Syngene Stock Analysis: Seeking Wisdom in Indian CRAMS Industry

Reading Time: 21 minutes

I will be analyzing one of the most interesting business models that I’ve ever come across. Don’t worry I am not writing this as a Buy or sell report. At SOIC, we like to prepare ourselves for any eventualities by doing business analysis of unique businesses that India has to offer.

Before I start the business analysis of Syngene. I would like to tell you about a mental model. Now, you will be thinking not another mental model Ishmohit. 

But, I promise you that this is one of the most interesting mental models that we have come across, it is used by various businesses and marketing teams across the world.

Foot in the Door Technique

Just ask yourself, “How can a person be induced something that they would rather avoid”? The simple answer lies in the usage of the commitment and consistency principle found in psychology.

Just think about this: why do websites ask for your email id? By sending free content, vouchers, 1+1 schemes, and by crediting money in your

virtual wallet, website owners actually try to get their foot in the door before asking for bigger compliance like buying merchandise or a subscription.

This technique is not only used by website owners but also by experts in various other fields to get compliance. I was left awestruck when I recently learned how Chinese made American soldiers comply with them using the commitment and consistency principle by slowly getting their foot in the door.

During the Korean War, many American soldiers were captured by the Chinese communists.

At the Prison camps, the Chinese adopted a very different approach to treat their prisoners as compared to the other countries. After the war, American psychologists questioned the returning prisoners to determine what had occurred.

As the Chinese were very successful in getting Americans to inform on one another and to give away

secret information. But, how were Chinese able to get compliance out of soldiers who were trained to provide nothing but their rank and serial number. The answer lies in the usage of Foot in the door technique.

For instance- Prisoners were frequently asked to make statements soo mildly Anti-American or Pro-Communist (eg- in a communist country unemployment is not a problem). But once these requests complied with bigger requests were made.

A man who had just agreed with the Chinese interrogators that the United States is not perfect might then be asked to indicate some of the ways in which he thought so.

This is how Foot in the door technique works, by getting someone to accept smaller compliances you can get bigger compliance accepted.

Why Syngene is a unique listed play because we can see the application of this mental model in the business. More on this in the later section. If you have read so far and plan to continue reading. Then I have successfully used Foot in the door technique to grab your attention 🙂

Lay off the land

These days we have been witnessing many terms like CRAMS/CDMO/CRO being floated around. What does the term mean? What are the trends driving the industry? Who are the major players in the industry?

To know more about the industry let’s read the conversation between the seeker (You&Me), Buffett, and Charlie Munger.

Seeker: Hi! Buffett and Munger. Hope both of you are keeping well.

Buffett: We still feel as energetic and young as ever. (in his usual enthusiastic style)

Munger: Hi, hope everything is good at your end too. (Charlie looks away as if he is thinking about something else)

Seeker: Yes, have been researching a lot about Contract research and manufacturing services lately.

Buffett: Oh, that is an interesting sector and the sector that has been experiencing tailwinds for a long time now.

Munger: One should completely understand what they are doing before taking a bet in this sector. Risk comes from not knowing what you’re doing. Here you will find managements who are impeccable in execution to managements who de-worsified in real estate Nbfcs to managements who keep promising big but deliver very little in terms of shareholder returns.

Seeker: Agree with you. I had a lot of questions related to the sector. Can you please help me understand?

Buffett: Why not? We will tell you about the sector from scratch. As it is important to reason from first principles rather than by analogy.

Munger: another way to improve as an investor is to keep asking why, why, and why to every extraordinary result that you find. Whenever you see extraordinary results happen in front of you, keep asking yourself about how sustainable is this? What can break these results?

Buffett: Before understanding about the Crams industry. Let’s understand the need for the industry, key trends, why tailwinds are there. You must understand these before we talk about CRAMS/CDMO industry. To be a good investor, you must learn how to zoom out (look at macro) and zoom back in (micro). You must learn to not ignore the forest for the trees, and at the same time, you have to pick the correct tree to provide you shade.

