Key Takeaways:
Current Price: $84 Price target: $107
Position size: 1.56% 1-year Performance: +31%
- Core sales +20.3% missed the street estimates but seems to be due to FX – reported revenue beat consensus by 1%
- Total sales $1,282M vs consensus $1,269M
- Clinical trials net new business grew 22% (4% tied to Covid-19 trials), with Book-to-Bill 1.37x. Their 2Q book-to-bill was the second-highest in the group behind competitor PPD
- Clinical revenue +31%
- Commercial net new business grew 51%, with book-to-bill 1.14x
- Commercial sales +13.2% y/y
- 80% of sites permit physical visits, an improvement from 70% in 1Q
- Recovery continues with good enrollment for covid and non-covid trials
- Gross margin expanded 110bps from 2Q2019
- Adjusted EBITDA margin of 13.6% vs. consensus 13.7%
- Operating margin expanded 220 bps y/y and 70bps vs. 2Q19
- EPS of $0.97 beat consensus by $0.02
- Share repurchases: $73M bought back in 2Q, leaving $182.5M through year end 2022
- Net leverage stands at 3.8x, lower from 4.1x in 1Q, on its way to reduce leverage of its balance sheet to 3.0-3.5x by year-end
- Revenue and EBITDA guidance for the year tightened on the lower and higher ends
- Sales $5.18B-$5.3B from $5.125B-$5.325B
- EBITDA $750M-$780M from $745M-$785
- EPS raised to $4.25-$4.43 from $4.17-$4.42
CEO quotes:
- “Clinical awards also included several COVID-19 related projects. Although, this category including treatment therapeutics remained at less than 4% of our backlog at the end of the quarter. Given this limited backlog concentration of COVID-studies, we expect our robust revenue growth in 2022 will be driven by the strength of our non-COVID backlog”
- “Syneos 1 our innovative end-to-end product development methodology continues to provide a competitive advantage across both segments. We are particularly excited about the Syneos 1 contribution to growing the pipeline of potential commercial awards and revenue with the first of many Syneos 1 portfolio assets set to begin commercialization in the third quarter”
While the quarter was good and comments on the call were promising for 2021-2022, the stock is trading down 4% as guidance was not increased for the year.
Sales returned to positive growth ~+4% overall, with clinical trials segment up 3.9% organically and commercial still negative -1.8% (but a 720bps sequential improvement). The management team expects a acceleration in sales growth throughout the year, driven by backlog (up 22.5% this quarter) in Covid and non-Covid trials. Covid is only 4% of backlog (and $25M in revenue last year). They currently have 22 Covid-related projects, with an additional 23 more. Covid is created interest in their integrated platform.
In clinical solutions, they experienced a record level of awards, and patient enrollment remains high. On the commercial side, consulting services is seeing double digits revenue growth, and the entire segment should see double digits organic growth in 2Q, while both commercial and clinical trials should grow mid-single-digits in the second half of the year. Syneos continues to invest in the decentralized trial model to grow its business – Illigworth being the latest addition on this front.
Its Syneos One offering is gaining traction with small and mid-sized customers and we should see some of that towards 2H2021, and the Synteract acquisition is increasing exposure to emerging biopharma as well. On the large pharma side, capabilities and penetration is good, and Syneos scale (vs. top player) is not an issue for large pharma customers. On the balance sheet front, the company continues to deleverage, now at 4.1X, and with a target of 3-3.5X by the end of year.
Overall we remain positive on Syneos and expect the recovery to accelerate throughout the year to see the investment thesis play out.
Investment Thesis:
I. Secular growth:
- Increasingly sophisticated and highly-regulated environment with government increasingly focused on drug pricing à biotech and large pharma need to reduce fixed costs
- Growing research and development (R&D) spending environment:
- Growing portion of R&D outsourced to Contract Research Organizations (CROs)
- Pharma/biotech clients choosing fewer & higher quality CROs (expertise and scale)
- Syneos has robust backlog predicting good growth for next 2 years
- Recovery in clinical trials post-covid
II. Competitive advantages:
- Only company integrating clinical trials (Contract Research Organization -CRO) and commercialization solutions (CCO):
- Offer customized solutions and possibility to lower time to market
- Top 3 market share within fragmented CRO market
- Global scale – allows to compete for larger trials, with expertise in complex diseases
- Diverse client base (large to small pharmaceuticals)
III. Attractive valuation: 45% upside
- Driven by secular growth drivers and margin expansion
$SYNH.US
[category earnings] [category equity research] [tag SYNH]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109