The Biotechnology & Business Notes: $$$ Opportunity for Indian Investors [An Equity Analysis Study]


CDMO (Contract Development & Manufacturing Organization) & CRAMS (Contract Research & Manufacturing Services) INDUSTRY


  • TAILWINDS IN THE CDMO & CRAMS INDUSTRY

  • TAILWINDS= HELP INVESTORS COMPOUND THEIR WEALTH AT A MUCH FASTER RATE

  • INDUSTRY DOES 5 YEARS WORK IN 3-4 YEARS [LESS DEVELOPMENTAL TIME]

  • In nature- there are diseases caused by many proteins.

  • So, we need consistent R&D by global innovators eg: NOVARTIS, PFIZER & SANOFI= SPEND 20-22% OF THEIR SALES ON R&D

VALUE CHAIN OF THE DRUG DISCOVERY PROCESS

  • DRUG DISCOVERY PROCESS [TAKES 12-15 YEARS]:

  • DRUG DISCOVERY—DRUG DEVELOPMENT (PHASE 1, 2 & 3)—MANUFACTURING—COMMERCIALISATION

  • THE BIGGEST PROBLEM OVER HERE IS THAT THE RETURNS ON R&D FOR THE GLOBAL INNOVATORS HAVE BEEN FOLLOWING IN THE LAST DECADE

  • due to too many litigations over patents and proliferation of generics

  • Suppose your molecule is in PHASE 3 (final phase of development) & you have set a plant because now you think your molecule is going to be manufactured & commercialized. BUT, SUDDENLY- THE DRUG FAILS IN PHASE 3 CLINICAL TRIALS.

  • SO, the facility that you set up becomes redundant & you face a huge LOSS


THIS IS WHERE THE CRAMS & CDMO INDUSTRY COMES IN


  • CRMS & CDMO OUTSOURCE THE DRUG MANUFACTURING & COMMERCIALIZATION

  • NEW TREND IN BIOTECH (VALUE MIGRATION): FROM CHEMICAL ENTITIES, THE SHIFT IS HAPPENING TO BIOLOGICAL ENTITIES [NEW DRUG APPLICATIONS (NDA) VS BIOLOGICS LICENSE APPLICATIONS (BLA)]

  • CHEMICAL ENTITIES= eg: CROCIN is made through a chemical reaction

  • BIOLOGICAL ENTITIES= eg: VACCINATION. a living organism/microbe/bacteria/virus is inserted in your body & your body reacts to that biological entity; because a living organism (biologics) is entering your body

  • 8 OF THE TOP 10 SELLING DRUGS IN THE WORLD ARE BIOLOGICS= eg: #1= HUMIRA

  • NEXT 5 YEARS= EXPECTED THAT 50-50% OF THE R&D PIPELINE OF GLOBAL INNOVATORS WOULD BE BIOLOGICS

THE REASON FOR THIS VALUE MIGRATION IS THAT CHEMICAL ENTITIES LEAD TO ADVERSE EFFECTS. Biologics are for specific niche diseases where controlling or combating is difficult.

MODE OF DELIVERY OF BIOLOGICS= INJECTIBLES


SINCE THERE HAS BEEN A GROWTH IN BIOLOGICS IN THE R&D PIPELINE. CDMO’S & CRAMS ARE IN THE TAILWINDS STAGE WITH A LOT OF POTENTIAL GROWTH

2 TYPES OF CDMO & CRAMS:

  1. CONTRACT RESEARCH ORGANIZATION: Help in research, discovery & pre-clinical services [animal testing, target validation]

  2. CONTRACT MANUFACTURING ORGANIZATION (CMO) or CDMO: Help in developing the process [manufacturing, scaling & technology transfer]

  • GREAT OPPORTUNITY FOR INDIAN INVESTORS

CDMO MARKET SIZE= 65 BILLION USD (2017)

  • continues to grow at 7 to 8%

  • EXPECTED TO DOUBLE BY 2026= 116 BILLION USD (2026)

CRO MARKET SIZE= 34 BILLION USD (2018)

  • continues to grow at 7 to 8%

  • EXPECTED TO DOUBLE BY 2026= 55 BILLION USD (2025)


REASONS FOR TAILWINDS IN THE INDUSTRY:

  1. RISING VC FUNDING IN STARTUPS THAT FOCUS ON R&D AND OUTSOURCE MANUFACTURING TO CDMOs & CROs

  2. RETURNS OF R&D ARE FALLING FOR LARGE PHARMA COMPANIES. TO CUT COSTS= THESE GUYS ARE INCREASING OUTSOURCING

  3. BIG INTERNATIONAL BIO-PHARMA PLAYERS LOWER COSTS BY 40-50% BY OUTSOURCING TO CDMOs & CROs IN COUNTRIES LIKE INDIA & CHINA