Munger: To truly understand what happens in the CRAMS industry. One needs to understand the entire drug discovery process first which is where the value chain starts.

Buffett: Right. How much time do you think it takes for a new molecule from discovery (in the lab) to reach commercialization (commercialize)

Seeker: somewhere around 6-8 years.

Buffett: close, but not quite. It usually takes between 10-15 years to get a drug approved. As it includes various stages like discovery, development which further includes 3 stages of clinical trials, Agency review and then finally commercialization.

Munger: Warren, I think it would be better if we explain the entire process step by step.

Buffett: The entire CRAMS industry is based on the journey of a novel molecule from the lab to the commercial markets. Here look at this chart before we proceed

Seeker: That chart looks really interesting, basically everything starts with the discovery of the drug.

Buffett: Yes, and from there on it proceeds. The entire work related to R&D is done by innovator pharma companies and they spend 20-22% of their sales on R&D every year. Before I tell you about the need for Crams industry. Let’s understand the drug discovery process step by step.


In the first step, a target is identified and validation kicks off the whole drug discovery process.

The target could be a protein or pathway in the body which had been implicated in a particular disease or a condition.

Researchers try to be as sure as possible that a target is involved in some way in the disease or condition before proceeding. Once the discovery and validation process is done, search to find entities (molecule) that can have an effect on it begins.

This usually involves Lab testing for 10,000 or more compounds to determine which shows some activity against the target.

Those compounds can then be tweaked to improve their Potency against the target. This process is known as lead optimization.

Anything to add Charlie?

Charlie: I have nothing to add.

Warren: In the second step, usually very few compounds from those initially considered would pass through to more rigorous Pre-clinical studies. Here, In Vitro and In vivo experiments are carried out. In vitro is basically, “within glass” and In Vivo is basically “in the living”. ‘In Vitro’ involves testing cells or molecules outside their usual biological surroundings and ‘In Vivo’ involves the use of animals to test drugs. Now, why is In vivo required? Because In Vivo tells the scientists about how the drugs would behave within the body. Pre-clinical testing takes between 1-3 years.

So far so good?

Seeker: Yes, Warren. I will ask if I have any questions.

Warren: Great. Now let’s talk about the third step, the third step involves the most crucial stage of the drug discovery. It involves doing clinical trials to prove the efficacy of the drug. These clinical trials are done on human volunteers. Here is where things get interesting. These trials are divided into 3 phases: Phase 1, Phase 2, and Phase 3.

Phase 1 trials are the first tests of the drugs involving human participants. In this, the drug is usually tested on

80-100 healthy volunteers to determine the safety of the drug. The overall likelihood of transition from Phase 1 to

Phase 2 is 63.2%. This phase is typically conducted for safety testing and is not dependent on the efficacy results for candidates to advance.

Coming to Phase 2 trials, here 100-250 people who are suffering from the disease are given the drug. But, the transition rate from Phase 2 to phase 3 is 30.7%, which is the lowest of all the 4 phases of the process. Why do you think is it so?

Seeker: maybe unlike the first stage where only the efficacy is tested. In this stage proof of concept might be?

Warren: Exactly! This is also the stage where the innovator (drug maker) has to decide whether to proceed to Phase 3 trials or not, which are much more expensive.

Coming to the Phase 3 trials, here 1000-5000 volunteers who are not in a good condition are given the drug. It is done to confirm the effectiveness of od the drug in the human body. And success rate over here is somewhere close to 58.1% of the drug passing to the next stage which is for the approval by the appropriate regulator.

Seeker: Basically, this is the game of optionality. Higher the number of molecules in the pipeline, the higher are the chances of success.

Warren: You have a good grasp of the idea. Now, after the molecule has passed the third stage. A new drug application (NDA) or a Biological Licence Application (BLA) is submitted to the regulator and here the chances of success are at 85.3%.

Charlie, anything?

