Key Takeaways:
Current Price: $83.5 Price target: $107
Position size: 1.68% Performance since inception: +15%
- Sales back in positive territory +4%
- Backlog at record levels
- Operating profits and cash flows higher
- Guidance for the year maintained
This morning Syneos released its 1Q 2021 earnings results. 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
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109