Syngene International Limited analyst Q&A

Thank you very much. We will now begin the question and a nswer session. We will take our first question from the line of Karan Vidhan Surana from Monarch AIF. Please go ahead.

Hello. Thank you, sir, for the opportunity. Sir, I would like to understand from the management that what would be our next two to three year strategy would be on the core business across all three segments like discovery development and our dedicated RD, especially in the light side we are facing significant pressure from a funding winter in biotech in our key geographies. And you also mentioned sir that there is some positive surprises that we've seen?

So the first bit was what is the strategy for the next 3 years I think is that the right question?

Yes sir. And sir when we are saying that the biotech funding environment is improving what evidences we have or what we have seen in the ground that gives us?

Yes USD23 billion of new funding went into the U S biotech sector in the last 12 weeks, but that's not my data, that that's why the reported by a number of banks, Jefferies do a very good tracker, other banks are available. I shouldn't just choose one, but that's data that I've looked at. So you can track that from the capital markets.

Sir in terms of our ramping up of both the Bangalore API as well as just Stelis bio facility that we just acquired. Can we see some ramp-up happening in FY 25 for the same in the later half of the year?

It's all it's all rolled up into our business guidance. So when we guide for revenue growth of high single digits, low double digit s on a constant currency basis. R emember, of course, we did 9% for the full year last year reported, but you have to take the cur rency of gets you back to a 6% baseline and then you get compared to 6% last year you get high single digit so low double digits the two ends of the range. I did say that sort of 50% to 100% step-up versus last year. So that all of those things include all of our thoughts around rebounding in the U S biotech sector, geo -political sector rotation in research services from large pharma and the CDMO businesses are growing. Trying to help you on the specifics, I don't have a lot of expectation coming out of the Stelis facility in the year ahead. We're going to spend most of the year working upgrading and qualifying it. So that's a growth engine for the longer term which tells you that the at the high single digit double digit growth doesn't include much for that, hopefully that’s helpful.

And sir on the Mangalore API plant because we have been waiting for its ramp up for the last couple of years. So just some color would be very helpful?

No, no, it's all rolled into the guidance where we have facilities only. I mean, we have 90 acres here in Bangalore I don't know how many different buildings and facilities. We don't give revenue guidance for every building, every lab we have got. So we rolled our forecast to once. You have the guidance for the year ahead, return to growth, high single digits, flowed double digits margins around where they were this year the EBITDA level, PAT growth in the single digits and I think quite a lot of color from Sibaji on how to phase that during the year. We don't expect a strong growth momentum in the first half pickup during the second half which mathematically suggests that the second half exit must be reasonably strong.

Okay. That’s helpful sir. S o last question from my side, there some reports suggesti ng that a Librela has been not good for the pet and it’s making pet sick, have you seen the same from our – whatever conversations we're having with Zoetis or it's all stable.

I've seen nothing, but then we don't have those sort of discussions with Zoetis. The discussions I have around manufacturing quality, on-time delivery. Our ability to innovate in processes and bring more value to them and those have been healthy conversations. Beyond that, not something I have any insight into. I think you probably need if you're an investor in Zoetis as well to direct your questions to them.

Okay. Thank you sir. That's it from my side.

Thank you.

Thank you. We will take the next question from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Yes, good afternoon, and thank you for taking my question. Just the first one is on the three businesses dedicated disco very and CDMO. How should with the backdrop of that revenue growth range that you've given and how should we look at each of thes e businesses doing well or not well in that sense, I think that's question number one.

Okay. So give me question number two as well.

Yes. The question number two is more on your opening remarks, Jonathan, where you mentioned that fourth quarter development activities have been softer than you usually anticipate. So if you could give us some context, please.