Charlie: You’ve done a good job Warren. Just to add more, this is how the probability of a new compound/molecule going from Phase 1 till the letter of approval looks like:

63.2% (Phase 1) * 30.7% (Phase 2) * 58.1% (Phase 3)* 85.3% = 9.6%

Probability of Success

Probability of Success

Warren: Moreover, the entire process is time-consuming and it takes a lot of money to commercialize one molecule. Just, check the amount spent by innovator companies on successfully commercializing one molecule:

Average Cost of Developing an NME (in USD Billion)


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The cost of R&D has increased over the years. As you can observe. Now you must be thinking, that Warren has only explained one side of the value chain, where do the Crams/Cdmo/CRO players fit in?

Seeker: Exactly my question.

Warren: Charlie can you please explain the need for Crams/Cdmo/CRO industry. Hope you have something to add this time :p

Charlie: These days I have been observing many investors say that the CRAMS industry is doing well. Rather than making such blanket statements, let’s invert the question and ask Why is the Crams industry doing so well and why is it required in the first place?

Seeker: interesting…

Charlie: Let’s start with the need for a contract services provider to Global Innovators in the first place. Let’s imagine, that you run a global innovator company and currently you are working on some molecules which are at various stages of development. One molecule of your shows very high potential and has successfully reached the 3rd Phase of clinical trials. Since you want to bet big on this molecule, you have already set up a production facility for the commercial manufacturing and have taken leverage to do so.

But, in Phase 3 trials, the molecule has an adverse reaction in the patients and isn’t able to progress to the next stage. What happens to the facility which you have set up using debt?

Seeker: that facility would be of no use to me as the molecule hasn’t progressed.

Charlie: Exactly. This is one of the major reasons why Global Innovators are increasingly outsourcing their discovery, development, and manufacturing activities to capable service providers in India, China, Switzerland, and Korea, etc.

Seeker: What are the other reasons, Charlie?

Charlie: other reasons include measures like cost-cutting, some Crams businesses specialize in technology which gives added capabilities, willingness to reduce Fixed costs and to focus on their own core areas rather than Manufacturing, to reduce lead time to market and to offset internal capacity constraints. Just consider this:

Cost arbitrage Average salary of a scientist in $

  • India: $60,000
  • China: $100,000
  • USA: $250,000

Average Salary of a Scientist (in USD)

Seeker: that seems like a big cost arbitrage.

Charlie: Absolutely. In some cases, cost savings for global innovators by outsourcing could be as high as 50%. Moreover, there is a new trend in the industry of Biotech startups being backed up by VC firms, these biotech startups just focus on the molecule and outsource 100% of the manufacturing to CDMO/CRAMS companies.

Seeker: there seems like a trend in the industry like what happened with the Indian IT exports and Indian Pharma exports.

Charlie: Well said. See if you study the success of any Indian export story, it is built on two pillars, those two pillars are namely Quality at a reasonable price. In this industry, a similar trend seems to be playing out.

Seeker: Charlie, How big is the industry, and what are the future growth prospects?

Charlie: According to estimates by Frost and Sullivan, the industry is valued at $100 billion and in the next 5 years it is expected to grow at 7-8% annually. The industry is really fragmented with more than 600 providers of CRAMS services. The pipeline of global R&D drugs remains very healthy:

Global Contract Manufacturing Industry (in USD Billion)

Currently, large biopharma companies outsource ~25% of their manufacturing and emerging Biotech firms outsource 100% of their manufacturing. There remains an ample size of the opportunity for players who are capable and who have the capability to grow.

Seeker: Charlie, if the industry is fragmented, do you think it is worth our time? As often I have witnessed that fragmented industries have cut-throat competition and no one makes high margins.

Charlie: there is a different trend in this industry. As some CRAMS players have differentiated them in terms of their specialty and technology. Additionally, Innovators only prefer to deal with 2 suppliers for getting their molecules manufactured. In a way, the industry is concentrated at the molecule level and players who are into the manufacturing of Novel Chemical entities make margins upwards of 25%. Just consider this, Suven pharmaceuticals have been making margins of 30%+ operating profit margins for a while now.

