Jefferies bullish on PolyPeptide, bearish on Bachem, amid strategy split

Jefferies has initiated coverage on two leading European peptide CDMOs with contrasting outlooks, rating Bachem Holding AG "underperform" with a CHF49.3 price target due to its reliance on large-scale GLP-1 production, customer concentration risks, and financing challenges for expansion. Conversely, PolyPeptide Group AG received a "buy" rating and a CHF38.7 price target, as Jefferies views it as undervalued with a flexible, diversified manufacturing model well-suited for industry shifts, despite current market skepticism regarding its ambitious growth targets which are fully contracted and align with Jefferies' own forecasts.

Analysis

Jefferies has initiated coverage on two key European peptide CDMOs with a starkly divergent outlook, presenting a clear pair trade thesis for investors. The brokerage assigned an "underperform" rating to Bachem Holding AG with a CHF49.3 price target, citing significant strategic risks. The primary concerns for Bachem are its over-reliance on large-scale reactors for blockbuster GLP-1 therapies and its concentration on a few market-dominant customers, which could limit long-term growth. Jefferies highlights execution and financing risks associated with its expansion projects, noting that the CHF1 billion Sisslerfeld greenfield project lacks an anchor customer and its projected internal rate of return falls below company targets. Furthermore, the report flags competitive threats from Asian capacity expansion and potential in-sourcing by large clients as risks to future revenue. In contrast, Jefferies initiated PolyPeptide Group AG with a "buy" rating and a CHF38.7 price target, viewing the company as undervalued and strategically well-positioned. The firm's flexible manufacturing model, centered on smaller reactors, is seen as a key advantage, enabling greater diversification across clients and products. Despite PolyPeptide's shares underperforming since its 2021 IPO, Jefferies' analysis suggests the market is incorrectly pricing its growth prospects. The company targets a doubling of 2023 revenues by fiscal 2028, a ~17.4% CAGR, and Jefferies notes that 100% of these projected revenues are already under contract, supporting a slightly more bullish forecast of an 18.1% CAGR.

Key Decisions for Investors

• Investors could consider a pair trade strategy, taking a long position in PolyPeptide Group AG and a short position in Bachem Holding AG, to capitalize on their contrasting strategic models and risk profiles as outlined by Jefferies.
• For Bachem, the key risk to monitor is the execution of its capital-intensive expansion, particularly the ability to secure an anchor tenant for the Sisslerfeld project, which is critical for validating its long-term growth strategy.
• The primary opportunity in PolyPeptide lies in the valuation disconnect between current market skepticism and its fully contracted revenue pipeline; investors should assess the credibility of its ability to meet a projected 17.4% revenue CAGR through 2028, which could trigger a significant re-rating if achieved.