Okay. I can sort of roll those altogether, how I mean you can tell me, but you're getting the broader context. If you look across every single services business, whether in India or in China, in Europe, in the US, if you look at all of the biotech companies and you look at the commentary coming out of the venture capital firms, it was a challenging year for fundraising in US biotech, challenging only in the following context. Go back and look at the amount of money raised and deployed into US biotech each month or each quarter, go back to the pandemic. And we saw a generational high over the 18 months or so coming out after the pandemic. The very nature of those start-up businesses for the market, they get funding they have, I don't know, a year to two years' worth of cash burn runway. So it just seems to me, if we had a peak a couple of years ago in biotech funding and they have about two years ' worth of money when they raise, we'll now have a peak of demand for refunding. And not everybody refinanced during the second half of last year. And candidly, with some of our small biotech clients, if they don't refinance, they have no money to spend. So that was one of the factors that was playing out in the fourth quarter. We didn't lose clients because we're not competitive. We didn't lose it because we don't provide good service. It was just as simple as them saying, look, we haven't managed to refinance. Often they were restructuring and downsizing. We're laying off some of our staff because we don't have the money to pay their wages, which means we're not spending money with you. My comments on the development. They're in danger that my answer is going to take longer than the recovery in the market. So there is -- I was being humorous, but there is an element of that. The fourth quarter is done. We're back into the first quarter of the new year. And we think there's going to be growth in the year ahead. Trying to caution everybody. Not don't wreck it. Don't think of too much. Don't phase it with too much in the firs t half. I think it picks up in the second half. And I'm just trying to explain why I think that. And the reason I think that is biotech companies that have raised new financing in the last 12 weeks won't be ready to spend it until the midyear. That's one factor. The second factor is just the China rotation by a secure dual sourcing. However , you want to describe it. I'm starting to sense a material shift, not an acceleration, just a shift that particularly the large cap companies are taking this much more seriously. And to some extent, it's been elevated from being a procurement or purchasing issue to being a n audit and risk committee topic. And therefore, you're getting a very different lens and a different tone to some of the discussions. People are now saying, well, look, even if we've got great partnerships with some of our Chinese vendors, we don't want all of our supply coming from one geography, particularly one that's certainly the focus of all sorts of discussion and legislation in the US. And that's moving them to look for alternatives. India has got a great opportunity. I think we do as a leading company in the Indian market. But so is the US and so is Europe. It won't all naturally flow just from one country to one other. But I think it creates a good environment. But that's a market environment and a trend that should play out over years. And I would echo some of the comments that I've heard from other companies, even as recently as today. I think Thermo Fisher's CEO said that they felt that it was a structural shift to play ou t over the coming years. And I'd echo that. So with that, that was my third attempt to try to answer your question. Hopefully, if you put the jigsaw pieces together, you get something useful out of it.

Just a housekeeping or a bookkeeping question. I think historically, Liberla contract, when we look at it 10 year, 500 million. Modeling purpose, we were doing like 50 million a year. Maybe my understanding is could be incorrect, but is that how it has played out in fiscal ' 24? Thank you.

Yes, it has played out. We are in full capacity production now. And if you have done 500 by 10, 50 million, you will be over there, broadly over there.

Thank you. Thank you and all the best.

Yes, it's one of the easier bits of modeling you'll ever have to do.

Got it. Thank you.

Thank you. The next question is from the line of Shaleen Kumar from UBS. Please go ahead.

Yes, and thanks. Thanks for the opportunity. So Jonathan, I understand your comment about the recovery to be back-ended. But what kind of a divergence are you looking at in first half versus second half?

Sorry, I missed you. What sort of…?

Sorry, come again?

Say the question again because you broke up. What sort of…?

Okay.

And then I missed whatever it was you said.

Sorry. So I was asking the kind of divergence, right? The divergence in the performance of the company in the first half versus second half. So we ended the 4Q with minus 8. We have a growth expectation of high-single lo w double digit. So any sense on that? We are looking at mid-single digit or low-single digit in the first half, and then mid-teen in the second half, or we're looking at a flat-ish in the first half and high-teens in the second half.

Come on. Why don't you ask me for morning and afternoon forecasts for the year? But Sibaji, if you go back and listen, if you re -listen to Sibaji's comments, I think he gave you the answer to your question. So just to help everybody, we'll go back and do it again. I think he said flat-ish to low single digits in the first half. And if you've got that, plus you've got a range. So you'll be able to do it. You can calculate and get a reasonable shape. Any more than that, and I really will end up having to give daily forecasts.

No, not really. That's just a long -term play around whether or not you -- you've got multiple sources. So you can discover, develop, and then manufacture. So you can just follow the molecule, follow the life cycle. You can often find opportunities where you've got a development capability, which allows you then to move into clinical manufacturing, and that gives you a shot at a later date to maybe do the drug substance API manufacturing. And then you've got dual sourcing. You've got peop le derisking their own supply chains and looking to supply chain diversity, all of which roll up to the same thing, getting out there in front of the customer, making sure you're visible, making sure your capabilities are known. But you did prompt a thought. It wasn't in your question, but I do think it's worth thinking around across actually not just Syngene, across the sector and across businesses that provide service in multiple geographies. If you're going to take and transfer some work out of China, t he easiest and the most fungible, certainly the quickest, is just the research part of it, so discovery research contracts. Just because of their very nature , they tend to be short-term or annual F TE contracts. Once you move into development, it's a bit stickier, and of course then product manufacturing, whether it's API or drug product, is much less agile and easy to move. So it plays out over quarters and years when you want to do that. Just think about what companies tell you when they have to tech transfer to a new site. That's quite a lot of work to do that. So you've got different turning circles on those different types of business. Hopefully that comment helps.