Seeker: this looks like a case of fragmented from the outside but consolidated on the molecule level from the inside. Charlie, before we proceed, I have a really basic question on the difference between a contract research organization(CRO) and a Contract development manufacturing organization (CDMO).

Munger: good question son. Basically a contract research organization helps the global innovator on the discovery front of the molecule. CRO services mostly consist of discovery services like target identification, lead discovery, target validation, target optimization, Preclinical and clinical, and these services are carried out at a very small scale. The global CRO industry is valued at $32.9 Billion and it is expected to grow at 7.6% Cagr to reach revenues of $61 billion by 2025. The key underlying reason for this growth is the need of global innovator companies to cut down on their R&D costs.

On the other hand, Contract Development and manufacturing services consists of developing the molecule, process research, tech transfer, and manufacturing the intermediates/API throughout the different phases of drug discovery.

It also includes the clinical and commercial supplies of APIs and intermediates to global innovators.

The industry is currently valued at $62billion and is growing at a CAGR of 7-8%.

In a nutshell, CRO is basically providing servicing for research activities and very little capex is needed here.

Whereas, the CDMO business requires the services of manufacturing and is a business that has a long gestation time and benefits accrue once the CDMO manufacturer starts using the facility fully.

As CDMO players have to build the facilities first, get it approved by regulators and then wait for the commercialization of molecules to start utilizing the facility.

Warren: There’s a bit of history behind the way Contract research organizations came into being. The roots of the current CRO marketplace can be traced back to the 1940s and 1950s, with the foundation of companies like Huntingdon Life Sciences and Charles River Laboratories. They provided either animals for clients to experiment on, or conducted the tests themselves, in a wide range of scientific areas rather than just pharmaceuticals.

The industry only began to emerge in its present form in the late 1970s and early 1980s. Quintiles (IQVIA), today the largest CRO in the world, was founded in 1982 by Denis Gillings.

Other top CRO’s of the world include companies like Covance and Parexel.

Charlie: And the CDMO industry was started decades ago as a niche service, and its rise has been fueled by failure in the pharma industry, as we discussed earlier. Moreover, CDMO’s provide extra capacity and specialty services to global innovators which might not be available in the house.

Seeker: Insightful. Clears up a lot of doubts I had about the terminologies. Warren, I had a very foolish question, I am thinking whether to ask or not.

Warren: A fool remains a fool until he asks. Don’t worry, we are not judging anyone. Asking questions and seeking answers is the best way to reduce foolishness. This is what Charlie and I have done throughout our lives and continue to do so 🙂

Charlie: A fool is a precursor to saviour. (Laughs)

Seeker: Great. So my question is, how do the CRO and CDMO players make money. Since drug discovery is an unpredictable activity, how does the industry make money?

Charlie: I will start with the backend of the question and let Warren answer on the CRO industry. How does CDMO make money in an unpredictable activity like drug discovery? The answer lies in the services that they provide. Just look at this graph:

As Warren told you earlier about how the number of patients keeps on increasing with every passing phase of the molecule.

Similar things happen with the business of a Crams service provider.

Entire business scale-up is dependent on the scale-up of the molecule. In an early drug discovery process, a typical contract manufacturer pockets USD 0.5 to 2 mn during the drug discovery phase.

On the other end of the spectrum, a CMO stands to gain in the range of ~ USD15mn – > USD50mn annually for the contract manufacturing of drugs depending on the type of molecule (small or large molecules).

This is a non-linear business model if you step back to think about it. How to be a successful CDMO? The answer is simple, get as many projects as possible. Basically participate in the journey of as many molecules as possible. If you read about WUXI Apptec which is one of the most successful CRAMS manufacturers, you will get to know that they have close to 1000 active projects.

