Syngene To Neuland And Laurus: Goldman Sachs Initiates Coverage As India Expands Global Pharma Supply

Goldman Sachs maintains a positive outlook on the Indian contract research, development and manufacturing services industry. It said the companies are strategically increasing their presence in the global pharmaceutical supply chain, aiming to enhance their offerings starting in 2024. This includes expanding capacity following a period of capital expenditure, improving quality and capabilities, and providing customers with additional options to mitigate risks to supply chains.

The industry is set to benefit from vertical integration, which is expected to take off in the current financial year as a result of the active-pharmaceutical-ingredient Production-Linked Incentive scheme, the research firm said in an April 11 note.

Goldman Sachs expects the sector to report operating profit growth of 22% over FY24-27, driven by 13% topline growth while factoring operating leverage benefits due to better mix and higher productivity. "While the sector is trading at premium valuations versus its last five-year average, we argue that higher multiples are warranted as earnings delivery will remain strong," it said.

Goldman initiated coverage on Syngene International Ltd. with a 'buy' rating on its leadership position in the India CRO segment, while it said its CDMO business is set to inflect.

The research firm has also initiated rating on Neuland Laboratories Ltd. with a 'buy' rating on its exposure to a fast-growing CDMO with higher share coming from commercialised molecules.

Goldman has a 'sell' rating on Laurus Labs Ltd. as they are cautious on its earnings delivery due to potential ramp-up delays and sees current valuations as expensive.

• Biotech funding environment: Small and mid-size pharma companies tend to outsource R&D functions more, given lack of resources/expertise internally. However, most of their early-stage clinical programmes are funded by external capital (VC/private equity), which could be volatile and dependent on the global interest rate cycle.

• Product/customer concentration risk: Given the smaller scale that Indian companies are currently operating at, concentration risk will be a key risk, especially if top products go generic, customers fail to renew the contract or switch suppliers for different clinical trial stages.

• Compliance track record: Maintaining quality/compliance standards at both regulatory as well as customer audits is a key factor. Any lapses on this front could lead to product/execution delays at the customer which could result in near-term earnings/valuation pressure.

Goldman Sachs remains optimistic about India's strong position within the global pharmaceutical outsourcing landscape, particularly concerning its engagement with developed markets.

However, their analysis of the historical development and success factors of the Chinese CRDMO industry leads them to say that despite India's promising outlook, its growth may not match the pace of China's growth over the previous decade. This discrepancy arises from India's relative lag in several key areas, like capacities, capabilities and domestic R&D infrastructure.