There’s More To Syngene Stock Surge Than Remdesivir Supply Pact

The stock now trades at a record of Rs 597 apiece, rising 190% since the global equity selloff triggered by the pandemic in March. That compares with a twofold jump in the Nifty Pharma Index and a 57% gain in the Nifty 50 Index.

The recent trigger for Syngene, a subsidiary of Kiran Mazumdar-Shaw-controlled Biocon Ltd., was its voluntary licensing agreement with Gilead Sciences Inc. to make and supply Remdesivir in India and other markets. The drug is used in severe cases of Covid-19, and was administered to U.S. President Donald Trump after he contracted the virus.

The Covid-19 patient tally has been increasing worldwide—with 35.6 million cases and 1.4 million deaths—and in absence of a vaccine, Remdesivir is likely to get major market share, Shrikant Akolkar, a research analyst at Ashika Stock Broking, said in a note. Gilead forecast 2 million treatment courses by December, he said, adding there’s already a shortage in India.

But the potential demand for Remdesivir is not alone driving the stock.

Marquee New Clients

Despite lockdown restrictions impacting operations in the first quarter, the management guided for double-digit revenue growth for the full 2020-21 fiscal on the back of client additions, extension of existing contracts and rising contribution from manufacturing and biologicals.

“With elite client additions like Amgen, Zoetis, Herbalife, GSK, etc., and multiple year extension of BMS and Baxter contracts, the company remains poised to capture opportunities in the global contract research,” Siddhant Kandekar of ICICI Securities wrote in a note.

The company offers research services in medicinal chemistry and biology in early stages of drug discovery, and offers discovery and development services for small and large molecules, antibody-drug conjugates and oligonucleotides.

Strong demand for research services and ramp-up of high margin discovery services and API business will benefit the company, according Dalal & Broacha. The brokerage expects a re-rating for Syngene citing its research infrastructure in India, along with a professional second line of management with international exposure in discovery sciences.

Capex Nearly Done

The company is on the verge of completing capital expenditure on a facility.

It’s spent $463 million so far this year and has earmarked another $87 million by year-end towards expansion in Bengaluru and Phase 2 in Hyderabad. This is funded through internal accrual.

“With the completion of the large capex by the end of fiscal 2021, capex plans are expected to be moderate,” Crisil said in a note. The operating margins are expected to sustain at 31-33% over the medium term, driven by ramp-up in the facilities in Bangalore and Mangalore and effective cost cuts, it said.

Healthy Cash Flows, Improving Financials

The company’s revenue and profit in the last five years and margins have stayed steady.

The company has cash and cash equivalents of around Rs 1,000 crore as of June 30. Additionally, it is expected to accrue Rs 700-800 crore each in fiscals 2021 and 2022.

“This will be sufficient to cover debt repayment obligation of Rs 367 crore and Rs 50 crore in fiscals 2021 and 2022, respectively, and annual capex of Rs 650-700 crore,” said Crisil.

Key Risks

• Potential exit of a large client.
• Adverse action or delay in getting approval from the U.S. drug regulator for its manufacturing site.
• Slower-than-anticipated scale-up of recently completed capex.