Syngene International Limited (SYNGENE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Syngene International Second Quarter and Half Year Ended September 2021 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Gauri Kanikar from EY. Thank you, and over to you, ma'am.

Thank you, and good afternoon to everyone. Thank you for joining us on this call to discuss Syngene's Q2 FY '22 and H1 FY '22 performance. To discuss the financial and business performance for the period, we have on this call today, Mr. Jonathan Hunt, Syngene's MD and Chief Executive Officer; Mr. Sibaji Biswas, Chief Financial Officer; and Dr. Mahesh Bhalgat, Chief Operating Officer. After the opening remarks, Jonathan, Sibaji and Mahesh will be happy to answer any questions you may have. Before we begin, I would like to caution that comments made during this conference call today will contain certain forward-looking statements and must be viewed in relation to the risks pertaining to the business. The safe harbor clause indicated in the investor presentation also applies to this conference call. The replay of this call will be available for the next few days, and the transcript will be made available. With this, I now hand over the call to Mr. Jonathan Hunt. Thank you.

Yes. Thank you, and thank you all for joining us on the call today to discuss Syngene's second quarter performance. I'll start by giving an overview of our performance in the second quarter and the first half of the financial year and then move on to some more operational highlights. Sibaji will provide more detailed insight into the financials in his remarks. The second quarter saw positive performances right across the business, and there were positive demand signals as our major client markets of the U.S. and Europe started to see the benefit of their COVID-19 vaccination programs, and many people began to return to more normal working and operating conditions. Now given the natural lag between rising client interest and then business closure and project delivery and on to revenue and billing, while it's positive to see this gradual return to normality, I think it's unlikely to drive this year's revenue performance. However, it does augur well for the next financial year. So for the quarter, revenue grew 17% over the corresponding quarter last year. We continued to manufacture remdesivir for COVID-19 during the quarter. Although from a societal perspective, I am pleased to see the volumes dropping as the impact of vaccination reduces the need for treatments such as this, in the second half of the year, we need to keep a watchful eye and see how COVID trends evolve, both here in India and in other key markets around the world. EBITDA for the quarter was up 12% to INR 1.9 billion reflecting, amongst other things, higher raw material costs and our ongoing strategy to invest in foundational dimensions of our business such as digitization and automation, where we're making advances in the way we manage our supply chain, engineering and maintenance, and of course, in our quality systems. Profit after tax was up 9% over the corresponding quarter to INR 920 million. And no doubt you'll have noticed that we reported 2 profit after tax numbers this quarter. The second one covering PAT after an exceptional charge, and this charge relates to the reversal of the benefit we gained from a Services Export Incentive Scheme following the government's recent decision to cap the incentive benefit at INR 50 million. Just to be clear, this is a one-off adjustment related to the financial year 2020, and I'll leave Sibaji to cover this in greater detail in his comments. Now as we're at the midpoint to the year, I want to pause for a moment on the financial results for the first half and ensure that everybody's got a clear understanding of some of the dynamics as we see them. Firstly, you'll recall that the year-on-year comparison in the first quarter was impacted by a muted first quarter last year due to a period of reduced activity owing to the first national lockdown in India. Consequently, first quarter year-on-year growth for this year was lifted by this soft comparison. By the second quarter of last year, our COVID control measures had allowed us to return to near normal levels of operations. And consequently, we don't see much -- such [ an artifact ] in this quarter's numbers. So in this context, the growth of 17% was both pleasing and I think a true reflection of the underlying movement and momentum within the business. Secondly, the manufacturing of remdesivir in the first 6 months of the year boosted revenue due to high demand during the second wave of the pandemic. Now while we're happy to manufacture this important treatment, we have little visibility on how demand and volumes will play out for the remainder of the year. Looking ahead, while we've delivered a robust performance in the first half of the year and as I look forward to the second half, I remain both positive and cautious over the coming months. Positive in that we've continued to operate at 100% of normal operational levels. Positive also in that we can see clear signs of our clients, particularly in the U.S. and Europe, getting back to work and back to a type of normality. And this is likely to ensure we see a good demand environment for the remainder of the year, a fact more likely to shape next year's revenue performance than this. And at the same time, we remain cautious in not knowing how the situation will evolve with COVID-19. So taking those factors into account, I'm pleased to see a positive performance across the business in the first half of the year and believe that we're firmly on track to deliver revenue growth in the mid-teens for the full year as we've previously guided. Turning now to operational matters. In the last couple of months, India's vaccination drive really picked up steam. And to protect our employees, we continued to implement COVID control measures such as regular COVID testing for employees on-site, shift working, social distancing in our laboratories and so on. This has helped us operate at normal levels and to keep our client projects on track. And we've also been conducting campus-wide vaccination drive. And I'm really pleased that more than 75% of employees who have taken up on this offering are now fully vaccinated. Most of the remainder have taken their first dose of the vaccine at close to 100%, high 90s have already had a single dose then they then are expecting to get their second dose when the timing is right. In a busy quarter, we continue to see a rising number of new client increase in Discovery Services, particularly in the emerging biopharma segment as a healthy indicator of global clients returning to more normal operations. We've made good progress on our plans further expansion and look forward to commissioning Phase III of the expansion in Hyderabad, and that will ensure that we have the laboratory capacity we need to accommodate future projects. In Development Services and Manufacturing Services, the quarter saw positive performances and early signs of more buoyant demand environment. Our small molecule plant at Mangalore remains on track with its program to be ready to gain U.S. FDA approval within 2 years. Across the company, we continued to invest in digitization to reduce the impact of human error and increase the ability to audit quality and other processes. And we know that these investments give great confidence to both regulators and clients alike while making life ever so much simpler for our staff. And finally, we made a number of key executive and operating leadership appointments in the quarter. Alex Del Priore joined the exec team to run our large and small molecule manufacturing operations. Dr. Alan Collis joined the company to build the integrated drug discovery services that we offer within Discovery Services and Dr. Sridevi Khambhampaty joined the company to lead our biologics development group as part of Manufacturing Services. Delighted to have all 3 of them on board, and they bring both the depth and the breadth of experience. So in summary, our performance in the second quarter and the first half of the financial year, taking account for the unusual characteristics of the period with COVID, gives us real confidence that we will deliver results in line with our revenue guidance for the full year. So with that, let me hand over to Sibaji to give you more details on the financials.

