Syngene International Limited (SYNGENE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Syngene International's Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Ms. Nandini Agarwal. Thank you, and over to you, ma'am.

Good morning, everyone. Thank you for joining us on this call today to discuss Syngene's first quarter results for FY 2027. To discuss the financial and business performance for the period, we have on this call today Ms. Kiran Mazumdar-Shaw, Syngene's Executive Chairperson; Mr. Siddharth Mittal, Managing Director and Chief Executive Officer; and Mr. Deepak Jain, Chief Financial Officer. After the opening remarks, they will be happy to answer any questions you might 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 released. With this, I will now turn over the call to our Executive Chairperson, Ms. Kiran Mazumdar.

Thank you, Nandini. Good morning, everyone, and thank you for joining us. Before I begin, I would like to welcome Siddharth Mittal to his new role as Managing Director and CEO of Syngene. During his 13 years at Biocon, Siddharth has played a key role in shaping the strategic direction of the company, helped transform its commercial and operational capabilities and position the company for sustainable growth. Having worked with him closely, I have every confidence that his business acumen, leadership experience and execution-focused approach equips him well to lead Syngene, not only through the current transient period, but also to set a strong foundation for the next phase of growth and value creation. Let me start by saying that FY '27 is a year of transition for Syngene. It is a year of course correction, strategic renewal and disciplined execution under a new leadership team. While the environment remains challenging, we have used the last few months to take a hard look at our business, identify where we have lost momentum and define a clear path to restoring sustainable profitable growth. Over the past few years, I believe we have drifted towards the larger share of commoditized research services where differentiation is limited and pricing pressure is inevitable. At the same time, our biologics manufacturing business became disproportionately dependent on a single large customer. The loss of that business has had a significant impact on our near-term financial performance and has reinforced the importance of building a more diversified and resilient commercial portfolio. These have been important learnings for us. They have sharpened our strategic focus and have strengthened our resolve to reposition Syngene around areas where we can create sustainable competitive advantage. And I'm pleased that I have now stepped in as Executive Chairperson to make this happen. Our first priority is to build a much stronger commercial engine. Winning business, deepening customer relationships and expanding strategic partnerships across global biotech and pharmaceutical companies will be central to our growth agenda. We are strengthening our commercial organization under the leadership of Abhijit Duchsi, a former Chief Commercial Officer of Biocon's Generics business, who has delivered very significant performance during this role. Abhijit will make sure that we have a sharper market segmentation, greater customer engagement and a more focused business development approach. Second, and this is very important, we are reaffirming CDMO as the primary growth engine of long-term growth. We believe the industry continues to offer significant opportunity for high-quality partners with scientific depth, development expertise and world-class manufacturing capabilities. Our investments in discovery, development and manufacturing positions us well to capture this opportunity. Third, we are moving decisively up the value chain by expanding our differentiated discovery capabilities. As you all know, artificial intelligence is transforming drug discovery and Syngene intends to be at the forefront of this evolution. We are integrating AI across the discovery workflow, combining computational biology, machine learning and advanced data science with deep experimental expertise to accelerate and improve the quality of research outcomes. Alongside AI, we are investing in emerging scientific modalities and strengthening our capabilities in translational science and clinical research, enabling us to partner with customers from target identification through early clinical development. Finally, large-molecule CDMO remains one of Syngene's strongest strategic differentiators. Few companies globally can offer the breadth of integrated biologics capabilities that we have built from cell line development and process optimization to clinical and commercial scale manufacturing. Combined with our expertise in biopharmaceutical manufacturing and our expanding global manufacturing footprint, especially the Bayview facility in the U.S. positions Syngene as a trusted end-to-end partner for biologics innovators. While the recent setback in biologics manufacturing has been significant, it has not diminished the strength of our capability or the long-term opportunity before us. The current year is therefore one of rebuilding rather than maximizing growth. For the full financial year, we do expect a single-digit decline in revenue in rupee terms and EBITDA margins in the mid-20%. Our focus is on restoring commercial momentum, improving asset utilization, driving operational efficiency and creating a higher quality, more differentiated business. By the end of this fiscal, we expect these actions to position Syngene for a return to profitable and sustainable growth, which will be delivered from FY '28 onwards. We are confident that the strategic choices we are making today will create a stronger, more resilient and more differentiated Syngene for the future. Now with that, I'd like to hand over to Siddharth to take you through the quarter's performance and our strategic priorities in greater detail. Over to you, Siddharth.