As the probability of getting more molecules commercialized increases if you have more number of projects:

Warren: This is basically getting one optionality after the other. As you keep increasing the optionalities, one of them gets commercialized and your volumes move up by 10x and the margins keep improving after every stage is successfully completed. The best bit is, that since you’re a service provider participating in the journey of a molecule. You don’t have to take the risk of R&D failure, and you start making money the moment the molecule enters your Pipeline.

Charlie: Absolutely. Successful commercialization can lead to very high growth. But, it is a lumpy business in general. As successful commercialization takes time, and generally production of Apis and Intermediates is done in batches depending upon the need of the global innovator and the phase that the molecule is in. Thus, in the short run is a lumpy business, but if the pipeline/number of projects are healthy for a CRAMS player, it’s generally a very healthy sign of future growth.

Seeker: feels like I have done a PHD in understanding how the CRAM/CDMO industry works. Before we proceed to how CRO’s make money, I had a follow-up question on the CRAMS/CDMO space. What kind of players there are in the industry?

Warren: Basically there are 3 types of players in the industry, first are your companies which possess unique capabilities, or also known as specialty CDMO’s. These specialty CDMOs bring differentiated technology or bring a niche ability to the table. For instance: high potency API manufacturing, development and manufacturing of large molecules, etc, and emerging platforms for cell and gene therapies (more on this later). In the Indian context, you can consider Neuland labs peptide ability, Syngenes Biologics ability as a type of specialization which these players have achieved.

The second type of CDMO players in the industry are those which can be classified as Capacity Consolidators, these players have acquired capacities in the past or acquire capabilities which they do not have inhouse. Some of the capacity consolidators:

EY Presentation Capacity consolidator:

Top Consolidators in the CDMO Industry (2012-2016)


Country of Origin

Revenue (US$,2016)

EBITDA Margin (2016)

N.o of Acquisitions































WuXi PharmaTech





Strides Shasun
















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Coming to the third category of CDMO players, these are vertically integrated companies. Basically, they act like a pure platform, from providing Discovery service till the manufacturing services. By offering the entire value chain to big pharmaceutical companies, these players mainly seek to establish a lock-in effect. This can be especially effective for biopharmaceuticals, an area in which replacing manufacturing partners is very time consuming and costly due to the impact of the manufacturing process on the final product. (more on biologics later)

For eg- Lonza and Wuxi Apptec which are some of the largest CDMO players are vertically integrated from providing CRO services to manufacturing. In India, Sygene is one of the only players that is vertically integrated.

Seeker: Great, I am currently writing a report on Syngene. Thank you with that bit of information 🙂 Charlie: Coming to your second question. How do CROs make money?

Warren: Let’s understand the dynamics of the CRO industry first. There are currently 1000 players who provide CRO services. And the big pharma currently outsources 40-45% of their activities to CROs, and this number is expected to up to 60% in the future. In contrast, small and medium-sized companies outsource substantially more of their activities — up to 65-70% and the emerging biotech startups typically outsource up to 90%, some of them operating as “virtual” companies. There are two ways in which CRO businesses make money:

Firstly they work on fee for service models. Where the R&D is outsourced and CRO’s take a fee for the specific service that is performed.

Secondly, they can also work on Full Time Equivalent Model, where a global innovator or a biotech, basically hires a science project team at CRO premises and pays for all the materials and other project expenses.

And Billing to clients is typically based on man-hour basis or dedicated number of scientists for a particular project.

Charlie: just stop here a second and think about the differences between a CDMO and a CRO. CDMO involves manufacturing,whereas,CRO involves the usage of people. Countries like India have an abundance of qualified people,with half a million graduates in Biological sciences, biotechnology and bioinformatic every year. As we saw the cost difference earlier, this is what gives the CRO based in Asia an edge.

Seeker: Understood Charlie. I still had a couple of questions, hope I am not asking too many 🙂

Charlie: No-no, we still have some time before we live. Look at Warren, he started reading another annual report while I was talking.

