioequivalence Used to assess the expected in-vivo biological equivalence of two proprietary preparations of a drug

Biostatics Application of statistics to a wide range of topics in biology

Bio-PolymersPolymers that are biodegradable. The input materials for production of these polymers may be either renewable (based on agricultural plant or animal products) or synthetic

Drug Product (DP) Formulation (finished drug product)

Drug Substance (DS) An active ingredient that is intended to furnish pharmacological activity

Investigating New Drug (IND)Programme by which a pharmaceutical company obtain permission to ship an experimental drug across state lines (usually to clinical investigators) before a marketing application for the drug has been approved

In-vitro Studies are performed with microorganisms, cells or biological molecules outside their normal biological context

In-vivo Tested on whole, living organisms usually animals including humans, and plants

Library Synthesis Synthesis of a number of analagous compounds for the purposes of testing

Mammalian An animal of the class Mammalia; mammal

Microbial Application of principles of population biology to microorganisms

New Biological Entity (NBE) Biological products, for example, proteins, peptides, antibodies, viruses and vaccines, used to prevent or treat disease

New Chemical Entity (NCE) Chemically derived; man-made and developed to treat a wide range of diseases

New Molecular Entity (NME) A drug in development; not a version or derivative of an existing and previously investigated, trialed and approved substance

Peptide Synthesis Production of peptides, which are organic compounds in which multiple amino acids are linked via amide bonds

PharmacoDynamics (PD)The study of the biochemical and physiological effects of drugs on the body or on microorganisms or parasites within or on the body and the mechanisms of drug action and the relationship between drug concentration and effect

PharmacoKinetics (PK) Described as what the body does to a drug, refers to the movement of drug into, through, and out of the body

PharmacovigilanceThe practice of monitoring the effects of medical drugs after they have been licensed for use, especially to identify and evaluate previously unreported adverse reactions

Speciality ChemicalsParticular chemical products, which provide a wide variety of effects. Some of the categories of speciality chemicals are adhesives, agrichemicals, cleaning materials, cosmetic additives, construction chemicals, elastomers, flavours, food additives, fragrances, industrial gases, lubricants, polymers, surfactants and textile auxiliaries



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


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