Thank you, Jonathan, and a very good afternoon to you all. I'm happy to take you through our results for the second quarter, followed by the half year in the 30th of September 2021 with comments on revenue performance and profitability for the company as a whole. The performance for the quarter has been robust. Revenue from operations increased by 17% for the quarter compared to the previous year. At constant exchange rates, the underlying sales grew by 19% year-on-year. The exchange rate for this quarter have been lower compared to the same quarter last year. This growth came from continued performance in all segments of our business. Before I get into the analysis of the P&L account, let me explain the onetime exceptional downward adjustment of INR 253 million, that's net of tax, that you have seen in our accounts and Jonathan just mentioned. This adjustment follows the government's recent decision to cap the Services Export Incentive Scheme for research and development services at INR 50 million for the financial year 2020. For financial year 2016 to 2019, Syngene benefited from this incentive of 5% of net foreign exchange earned without any cap. Following precedence, Syngene assumed and accounted the same rate of 5% for accruing the service export incentives for financial year 2020, and this was included in the financial results for that year. Now based on the current notification from the government, the company has reversed differential SEIS claims receivables, and this has been presented as an exceptional item in the financial results for the quarter and the half year ended 30th September 2021. For ample clarity, no SEIS benefit has been booked since last year, that is financial year 2021. And hence, this reversal represents a nonrecurring one-off exceptional item in our P&L and does not represent the underlying operational performance or future cash flows of the company. Now moving on. EBITDA for the quarter was higher by 12% as compared to the previous year. The EBITDA margin for the period was at 30.5% and last year was 31.8%. Material costs have increased from 24% of revenue in Q2 of last year to 27% of revenue in Q2 of the current year. We are witnessing some supply chain delays or longer lead times in raw materials as there has been a spurt in demand, a challenge which has been compounded by the ongoing supply chain disruptions across the world. As a precautionary measure to ensure our projects are delivered as per time lines, we are securing our supplies by advancing second raw material purchases and stocking them to avoid any potential disruptions, which means to buy in advance is having an impact on raw material costs and working capital, which is expected to continue in the subsequent quarters till the supply chain situation stabilizes. While this may impact our operating margins during the year, we believe it is a prudent approach to ensure timely deliveries for our customers and for optimized utilization of our assets. Let me now take a moment to explain the movement in other cost lines in the P&L. During the quarter, employee costs increased by INR 234 million to about INR 1.85 billion as compared to INR 1.6 billion in the same period last year. This is an increase of about 15% and is a result of salary increments and headcount additions and senior hires across Discovery, Development, Manufacturing and commercial organizations. We strongly believe that hiring key talent in the new and developing areas of our business and in locations closer to the customers is critical for the next stage of growth. And hence, we will continue to invest in human resources, the benefit of which will show with the lag in our P&L. Power costs remained at a similar level to last year, which is less than the rate of revenue growth. Syngene's sourcing of power from green energy in our main Bangalore campus has been around 90%, and we are very proud of that. We have a high share of our power requirement service to captive units, both solar and wind, which has been sourced at a lower unitary cost. This has helped us reduce and control power costs despite an increase in unit consumption. We'll continue with our efforts to maximize renewable power consumption in our setup. This is one of the several steps that Syngene is taking to address environment, social and governance aspects of our business to create a sustainable environmental growth. ESG rating agencies have rated Syngene at or above the industry average in this aspect. Following our summary ESG report, a detailed ESG report will be published in half 2 of this financial year setting out our ESG strategy and priorities. Now turning to other expenses, which comprises of selling expenses, IT costs, maintenance expenditure and other general overheads. These are up by 14% year-on-year to INR 754 million as compared to the same period last year. Despite continued pressure on expenses due to COVID protocols, the continued digitization drive across our businesses, increased maintenance