Thank you, Kiran, and good morning, everyone. I appreciate the opportunity to lead Syngene at such an important point in its journey. And I would like to thank the Board of Directors for the confidence they have placed in me. The CRDMO industry continues to present significant opportunities for long-term growth, and I'm very confident that Syngene's strong scientific foundation, differentiated capabilities and trusted customer relations position us well to capture these opportunities. So my immediate focus will be on translating these priorities that Kiran outlined into a very disciplined execution and tangible business outcomes. This will entail sharpening our commercial execution, strengthening delivery across our businesses and building a more agile, cost-competitive organization. While we will continue to invest in our discovery and CDMO capabilities, AI and digital technologies and differentiated scientific expertise will definitely deliver greater value for our customers and strengthen our competitive position. Let me now take you through key business highlights for the quarter. Syngene signed a memorandum of understanding with Translational Health Science and Technology Institute, a premier institution under Department of Biotechnology Government of India. The collaboration establishes an operational partnership for early- and late-phase clinical development, translational research and bioanalytical sciences. The collaboration will also enable the evaluation and execution of first-in-human and Phase I clinical programs, along with bioanalytical, biomarker and patient-based clinical research programs. We also continue to strengthen Syn.AI, our AI-enabled scientific platform for accelerating drug Discovery Services. The company developed giga-scale virtual screening capabilities, enabling larger libraries of molecules to be screened and prioritized, accelerating the identification of promising drug candidates. We also advanced our AI-driven de novo design capabilities, helping accelerate design and optimization of novel drug candidates. Now these investments are helping us to enhance productivity, improve speed to science and hence create a greater value for our customers. We are also pleased to be recognized for the second consecutive year in Time Magazine and Statista World's Most Sustainable Companies 2026 ranking, selected from more than 5,800 companies across 43 countries. This recognition reflects the strength of our sustainability agenda and reinforces our reputation as a trusted global partner for our customers. Now let me turn to the financial performance for the quarter. Revenue from the operations for the quarter was at INR 736 crore, a decline of 16% year-on-year, primarily reflecting the absence of offtake from Zoetis during this quarter. Additionally, we also experienced the attrition of a few clients in our Research Services business. Research Services accounted for 78% of the sales, while CDMO accounted for the remaining 22% for the quarter. Operating EBITDA for the quarter stood at INR 91 crore with an EBITDA margin of 12%. The main -- the margin performance reflected the impact of lower revenues together with foreign exchange hedge loss of INR 50 crore during the quarter. This impact was partially offset by our ongoing cost optimization program, including employee-related costs and other expenses. Profit after tax, but before exceptional items was at INR 1 crore. During the quarter, the company recognized an exceptional charge of INR 10 crore net of taxes related to termination benefits extended to employees in accordance with the company approved policy. Consequently, reported profit after tax was a negative INR 9 crores. Capital expenditure during the quarter was approximately INR 70 crore, primarily in our Bayview facility and other investments across technology platforms, including automation and AI capabilities. But despite the near-term challenges, our balance sheet remains strong. We ended the quarter with a net cash balance of INR 1,541 crores. And we will continue to make investments throughout the year, primarily in operationalizing our Bayview facility, expanding our capabilities and advancing new modalities that will strengthen our long-term competitiveness and position Syngene for future growth. Let me conclude by reiterating that our priorities are clear and the focus of the management team is now on executing them consistently, enhancing operational performance and delivering better outcomes for our customers and stakeholders. With that, let me open the line for questions and answers.

[Operator Instructions] We will take the first question from the line of Kunal Dhamesha from Macquarie.

First question on our guidance revision, which I think earlier we had mentioned it would be more or less flat revenue and now we have revised down to degrowth of low single digits. So what has changed between Q4 and Q1 leading to this revision if you could provide some highlight here.

Let me start with answering that question and then ask Siddharth to continue. Basically, as I mentioned earlier on, the big impact that we have felt this quarter is the loss or the absence of the Zoetis contribution to our numbers. We see a significant decline in this particular business over this fiscal. And therefore, we believe that by -- we are of course working hard to fill this gap. But by the time we start filling this gap with other customers, we believe it will be by the end of this fiscal. And therefore, we are projecting or guiding for a slight decline in revenue.

And if I may just add, Kunal, we've of course had a hard look at what are the discussions going on with our various customers and the pipeline. I think Kiran did allude in her opening comments that we are looking at sharpening our focus on commercial execution and by focusing on CDMO as a prime growth driver and, of course, the differentiated offerings in discovery business. And I think while we get the new commercial organization to fire, we, of course, will -- there will be a gestation time from the time we get the RFPs and then translate that business into revenues. So what we have guided for is what we believe is the realistic view of where we will end up in the year. But of course, we have also said that H1 is where we will see a significant impact in H2, we have a better visibility on both CDMO as well as our discovery businesses.