Yes. The only thing is that if there's so many scopes out there, we're still kind of not seeing the kind of traction we anticipated to see in API. So is there -- we are in some final stages of discussion or something or some visibility is getting better

I don't know. I think our investors, surely they're investing in the whole corporation, the whole equity, not just component parts of it. And from that point of view, Syngene's performance certainly seems to be reflecting well by comparative standards. We're comp eting well. We continue to grow. We've indicated we expect to grow in the year ahead. I don't look at it as a small or large molecule. I look at it as a CDMO strategy.

Okay. Got it. On bookkeeping side I just want to…

Sorry, I'm sorry, I missed you.

Shaleen, can you please repeat the question?

Just on the bookkeeping question, not a how should I think about the gross margin for the next year, right for my modelling purposes?

Two things happened this year on the gross margin, if you compare year-on-year gross margin, FY '24 over FY '23, you'll see broadly they are the same level. So there are two compensating factors for that. One is, you know, as a CDMO business share in our overall business increased our material cost to revenue ratio increased a bit. At the same time as we mature as a CDMO business. We have started d riving more efficiency and material cost utilization. So these two have offset each other and we kind of came to the same level of material cost utilization ratio. I think you will not be wrong at all, if you presume that the same will be continuing into the next year because we are stabilizing the commercial manufacturing now.

Got it. And just last one on Stelis. How should think about the fixed cost and depreciation?

Sincerely apologise for this. We don't know whether technical issues, but we’ll try to be more diligent next time, but I don't know where I lost you Shaleen. I was talking about the useful life of asset for Unit 3 and during the acquisition process, we estimated that through qualified professionals to be 15 years. So we'll depreciate Uni t 3 over a period of 15 years. Does that answer your question Shaleen?

Yes. And should start from when, from now onwards, or it has already been started coming in.

So it has not come in yet. It will come on coming from the second half when you start to commission the plant.

Got it. That's helpful. Thank you. That's it from my side.

Thank you. The next question is from the line of Udit from Catamaran. Please go ahead.

Yes, hello sir. Sir if you can just talk about how many sales people are carrying targets of with large pharma accounts? And usually, how do you do this target set for those people? And secondly, how many Boston VC clients did we had at our peak and currently have any VC clients do are we serving?

Well super question, I'm going to disappoint you by talking around issues. Both of those are questions that are not putting into the public domain as they are competitively sensitive on. I'm not about to tell our direct competitors, how many sales people we have in the field or how we allocate the targets. But if you want, do you want to comment on the methodologies by which everybody set sales targets, and I'm not sure how it would help you, but I'll happily do it if you want me to.

Yes, even that would be helpful. We are just trying to understand like obviously, we have done a lot of hiring over the last five years, right? So currently, what our structure looks like are we…

I think all those are here. But even though we've done some hiring, I'm not sure we've done a lot of them in the sales organization. It's more about quality than quantity. One people that are technically capable of explaining our scientific and manufacturing capabilities. You need them to be close to the customer. Life sciences and pharma is one of those industries, which is really around almost 30 states as a way of thinking about it. You can go to Boston, you go to the New Jersey, Turnpike, Chicago, Indianapolis, San Diego, San Francisco in Europe, we probably go in the UK, t he Cambridge of the trial and move that up to the north west in the UK. And we cover most of the pharma companies and so on and so forth, the real value in Germany, Stockholm and Gothenburg and Denmark and for Switzerland. So you can go around the world and you know where the clusters are when a life sciences companies tend to congregate and you make sure you've got sales people close to those close to the customer. So I'll give you a sense of that.

But is this a bit of sense like that? Do you think that now you are well covered in the top 20 accounts, let's say. And is are you happy with the client mining, which is happening? Or do you think that will take some time because still the team is new or can you just comment on those aspects?

I'm broadly happy. I think we're well covered. And then we were fortunate any which way you slice it 15 of the top 20, 25 of the top 50 . that you would struggle to find a major or medium - sized biopharma company. But we don't have it connect t o it that we don't interact with can always been just say that with that preferred provider or that were currently doing project work for them, but we engage with them. Same thing in animal health. It's a smaller industry by sort of number of players and m ore concentrated were super well connected at a personal level. I've spent a fair amount of my time in the year meeting with the executives and the senior research development and manufacturing leaders of those companies. So I think we do pretty well. And then the other part of me, which is the CEO. I'm never going to publicly go on record and tell my sales people, I think that they couldn't do more and that targets couldn't be higher, which was the other implication of your question.

And sir I think in earlier, I think in the previous interview you had mentioned that you're seeing a lot more client visits and audits, right? The prospect even for prospective clients. I think you can just talk about some numbers, like how many client visits about it hap pened this year compared to last year?