expenses on the expanded asset base, we have been able to manage discretionary spend effectively keeping overall operating costs under control. The lower growth in costs has also been a result of lower level of intentional travel in the first half. We expect intentional travel opening from Q3 and this is very important for building a healthy sales pipeline for our business. Hence, going forward, we may expect some increase in the other expense lines, but otherwise, we continue with strict measures to control all discretionary costs. Our hedging strategy has always helped us navigate currency volatility over the years. So while the tendering of rupee versus U.S. dollar against the same quarter last year has resulted in lower rupee-denominated growth revenues, the hedge we had on U.S. dollar receivables has helped us book a hedge gain of INR 104 million in the quarter. This reflects the difference between [ forward ] rate versus the prevailing spot rate. The hedge rate was close to INR 76.5 per U.S. dollar as against a spot rate of INR 74 per U.S. dollar during the quarter. Revenues for the second half is also hedged around the same rate of INR 76.5. And depending on how the rupee moves versus U.S. dollar, the benefit of this hedge will be reflected either in the top line or in form of hedge gains. Depreciation stands at INR 762 million, which is INR 75 million increase from INR 687 million in the same period last year. The increase on a year-on-year basis is attributable to addition of assets during the period. The CapEx during the quarter was around INR 1 billion, comprising of Discovery Services expansion at Hyderabad and Mangalore, expansion of dedicated centers and investment in our Biologics facility. Now let me come to the tax rate. The effective tax rate for the quarter was at around 18.5%, similar to the tax rate in quarter 1 of the current financial year. This is higher than last year's effective tax rate of 12% for the full financial year, which had the benefit of accelerated depreciation coming from the Mangalore API plant and other new units that had gone live in various locations. There was also a onetime positive impact in the previous year arising out of revaluation of a tax position based on a favorable legal opinion. The profit after tax before exceptional items was up 9% to INR 920 million as compared to INR 841 million in the same period last year, reflecting an overall strong performance for the quarter. Adjusted for the onetime tax benefit in quarter 2 of the last year, which I spoke about, the increased in profit after tax before the exceptional items was a very strong 20%. Now moving to half year. Revenue from operations for the half year ended 30th September increased by 28% to INR 12 billion as compared to INR 9.4 billion during the same period in the previous year. As Jonathan explained, this high growth is reflective of good momentum in business and 2 additional factors: a low base effect in quarter 1 compared to the quarter 1 of last financial year and upside due to remdesivir sales in the first half of the current year. The underlying business growth remains robust in the mid-teen range. EBITDA is up 19% to INR 3.67 billion, a reflection of the improved operating performance in the business. EBITDA margin for the period stood at around 30% compared to 32% in the previous year due to the higher material cost in the P&L. The increased value of fixed assets has resulted in a 12% increase in depreciation expenses to INR 1.5 billion versus INR 1.35 billion in the same period last year. Overall, profit after tax for the half year, excluding the exceptional item due to reversal of export incentives, increased by 19% year-on-year to INR 1.69 billion. Reported profit after tax after the exceptional items for the half year was at INR 1.44 billion. Let me now speak about CapEx. Our CapEx guidance has sustained between INR 7.5 billion to INR 9 billion during the year, and this included about INR 2.5 billion rollover from the previous year. In the first 6 months, we have invested around INR 1.8 billion, and we have already committed close to INR 5 billion for execution. So we are broadly on track with our CapEx program and expect to see an accelerated CapEx spend in the second half as the program get executed. FY '22 has some overhang of pandemic both in supply and demand sides. With travel resuming now, we believe the combination of virtual way and physical way of doing things is likely to ensure a good demand environment for the remainder of the year, a factor more likely to shape next year's revenue performance than this year. Our underlying performance for the first half has remained robust and we are operating at normal levels at our facilities. This gives us the confidence that we are on track to deliver the revenue guidance for the full year. We will be in a better position to get this guidance in January '22, when we have a clear visibility on the year-end. Thank you, and we can open for questions now.