And just a follow-up on that, when we are saying that FY '28 would be a better growth year for us, right? And we are trying to fill this gap with newer product. But my understanding is, as you highlighted, that these RFPs take time to convert and then there is a tech transfer involved in certain cases, there is a requirement of plant inspection, et cetera. So one question out of it is this gap which is coming from a commercial molecule will it be filled with, let's say, clinical molecules or commercial molecule? If it is commercial molecule, do we have strong visibility here or we are still at the RF stage?

It's a combination of both. We do have certain commercial molecules. And I think I would like to also specifically mention Mangalore. We all are aware that Mangalore had a very low utilization in the past years. We have had very good discussions and few lock-ins for both commercial as well as clinical molecules from Mangalore. And this fiscal year itself, you will see a significant ramp-up in utilization. And that utilization -- the increase in utilization will continue in FY '28, which will of course drive the revenue growth in our small molecule CDMO business. And as far as the large-molecule CDMO business is concerned, again, we are looking at operationalizing Bayview. By end of this year, we have discussions going on with prospective customers who want to utilize this facility, which will drive revenue growth in FY '28.

And what about the Stelis facility? What are you seeing there in terms of traction?

See, the customers have already signed up, and we have taken batches for a few of our customers. And again, there also we see a ramp-up happening during this year and continuing into next year. But most of these molecules in Stelis are at clinical or development stage. So at this stage, we do not have a large volume commercial molecule from Unit 3.

Kunal, to answer your question, I think we have to basically really have a sharp focus on the CDMO business, which I think Siddharth and Abhijit Zutshi will really now double down on. I think that's where we have found that we have really, not really taken advantage of our very differentiated position because we were just being very complacent about one big customer. So I think that's where the real strategy is going to be focused, and that's where we believe that the real opportunity lies.

And if I can just ask one more, let's say, segment-wise in Q1 between Discovery and CDMO, if you could highlight how the Discovery has done. And it seems that the macro environment for Discovery business is improving with VC funding in U.S. up by single digit year-to-date. So are we seeing that momentum in the Discovery business? And if you could provide Q1 growth number for Discovery business, that would be great.

So Kunal, to answer that question, let me answer that by saying that actually we have answered that particular percentage in Siddharth's opening remarks where really 78% of the business came from the Discovery development services and 22% came from CDMO, this quarter. But what -- to answer your second question about Discovery Services, we believe that we need to really differentiate our Discovery Services because I think the opportunity for Syngene, which has always been ahead of the curve is to really look at new science, new technologies that will differentiate us further, and that's where we are really focused. Otherwise, it becomes a race to the bottom because it becomes commoditized and then you're just basically providing very low-margin services, which is what has happened to us. So I think we need to double down on differentiated services, and you will see this big turnaround next year because that's what we are doing this year. A lot of our focus is on AI-led differentiation. And we think we are very confident that this will happen during this fiscal, and we will see that turnaround by the end of this fiscal.

We'll take the next question from the line of Shyam Srinivasan from Goldman Sachs.

Just a comment around the Discovery business and attrition of a few clinically stage clients, right? If you could just provide some additional details around it. Is it just how the pipeline has evolved? Or is there something more specific for this attrition?

I think the attrition has happened really because of a focus on the cost of these services. Again, I go back to the fact that as you get more and more into commoditized services, there are going to be competitors who offer these services at a much lower cost. We do not wish to compete on such a level. And therefore, we all opt out of such opportunities and there is attrition seen of such customers. And that is what I again want to emphasize the fact that we would like to start getting back to our old formula of having very, very value-added differentiated services where I think we have basically taken the eye off the ball. And that's where we want to focus. And therefore, I think by the end of this fiscal, you will see that turnaround.

That's helpful. Just I'm looking for some illustrations like what -- how would you classify the commoditized part, which you're deemphasizing in Discovery as well as what are the new value-added parts? Is there something that you could illustrate so that we just get a hang of which parts is where Syngene is trying to focus on?

So maybe we should take this offline, Shyam, and I think Siddharth will be very happy to discuss this with you. But it's basically very common generic kind of services.

Mostly in discovery chemistration. I think that business, of course, in the Indian CRO space, you know that there are many companies who have invested a lot over the years, and these are commoditized services, is simple, I would say, discovery work that is happening. And our focus would continue to be on specialized technologies. I think in the past we have alluded to newer drug classes like oligonucleotides, ADCs, peptides, of course, is not new, but it's a very exciting space, and we are looking at double-downing our investments in these new modalities.