Warren: it’s the best activity I know of (smiles slightly) Seeker: you two truly are different than the others.

Warren: I will answer your next question. Please ask

Seeker: So Warren I recently read a quotation of yours on the topic of moats.

(“A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns.

“Therefore a formidable barrier such as a company’s being the low-cost producer or possessing a powerful world-wide brand is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.”)

What is the source of moat in this industry?

Warren: That is a very important and unfortunately a very loosely used word these days. But, to truly understand the moat of a company, we need to consider the qualitative and the quantitative factors.

Qualitatively, the facts that point towards a moat in this industry are the presence of entry barriers and switching costs. Why entry barriers?

Seeker: could be due to the long gestation nature of the business and lumpiness that is inbuilt into the business.

Warren: that is half right. The other sources of entry barrier in the industry are the trust of Intellectual property, No global innovator would give away its IP that easily. The CDMO player needs to be credible and should have a long history of operations for gaining more and more business. Secondly, entry barriers exist as the formulations players cannot enter this industry easily. As there would always be suspicion related to intellectual property. The other two sources you have already mentioned.

Now let’s think about the switching costs. Charlie do you have anything to add?

Charlie: I have nothing to add (in his trademark style)

Warren: Alright. For every molecule, once commercialized the global innovators have only 2 suppliers or at max 3 . As the global pharma companies do not like to deal with more than 2-3 vendors. Lets understand the finer nuances of switching costs. Globally there has been an increasing trend of more and more R&D being done on Biologics molecules as compared to the chemical molecules.

Seeker: What are biologics?

Warren: Traditionally, the treatment of human disease has been dominated by small-molecule drugs. Small molecules are used to treat a variety of diseases and conditions and can be quite diverse in their mechanisms of action. Small molecules are basically chemically synthesized and biologics are made from living cells and are produced via complex processes. Most of the modern biologics are produced inside bioreactors that house

genetically engineered cell cultures that can sometimes take more than 7-8 years to perfect. Once a cell line is established it becomes really difficult to switch.

Seeker: really interesting, so basically a vaccine is a biological product? As a weakened living microbe is inserted to build immunity inside us.

Charlie: Absolutely. Now, just consider this fact. That the world’s top-selling drug is HUMIRA (A biologic) and as of 2020, 8 of the top 10 best-selling drugs in the world are biologics. There’s a shift in terms of the type of molecule that are there in the pipeline of global innovators, just check this:


New Drug Application (NDA) VS Biologics License Applications (BLA)

And the market for Biologics CRAMS is growing faster than the industry

Biologics Crams growth

Total  BIO-CDMO Market Forecast, 2012-2025 USD billion 

Warren: now coming back to the question of Biologics and switching costs. CDMO’s who have the ability to provide services for the manufacturing of biologics have better switching costs built into the business model when compared with the small molecules. As establishing cell lines is a tedious task that takes a long time. And once established it is very difficult to switch vendors. So, basically the market is growing at 20%+ for biologics crams and moreover the switching costs are higher. This is the main reason why players like Samsung Biologics are trading at a valuation of more than 50 times Price/sales. And in India, Sygene which is a vertically integrated company, has also started offering the manufacturing of biologics.

Seeker: That seems really really interesting. Both of you have just motivated me to write a detailed report on Syngene.

Charlie: those who keep learning, will keep rising in life. Both of us are interested to read your report. Do include the sources of risk that this industry faces as we leave that task to you 🙂

Seeker: I can’t thank you two enough for taking out the time and helping us understand the entire CRAMS/CDMO/CRO space.

Warren: we enjoy studying new sectors. One’s entire life can be spent in exploring and reading your circle of competence.

Charlie: Until next time.

Warren: take care. Waiting for the report. Seeker: I will do my best!

With this both Munger and Buffett leave for their home back in the USA. And the Seeker is currently working on a report on Syngene, determined to expand the horizons of his knowledge and to send the report to Warren and Charlie.


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