I'll talk around to those to try and I'll give you the news around the quarter that I would just note that such operational detail to tell you and I just don't think whatever report that as a public company, how many client visits, how many people came in the cafeteria on a Wednesday . It's more just to signal something I think most strategic. And again, I was trying in my earlier comments to say, look across all of the earnings season. You had the CFO of Novartis this week make a comment that they were rotating away from China. I think you had Paul Hudson at Sanofi this morning, who is the CEO. They're saying that they felt they made good progress on that, but they will rebalance in May on geographical suppliers. You had the CEO of Thermo Fisher. I saw on this morning's wires make some sort of comment. I'm just saying I see a similar pat tern I think it creates opportunity and a good environment for us. I think it will play out not just th is year, but next year and beyond. And then you tie it back to the earnings or the revenue guidance I gave you that. That's our guidance for the year. I'm not going to jump from one to the other. Does that at least explain why I made that comment.

Yes, got it. Understood. And just the last question, if I can ask if you can just talk about what was the attrition level at the whole at the company level, how many employees do we have currently? And how what was the attrition for the BD team?

With somebody who you would do with that as an investor or a market commentator?

If there is less attrition, I would think that the company is stable and going forward, and that's the only thing which a try to understand with that number.

So there is attrition. Our attrition in general across the majority of our workforce is in India like your business, every other business in India, there was a rise in attrition during the pandemic. People often swapped work from office to work from home. Work from home came just popping back to my native and living with my parents. Our attrition rates are down continue to come down and you don't want a lot of attrition that actually you don't want to little or no attrition because you've got to kee p renewing your capabilities, the energy and skill sets in the business. So I -- if you ask me from a strategic point of view, I'm not seeing anything within the business that makes me think attrition is a barrier to performance or growth.

Okay. Thanks a lot.

Thank you. We have a next question from the line of Kunal Dhamesha from Macquarie Capital. Please go ahead.

Thank you for the opportunity. So the first one on the material shift… that you are seeing commentary in terms of client queries, etcetera, or would you put it as more or less than a penny per share of capacity? Our have been very careful to move away from the China or it's like moderate increase in the moderate increase on the normalized business that you see?

Yes, it is long as you promise, not to tie back to my revenue guidance for the comment was the ;facilities visiting India visiting our competitors in India as well because you don't travel thousands miles without making sure you're looking at every option in the market and over the start of this year, I think that's gone up a level. And increasingly, people are saying, look, we've got long-term relationships in China were likely to rebalance that little bit less in China, a little bit more in other places to give us diversity and risk diversification. And we're having a look what's available all the way around the world in the U.S., in Europe, in Asia and here in China here in India, and we're delighted to host them and we'll make our case for why we can bring value to them

Would you accelerate your capex plan in response to that change in the market environment?

We will yes. I mean, I yes, if somebody came along and said, you know what I'd like is an enormous Research Centre building. And then we have deployed the capex to do it. So just let me check what again, I'll have the question behind the question was what are you trying to get at?

I'm just trying to get it, we will – we as a Company will be able to capitalize on this material shift. Given you are saying that the large cap companies as someone who are actively looking and obviously large cap companies would like to go with a larger capacity We are just stepping up our capacity and…

So that I'm thinking about I'm just I commented earlier, I think I should take a step back. I think we'll be having this conversation every quarter for the next two or three years. So we may as well get the frame of the question. And so yes.

Yes. So let's say, one of your competitors purchased roughly 3,30,000 litre capacity from Roche in the US. Samsung opened some 2.8 lakh litre capacity as a plant floor. So is there anything for us like that in the making, what you are thinking?

Coming purely from a biologics manufacturing, I'm talking about the whole business, research, services, development, as well as the CDMO part of the organization. I'm thinking as much about the 17 acres of land that we built in Hyderabad that will house scientists as we build labs there as much as I am about biologics capacity. When we bring Unit 3 online, we'll have three times the capacity. But relative to, I don't know, who are the two biggest leaders? Is it Samsung as being a sort of giant in biologics manufacturing. I don't think our change in capacity makes a structural difference to that. But we probably serve very different customers.

Okay, so you being on a more, you can say small to medium biotech company?

Small to medium. People with single assets, people that want clinical scale manufacturing, but also then depends on the drug. If you've got a drug that is going to be in very large volumes that requires 10,000 litre, 15,000 litre stainless steel bullets to get optimal capacity, depends on your cell line yield, your titters, perfusion technologies. There's a myriad of things that make it project specific that are not as simple as big companies buy big volumes from big vendors.

Sure, thank you.

Thank you. Ladies and gentlemen, we'll take that as last question for today. We apologize for the technical issues faced during the call today and also thank the management team for extending the call for offsetting the time loss due to the technical glitch. I now hand the conference over to Ms. Nandini Agarwal for closing comments. Over to you.

Thank you everyone for joining today's call. If you have any further questions, please do get in touch with our team and we'll be happy to assist you. Have a good day and thanks once again.

Thank you. On behalf of Syngene International Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.