AVG. SALARY OF INDIAN SCIENTIST= 60,000 USD

AVG. SALARY OF CHINESE SCIENTIST= 100,000 USD

AVG. SALARY OF WESTERN CRO SCIENTIST= 1,75,000 USD


INDIA PAYS WAY LESSER TO ITS SCIENTISTS!! SO, IT IS CHEAPER FOR OTHER COUNTRIES TO EXPLOIT THIS. AS AN INDIAN, THIS CAN BE A GREAT INVESTMENT OPPORTUNITY.


IN INDIA= 
1990= IT EXPORT BOOM because of LOWER COST
2005= PHARMA BOOM because of LOWER COST
TEXTILE EXPORTS ALSO BOOMED because of LOWER COSTS (CHEAPER LABOUR). Eventually, Nepal & Bangladesh ate away India’s pie. 

NEXT INDUSTRY WHICH CAN DO WELL BASED ON LOWER COSTS & CAPABILITY OF INDIAN PLAYERS= CDMO & CHEMICAL INDUSTRY

THE CDMO INDUSTRY IS A FRAGMENTED INDUSTRY [ONLY 400-500 PLAYERS]

  • WARREN BUFFET & HOWARD MARKS= say that there is no profitability in fragmented industries.

  • BUT, THIS ISN’T TRUE IN THIS CASE. BECAUSE GLOBAL INNOVATORS LIKE PFIZER OR SANOFE WILL SELECT ONLY 2 VENDORS

FOR EVERY 1 MOLECULE- THERE ARE 2 VENDORS

THEREFORE, CDMO INDUSTRY=

  1. FRAGMENTED ON THE INDUSTRY LEVEL

  2. CONSOLIDATED ON THE MOLECULAR LEVEL

i.e. that the contract for one molecule wouldn’t be given to >2 vendors

3 TYPES OF CDMO/CMOs:


  1. SPECIALITY CRAMS= possess niche technology. eg: Suven Pharmaceuticals which are CENTRAL NERVOUS SYSTEM CRAMS

  2. CAPACITY CONSOLIDATORS= eg: PIRAMAL & STRIDES & SHASUN PHARMA= THEY ACQUIRE CAPABILITIES THEY DON’T HAVE. They’re into acquisition

  3. VERTICALLY-INTEGRATED= Integrated from CRO to CDMO [FROM DRUG DISCOVERY TO MANUFACTURING]= LIKE A HIDDEN PLATFORM

eg: SYNGENE IS VERTICALLY-INTEGRATED


INSIDE THE VALUE CHAIN: HOW DO CRAMS MAKE THEIR MONEY & WHERE DO THEY MAKE THE MOST

  1. DRUG DISCOVERY STEP= CRO & CRAMS make revenue from near 0.5 MILLION USD TO 2 MILLION USD [4-16 CRORE INR]

  2. PHASE 1 OF DRUG DEVELOPMENT= Suven Pharma & other base CRAMS deal with the supply of intermediate Active Pharmaceutical Ingredients (APIs)= REVENUE POTENTIAL= 2-6 MILLION USD [14-50 CRORES]

  3. PHASE 3= CRITICAL STEP= POTENTIAL OF REVENUE INCREASES BY 10x [15-50 million USD or 100-350 crores]

Thus, CRAMS industry has a NON-LINEAR BUSINESS MODEL


MAIN COMPETITOR OF SYNGENE IS VUSHI APTECH [CHINESE COMPANY WITH 1000 PROJECTS; they started of as a CRO & then diversified as a CRAM]

  • The moment the molecules go to PHASE 3, the revenue potential increases by 10x. Out of these 100 projects, not all molecules will translate into 10x revenue because they may fail in phase 3. But, those which do go ahead- make 10x more money



EQUITY RESEARCH & ANALYSIS: A SYNGENE CASE-STUDY


Current Market Price (26th June, 2021)= 584.85 INR

  • INDIA’S FIRST CRO {1993}

  • IN 2002= facility of 20,000 sq. ft.

  • IN 2021= facility of 1.9 million sq. ft.

  • Cater to the TOP 8 Pharma companies of the world

  • NOT ONLY LIMITED TO PHARMA CDMOs OR CRAMs. They supply to industries like animal healthcare, consumer health & FMCG too !!!