[Operator Instructions] The first question is from the line of Alankar Garude from Macquarie.

Sir, my first question is on the guidance. We have reported 28% growth in the first half. Even if I assume, say, a 15% growth for FY '22, it just implies a 5% growth in the second half despite the good demand environment, as you mentioned. So the question is what is the upside risk to this FY '22 top line guidance of mid-teens?

Yes. Good question. I'm not going to quantify it for you. Math is logical. I would -- maybe it's British English, but our guidance was mid-teens, that implies for me a range. And if you can start at 13% and go all the way to 19% and define where you think the middle of that range is or what mid-teens would be, you get a range of percentages. You can do a sensitivity analysis on all of those. But in general, I think the message is mid-teens for the full year. Very happy with the performance in the first half. Seeing good demand environment and good progress on the business. I think if we come in at the mid-teens or at least the mid-teens, maybe [ a notch ] higher, I think those are all likely outcomes. But at this stage of the year, only halfway through the numbers knowing what the next 6 months will bring in terms of COVID, you'll forgive me, I hope, a little bit of conservatism of saying I'll wait and see what happens for another quarter before I give a more detailed comment on that.

Understood. Okay.

Hopefully, there's enough in my answer that you can get a feeling it's not a point estimate.

No. I understood that. Thanks for the context. My second question is you have mentioned about excellent demand in emerging biopharma Discovery Services. Can you also comment on the demand for Biologics Manufacturing? Also, if you could highlight where are we in the evolution curve with respect to the return on investments for Biologics Manufacturing?

