UBS downgrades Syngene to ‘sell’ on weak outlook, shares slip 3%

Syngene shares slipped three percent in early trade on January 16 after UBS downgraded the counter to ‘sell’ from ‘buy’, with a revised target price of Rs 700.

As a result of “a tough macroeconomy, tight budgets for large, global pharma companies and muted VC funding for biotech”, the outlook for Syngene looks weak.

Syngene’s performance has diverged from other contract research organizations, suggesting the market is not fully pricing in these headwinds for Syngene, added the brokerage.

From its September highs of Rs 860.25, the stock has corrected more than 15 percent to trade at Rs 716.15 apiece at 11 am on the NSE.

With a likely earnings cut and the risk of a softer guidance for the upcoming fiscal year, UBS anticipated a further downside. Syngene’s target price has been cut to Rs 700, from Rs 875 apiece, suggesting a downside of 4.3 percent at the CMP.

Since VC funding for biotech companies has been muted over the past few quarters, there are fewer early-stage discovery projects. As a result, the pressure will continue for the current calendar year, with Syngene’s revenue taking a hit on its exposure levels to medium-sized and small biopharma firms. Even large pharma companies will see challenges as a result of pricing during an election year, leading to a likely impact on their profits.

Earlier, UBS believed there would be easing headwinds in the discovery space, but it hasn’t played out as yet. Additionally, there remains opacity in the company’s near- to medium-term revenue growth prospects. Syngene’s slow ramp-up of its API unit has also caused concern.

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The sector, in the long term, looks positive, but “guidance downgrades from global CROs, lower private equity/VC fundings in biotech, and tighter client budgets suggest FY25E is likely to be challenging until the macro environment improves”.

UBS said that the market expectations for high-teen revenue growth in FY25 is likely to be at risk and thus anticipate earnings cut in the coming quarters, which may disappoint investors.

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