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

My first question was about the CDMO biologic business opportunity, ma'am. See, in fact we know that the anchor client for us for the large-molecule biologic business was at -- large-molecule CDMO business was at majority and that was a kind of a starting point also for that business in a greater way. So like challenges that we are recognizing there, so any concrete progress in terms of the kind of the clientele addition or any visibility, anything that we can share that will provide some incremental visibility about the CDMO business wherein larger investments are also gone from our side. So that will be helpful, please.

Yes. So let me answer that question by saying that we were over-dependent on large customer and obviously a lot of investments were made then to diversify that portfolio. But by the time that happened, we had a big drop in the opportunity with the large customer. So we then had where we were left with spare capacity and we had to fill in a lot of the new capacity that we had built in anticipation of diversifying that business. We've also, as you know, invested in the Bayview facility in the U.S., which also offers us a very large opportunity to also have a diversified geographic footprint. Now we have already obtained quite a few projects from biologics requirements in the new facilities that we have acquired as a result of the large dependence on that one customer. And of course, Bayview is in the state of being made into a state of readiness. And we have already had a lot of expressions of interest and many of that 1 or 2 have been converted into a project-based CMO requirement in the U.S. But the actual revenues of that will only start showing by the -- significantly from next year. And in the meantime, we are really now doubling down on filling that big gap that has been created by the loss of the one big customer. So I think we have a lot cutoff for us, and I'm glad that we have a very focused commercial engine now that is going to double down on this very differentiated service that we offer. And I think we'll be able to share more color and visibility by next quarter because I think right now we are seeing some very good green shoots, but I think we will start giving you better clarity starting next quarter.

One more thing about the clinical trial activities that we have forayed recently. So we have talked about it at length, but there is -- so far, there is no commercial sense to the analyst community. So if you can add anything to that...

Yes. I think this is a very, very attractive part of our business that is emerging. It's a small base right now, but it has grown significantly over the last year. But because the low base, it's difficult to really sort of talk too much about it at the moment. But I think we have seen a lot of progress. We have had new leadership. We are putting in some new capabilities in translational research. And we are very confident that this -- starting this fiscal, we are likely to see a very strong growth in this business, which will start becoming a significant part of our business going forward.

It also positions the company, differentiates us from rest of the clinical research companies because, I mean, in India, you know the companies are more focused on BA/BE studies and a Phase I or a global Phase III or Phase II. These are some of the differentiators for us and will definitely in the years to come will be a large contributor as a percentage of our overall revenues.

Okay. So is it fair to believe that, okay, let's say, over a period of 3-year time this clinical trial revenue stream will be about, I think, 20% of the total company's revenue for a company like us. Any sense on those lines?

See, Surya, we cannot quantify in terms of percentage because other businesses will also grow. But today, it's a small base, as Kiran mentioned, but it will become a larger part of our business, both in absolute terms as well as in percentage terms.

Okay. Just last question from my side, sir. You mentioned in your opening remarks that there is some progress visible on the small molecule CDMO side from your Mangalore site. Whether it is a kind of a project which is getting extended from your share of activity or it is a fresh commercial manufacturing opportunity that you are getting from some client?

So these are more direct manufacturing opportunities mostly. And again, one of the focus for Abhijit and his team would be to look at integrated drug discovery and development. So the molecules in discovery labs should move to development at various facilities. And that's what -- that's where we think we can add a lot -- capture a lot more value, which today we are not doing it so much.

The next question is from the line of Bino Pathiparampil from Elara Capital.

Just couple of follow-up questions. So I was looking at your revenue run rate 3 years back before the Caritas contract came in. At that time you used to do around $350 million to $400 million. As we all know, this product exploitative contract did not work well and we are seeing destocking. But even if we annualize the current quarterly run rate, actually won't reach the revenue run rate reached 3 years back because of the Caritas contract. What is the -- what has happened to the rest of the business?

I think if you look at our presence, of course we are expecting the second half to be much stronger than the first half. So I don't think you should look at the current run rate based on today's -- on this quarter's numbers. But having said that, I think you should understand that the impact of the one client was nearly $50 million. So I think if you look at that particular impact alone, it's significant, which we are now trying to fill. And if you look at the fact that we have seen attrition in some of our commoditized service offerings, which we deliberately did not focus on because we felt that the low-margin business was the race to the bottom. We are rebuilding that business. So to answer your question, yes, we were at a good run rate in the last -- over the last few years, but it has started declining, as you know, even starting last year. And what we are basically now doing is really rebuilding the business, rejigging the business and making sure that we get back to this very robust growth because our aim is to really get back to a double-digit sustainable growth which we think we will be able to do starting next fiscal.

Understood. Just a follow-up. Can I assume that now our Zoetis revenues are 0, so that it's completely out of the base?

Well, not completely 0, but a very small percentage of that.