Yes. That's good. I don't think I said excellent. I think I said positive. It wasn't -- the general tone I'm giving, I think, it's certainly in Europe and the U.S. is that national vaccination campaigns kick in and really seem to be making a difference. You've got a general sense, it's palpable if you go to the U.S. at the moment, of people going back to work, getting back into the routine of being in an office and that's triggering them to sort of catch up a little bit on projects that had run a little bit slowly. It's warm rather than hot. I don't think it's a hot environment yet. But it's warming up, and that's a good thing for next year rather than for this as it would take a while to respond to those client inquiries, turn them into contracts won and then start delivering them. But yes, reasonably positive, I think, on that. On the Biologics, structurally, actually, I think it's a good market to be in. There's an awful lot of demand. The whole global response to COVID has consumed quite a lot of biologics capacity. And therefore, there's a general sense that capacity, if you've got it, is valuable and a scarce thing. And I'm hopeful that we'll start to see that come through in future quarters and into next year in our P&L. But we are seeing a rising number of client inquiries and a rising number of client wins. It's not there yet strongly in the P&L, but I think it should -- for whatever reason, I think it will be next year.

[Operator Instructions] The next question is from the line of Surya Patra from PhillipCapital.

Sir, just one clarification about the gross margin. So in fact, in the previous quarter also, we had seen a kind of first half Y-o-Y decline on the gross margin. But that was led by incremental manufacturing activity, what we had done for remdesivir. I think, sequentially, the number has come down drastically about remdesivir's manufacturing. But still there is a kind of a 500 basis point kind of Y-o-Y impact still that is visible. So one reason you have mentioned that some raw material inventory buildup for that. But is it that -- and it is likely to be sustainable in the subsequent quarters that you have mentioned. So whether this is going to be a kind of an ongoing concern that gross margin level itself we will be seeing some dent?

I'll take it. Surya, you're right. Last quarter, it was mainly on account of remdesivir. We had a very high percentage of raw material costs. And what we see this quarter, we see a bit of that remdesivir, although much lower. However, as I said, we procured a lot in advance. And when -- what happens when you procure a lot in advance? Most of it goes and stays in the inventory, but some are in nature of consumables and -- like solvents, which go and get into the P&L immediately. As a result, you see a high material cost in the P&L. Over a period of time, as we use this material, and that may be over a few quarters, we should see this gradually normalizing. We are keeping -- we'll keep a close watch on that because it's not always good to buy raw materials at once, but we prioritize that because we think customer experience and our delivery is very important, and hence, we decided to do what we did. And over a period of next few quarters, we should see this gradually normalizing. So yes, if I answered your question.

Yes. And then just to comment if I -- I don't see it particularly as a negative, but I actually think it's a prudent thing to do. In general, we've made an active choice to carry higher inventory levels, higher stock of consumables or warehouses are running full as our stock rooms, and that's really deliberate. I mean we're in a pandemic environment. You see more broadly in the economy and in other industries people struggling at times with logistics and distribution and supply chain and lengthening supply lead times. And I'd much rather make sure we're as insulated from that as we can do. And one of the ways of insulating yourself from that is to carry a little bit of a higher inventory load. For me, it's quite a healthy indicator. We're doing that because we see demand, and we want to be ready to service that demand.

Yes. So sir, just a clarification on that again. See whether this remdesivir manufacturing was from Mangalore unit?

In terms of a specific location. Sibaji?

No. It is not from Mangalore unit. We get it manufactured from our other manufacturing facilities that we have.

Okay. Sure. My second question is, sir, on the Biologics plant. So out of the total spend of like a $50 million kind of spend on the Biologics plant, what portion of that is already capitalized? And what is the occupancy and utilization rate that we'll be having for that unit?

