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We parsed the commentary of Charles River (CRL), a global CDMO player that offers preclinical and post-trial services along with manufacturing capabilities. While we are cognizant there is not a perfect overlap, a certain commonality exists across discovery services and pre-IND work as well as target customers. We highlight sobering commentary put out by CRL in its Q2 earnings call which is a change from the positive narrative of recovery in biotech funding. CRL believes there is an urgency amongst clients to prioritize trial work with an eye on commercial marketing. This implies less of a focus on early-stage research and discovery – areas which are important for Syngene. CRL believes the soft demand and cutback in large biopharma would continue in 2025, a scenario which is certainly not factored in ours as well as consensus growth expectation for Syngene. Reckon what such a commentary from a global peer does is put the spotlight back on Syngene H2 growth. For now, our ADD rating stays even as the purpose of this update is to highlightthe developing backdrop amidst which Syngene has to deliver a strong performance to meet FY25 guidance.

Key global CDMO peer gives sobering outlook

We parse the Q2 commentary of key global player Charles River (CRL) which has given a sobering outlook for key verticals like early-stage research and discovery services. According to the company, recent emerging trends indicate a softening demand outlook which has resulted in a much more negative outlook for rest of CY24. CRL alluded to major restructuring programs undertaken by global biopharma companies likely triggered by IRA in US and/or patent expiration leading to tighter budgets and additional pipeline reprioritization activities in current year. CRL has pointed out to a slower recovery in biotech which is likely to persist in 2025.

Disproportionate focus on clinic vs IND work says CRL

CRL believes there is an urgency to push drugs through trials and into commercial production; what this has meant is pre-IND work and early-stage discovery has taken a kind of back seat. While company is not willing to wager how long this (disproportionate focus on clinic) would continue, it is hopeful that successful attempts to get drugs to market would fund more work on IND phase and then ultimately more discovery requirements.

Where does this outlook leave Syngene?

We recollect Syngene’s majority of revenues today still accrue from research services even as it creates capacity to cater to small molecule and biologics manufacturing. Syngene management has indicated a sharp 50% recovery in RFPs across discovery and manufacturing verticals; albeit a potential slowdown in research and pre-IND work demand would make Syngene vulnerable as ex-manufacturing business comprises of short gestation projects. We note that CRL had downgraded their CY24 guidance and now expect a revenue decline vs growth earlier as it does not expect overall demand from biopharma clients to improve in H2 CY24.

Subdued peer commentary puts H2 Syngene guidance under spotlight

Syngene had maintained its outlook for a growth rebound in H2 though subdued commentary by a global peer would likely create a situation where pace of growth delivery might be put under the spotlight. We do not change our estimates (continue to expect a strong second half recovery necessary to achieve full year guidance) though we would tend to give increased weightage to a possibility that any miss on growth is not completely ruled out. Retain ADD rating with unchanged multiple and TP based on 45x FY26 EPS.

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