  • THEIR CLIENTS (362): UNILEVER, BMS, BAXTER, ZOETIS (one of the largest animal health manufacturers in the world), AMGEN, (GOT MERCK & GSK CONTRACTS RECENTLY)

  • Rise in client base over the last 5 years= 200-256 clients to 362 clients

  • IN 2002= EMPLOYEE BASE OF 100 PEOPLE

  • IN 2020= EMPLOYEE BASE OF 5000 PEOPLE (50X SPURT!!!)

INVESTORS MUST LOOK AT HOW MANY CLIENTS THEY WON & HOW MANY THEY ARE IN THE PROCESS OF MINING 

WARREN BUFFET= “BUSINESS IS A DYNAMIC MOVIE, NOT A STATIC PICTURE”

3 BUSINESS MODELS OF GENERATING REVENUE:

  1. FULL-TIME EQUIVALENT (FTE) BASIS: This is like the IT- head count business model. Global Innovators would hire Syngene scientists to do their R&D work inside Syngene’s labs & infrastructure. Renewals annual or triennial basis (once every 3 years)

  2. FEE FOR SERVICE (FFS): Small projects (15-20 days) outsourced by global innovators to Syngene’s scientists that work inside Syngene’s labs & infrastructure.

  3. EQUITY FOR SERVICE (EFS)

THE $$$ TRIANGULATION: SYNGENE'S 3 BUSINESS SEGMENTS:


I). DRUG DISCOVERY SEGMENT= for both chemicals & biologics= (32% of the sales)= FTE BASIS

  • They often start small FFS businesses that translate to big FTE revenue models. Eg: Done with MERCK recently.

  • Syngene has Bioinformatics services and Viral Testing facilities for discovery biology, among other capabilities.

II). DRUG DEVELOPMENT & MANUFACTURING (37% of the sales)= FFS BASIS

  • Provide services for pre-clinical, phase 1, phase 2 & phase 3 trials

  • In 2018= They set up Biologics manufacturing capacity

  • CAPEX (CAPITAL EXPENDITURE)= Establishing an API plant based out of Bangalore= 600-700 crores being spent on this project

  • This plant is already commercialised, but will receive the regulatory clearances over this year (2021)

  • The company is thus diversifying from a CRO to a CRAM i.e. FORWARD INTEGRATION FROM CRO TO A COMPLETELY INTEGRATED PLAYER


HOW DO CROs (like Syngene) GENERATE REVENUE

  • SYNGENE FOLLOWS THE FTE & FFS MODELS

Since they are evolving forward from a CRO to a CRAM- they can now provide an integrated platform to their clients. Thus, the clients who signed contracts with them for drug discovery & development- might also take the contract forward for the manufacturing & commercialization of the drug, as the clients wish to reduce their lead time to the markets.


Moreover, if the company (Syngene in this case) has the domain knowledge of the molecule because of its discovery and development- there is a very high probability that the molecule will also be manufactured & commercialized by the same company


PROOF THAT SUBSTANTIATES TO THE ABOVE COMMENT ABOUT HOW SYNGENE IS BECOMING A PLATFORM BUSINESS:

  1. Recently, Syngene received a contract from a Japanese MNC. Syngene discovered, developed & manufactured the molecule for the MNC. It also went on to get the contract for the new chemical entity when the molecule was about to get launched in the markets.

SYNGENE’S GRAND STRATEGY: A Vertically-Integrated Business Model

  • They wish to provide an integrated platform to the users wherein they cater to all the steps of the pipeline:

RESEARCH, DISCOVERY, DEVELOPMENT & MANUFACTURING

III). R&D SEGMENT (31% of the sales)


  • They have old customer relationships that they start on a FFS basis.

  • Once the clients like their service- that FFS model of the small project is converted into a dedicated R&D segment.

  • PSYCHOLOGY= FOOT IN THE DOOR TECHNIQUE= CONVERTING A CLIENT (EG: AMGEN) RELATIONSHIP FROM FFS TO A LONG TERM RELATIONSHIP

5 MAJOR CLIENTS:

  1. AMGEN- 170 scientists; 60, 000 sq. ft. of laboratory space; [Recently expanded their capacity from 25, 000 sq. ft. to 60, 000 sq. ft. & scientists from 100 to 170]

  2. BAXTER- 200 scientists; 70, 000 sq. ft. of laboratory space

  3. BRISTOL-MYERS SQUIBB- 550 scientists; >2,50,000 sq. ft. of laboratory space [expected to expand in 2024]

  4. BAXTER- 200 scientists; 70, 000 sq. ft. of laboratory space

  5. HERBALIFE- 8 scientists; 3,200 sq. ft. of labo