So Sibaji, if you maybe take the opportunity to sort of do a broader recap of where we are on CapEx this year. So the big program this year, we gave guidance at the beginning of the year. And as you do that, I can sneak in and say -- you'll forgive us, but we won't be giving you the asset utilization of individual plants and lines. It's not a level of disclosure that would be usual in our business. But I'm sure Sibaji would be happy to give you the general shape of the CapEx program, what we're investing in and why.

Yes. I will do that. So broadly, based on whatever we told you are right, we have invested around $50 million in the Biologics and it's on the ground. For the current year, our CapEx guidance has been INR 7.5 billion or $100 million to $120 million. That included an expansion of our Biologics plant as well. Part of that has already happened and has been reported in half 1. And some part of that will happen in the rest of the year. So we will continue to expand our Biologics facility based on the demand that we are seeing. So the amount of CapEx that has gone into Biologics plant will vary from quarter-to-quarter.

Sure. Sure. Okay. Yes, yes. If I just add one more, please. In the previous quarter, you had mentioned about the spike proteins what you have developed, given the kind of situation what the entire volume is facing about COVID and all. So any progress on the commercialization aspect on those development front, sir?

Yes. Maybe, Mahesh, you could dive in and take the opportunity just to talk a little bit about that. One of the things I would caution you is all of those COVID-related activities for us often scientifically interesting, certainly something that we've got skills to contribute. But it's not a strategically core business for us. We're doing it as much driven by a sense of obligation and duty to play our part in a global pandemic response as we are for commercial reasons. So many of those activities, the reason for disclosing them to the capital markets was less about their financial value, more just to demonstrate that we're playing an active part. But Mahesh, do you have any other comments?

I think you covered it, Jonathan. I'll just add a little bit of more color to it. The kind of things that we have done are more supporting in nature outside of remdesivir, which is a direct help, right? What we've done is make sure that there are reagents that are available that are needed for kits. We've made sure that we have tests that are developed. We've made sure that there are tests that the vaccine manufacturers can use. And these are all supporting services. Literally, just to enable the movement of the other manufacturing organizations such as the vaccine manufacturers or the clinical trial groups or the diagnostic labs to help in the pandemic. So the focus has been really to use our -- put our scientific acumen and expertise for that purpose as opposed to really making it a revenue-generating opportunity.

Okay. So was it leading to any cost pressure, sir...

[Operator Instructions]

So these are items that are...

Mahesh, I think we lost you. What we'll do, we'll continue with the queue. And if we get chance, you can make a comment on that at the end.

[Operator Instructions] The next question is from the line of Prakash Agarwal from Axis Capital.

My question is towards margins. So in the last 2 to 3 years, we have seen significant improvement in the products or these offerings. We've been talking about ADC and recent press we are also talking about a couple of new initiatives and biosimilars also ramping up. Just trying to understand how and then while the growth is definitely looking upwards of mid-teen plus, when do you see the step function step-up in the margins? We are in that range of this 28% to 30% and excluding other income here. But I mean when do we see the margin inching up for us into the next 200, 300 basis points. How do we think about adding new and improved services, which I understand are higher value? But how do we see margin improvement from here from these services?

Yes. Good -- interesting question. Actually I'd put an even broader frame on it and go back a little bit. Syngene's margin has been pretty much consistent in that sort of very high 20, low 30s at the EBITDA level. I remember 5 years ago having the same discussion with you on analyst calls and saying, look, that's a solid, sustainable rate. We'll fluctuate a little bit around within that zone, but I think that is sustainable while investing consistently in the business and continue to grow and globalize and add new services. And that's exactly what we've done and I think we're continuing to do. That's a pretty top-tier set of margins by our industry standards. Every time I look around the world and look at the whole range of competitors that are in our industry, whether they're companies in India, whether they're companies in China, Europe or the U.S., whether they're public companies or private companies, what I consistently see from Syngene is an upper quartile margin structure. So I'm not sure I buy into the premise that there should be ever upward march on margins when you're already one of the margin leaders in your global industry group. What we are willing to do is actively invest even if that means that our margins regress a little bit towards the mean for our global industry group. The key thing isn't actually margins. It's about value creation beyond your cost of capital and we do that on an enduring and sustainable basis. So I'm generally happy with the margins. I think if you do a comparison across the global industry group of public and private, you'll see that we are consistently one of the better margin businesses, one of the leaders. And the reason for that is around the value we create for our customers. And it's that combination of managing the businesses allowed us to, I don't know, over the last 5 years, more than triple the revenue, effectively triple the market cap of the company.

Okay. And my second question is on the costs related to Mangalore facility. What is the margin pull-down due to Mangalore facility currently? And is it fair to assume that once Mangalore is on the pull-down stops and then we can see margin expansion, would that be correct way of understanding?

A fully utilized Mangalore facility won't be margin dilutive. It should be pretty much in line or even accretive to our core margins. So yes, we're some way off. Yes, I think we've given extensive guidance. Certainly, it's a topic I seem to repeat the same phrase every quarter. The key pivotal piece for Mangalore is getting FDA and other major regulatory approvals. We've got programs ongoing to deliver that. We're on track with those. I think they'll deliver that within the 2-year time frame that we set. And then beyond that, you start to build that business, drive asset utilization. And that then allows that bit of the business to contribute to our profit -- to our margin structure. But we've got more than that going on. I mean Syngene as a business is not a single string to our bow, single shop business. So it's not all about Mangalore. Mangalore is just one of a number of businesses. We' have even more than that going on within the Manufacturing Services. I'd point you to the very good progress we're starting to see in our Biologics business. So it's one of many operating leverage points. It's not the only one.

Yes. I understand that. Are we calling out the top line and the cost related to that?

No.

The next question is from the line of Anubhav Aggarwal from Credit Suisse.

Just a clarity on the raw material argument that you mentioned. I have not understood it actually, sir. Do you mean to say that you procure raw materials and since then the raw material prices have gone down? And therefore, when you're pricing it to customers, you're not getting an equal benefit. The gist of the question is that with...

No. I think the premise of the question and the comment was -- from the other question was the proportion of money tied up in raw materials in the business has gone up this year compared to previous quarters. And the answer to that is yes, it has because we have bought more raw materials to put them in our warehouses and stockrooms. And the reasons for carrying a higher inventory of raw materials and consumables is because there's a global pandemic going on and we can see challenges that other industries and other companies are facing with supply chain, logistics, distribution, shipping, lead times, delivery and we want to be insulated and protected from that. And the way to do that is to make sure that you've already got the raw materials you need for the second half of this year. So our current -- our P&L for the first half, you can see a rising cost of factors of production like raw materials and consumables. And the reason for that is we've bought more of them so that we have them when we need them throughout the second half of the year. Hopefully, that -- does that get to the essence of it?

Sir, I'm still confused in the sense that, one, I can understand the inventory is much higher with us, but I'm not able to understand still that people are stocking higher. Why is that impacting your P&L to this extent? That's something still unclear to me.

I'll try answering that, but I'll...

Yes. Please go ahead.

I'll make one more attempt. As I said, our raw material -- part of the higher raw material is because we continue to manufacture remdesivir, but it's only a fraction of the increase. The rest of it, it comes from some of the raw materials that we buy that get expensed up or charged to the P&L immediately. Project-specific raw materials get inventorized, the general raw materials. And we have a lot of that, like solvents, do not get inventorized, get charged up to the P&L immediately. That doesn't mean the raw material is not with us. It's an accounting policy that we follow that if we cannot link a particular raw material to a particular project, it gets to the P&L immediately and that's why you see the higher charge in the P&L. Hope this is clear.

Okay. Yes, it's clear to me. Basically solvents, et cetera, that's not priced into the customer. That's open effectively. If it goes down, it benefited. It goes up, that's a hit in the near term. Understood. And second question is, can you just roughly tell us how big is Manufacturing out of the component like 3 businesses that you have, discovery, Development and Manufacturing, today? And the INR 600 crore top line, roughly how much is Manufacturing total for you guys?

Yes. So Sibaji, do you want to give a comment just broad shape for divisions, what's the sort of percentage distribution between them.

Yes. So on a full year basis, I'll give you -- I don't want to go into specifics of a quarter. At this point of time, 1/3 of our revenues come from dedicated centers, 1/3 from Discovery and 1/3 from Development and Manufacturing. And from quarter-to-quarter, this may shift, but on a full year basis, this is the pattern we see.

And sir, just for clarity, so Development is basically equal to Manufacture for us?

Development is not equal to Manufacturing. Development is a stage before Manufacturing. What we do today is that we are reporting these tools in a combined form. So Development and Manufacturing is 1/3 of our revenues.

The next question is from the line of Charulata Gaidhani from Dalal & Broacha.

Congrats on the good numbers. And I wanted to know how much would be remdesivir in the current quarter?

Okay. And your second question?

And the second question pertains to the FDA approval for the Mangalore plant. Then, you said 24 months. Would it mean end of -- middle of FY '24?

Okay. Thank you. So Sibaji, do you want to give some guidance? Maybe, Mahesh, you can on the FDA one. I don't think we broke it down to a quarter. In the past, I think we gave a broader time line for that. But over to you, guys.

Charulata, the line over here broke a bit. If you can please repeat the first question, it would be a big help to me.

The first question is one were unlikely to answer actually, which is what was the revenue breakup of remdesivir in the second quarter, first quarter. It's not a [ level ] we have.

Sure. So Charulata, thanks for the question. We don't give breakup to that level. But as we mentioned, that at a normalized level, we are growing at mid-teens. So if you take out the other aspects, which is a soft quarter 1 of last year and remdesivir from the first half growth, we are still growing at a mid-teen level. So you can then model it based on that.

Okay. Okay. Right. And in terms of the approvals?

Yes. So Charulata, this is Mahesh. To answer your question around the timing for the Mangalore. You can expect that we are looking at the timing that the early or the first half of FY '24 to get the first regulatory approvals in place for that facility. As Jonathan mentioned...

Go ahead, Mahesh, I was going to answer but go ahead.

Yes. No, I was just going to mention that we have the strategy and the pathway for that approval in place. We will, of course, look to continuously revisit that time line and do everything we can to accelerate it as well. However, we want to be realistic about the fact that today the environment is very dynamic. There's a lot of changes that are happening with regards to prioritization at the FDA, which is the key regulatory body that we are looking at for regulatory approvals.

Yes. I think you touched on my point, which is, of course, it won't be lost on any of us. When the FDA comes to inspect, it's their decision to do and it's their time line. It's not ours. So when we give you guidance, it's a prediction or it's an estimate. But as it's not in our control, it's completely down to the regulators.

Right. And do you expect the approval for the Biologics plant?

Again, I'm not sure which Biologics plant you're referring to, which approval. So Mahesh, could you shed any on that?

Yes. So just to emphasize, so we have a Biologics facility that is a mammalian manufacturing facility and we are looking at the regulatory pathway for getting that facility approved as well. At this point of time, I will not be able to give you a specific date for that. However, I would say that we are in active negotiation with clients who will help us to use that facility for commercial manufacturing, which, of course, will happen through the FDA approval process. So stay tuned on that one. The microbial facility, we just brought online so we are finishing the qualification and that will be a little bit further down in terms of its approval or regulatory pathway.

Ladies and gentlemen, due to time constraint, that was the last question. I would now like to hand the conference over to Ms. Gauri Kanikar for her closing comments.

Thank you, everyone, for joining today's call. Hope we have answered your questions. If there are any further questions, please do get in touch with our team, and we will be happy to get back to you. Have a good day, and thank you once again.

Thank you. Ladies and gentlemen, on behalf of...

Thank you.

Syngene International, that concludes this conference call. Thank you all for joining. You may now disconnect your lines.