Syngene International Limited (SYNGENE) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Syngene International's Q2 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this meeting is being recorded. I now hand the conference over to Ms. Soudabi Neduvanchery from Syngene. Thank you, and over to you, ma'am.

Good morning, everyone. Thank you for joining us on this call to discuss Syngene's second quarter results for FY 2027. To discuss the financial and business performance for the period, we have on this call today 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 may have. Before we begin, I would like to caution that comments made during the conference call today will contain certain forward-looking statements and must be viewed in relation to the risk pertaining to the business. The safe harbor clause indicated in the investor presentation also applies to this conference call. The recording and transcript of this call will be made available on the company website. With this, I would now turn the call over to our Executive Chairperson, Mr. Kiran Mazumdar-Shaw.

Thank you, Soudabi. Good morning, everyone, and thank you for joining us. At the end of the quarter -- last quarter, I described FY '27 as a year of transition and transformation for Syngene, a year in which we could reset our growth priorities, sharpen our competitive positioning and build a stronger foundation for sustainable profitable growth. I outlined three strategic priorities: reenergizing our commercial engine, establishing CDMO as our principal growth driver and transforming Discovery Services into a more differentiated technology-enabled and higher-value business. Our second quarter performance provides encouraging early evidence that this strategy is beginning to gain traction. The global pharmaceutical industry, as many of you know, is undergoing a significant transformation. Increasing scientific complexity, the emergence of new therapeutic modalities, growing cost pressures and the need for resilient global supply chains are reshaping how pharmaceutical and biotech companies approach research, development and manufacturing. Customers are increasingly seeking strategic partners who can combine scientific excellence, technological sophistication and manufacturing capabilities within an integrated operating model. This shift plays directly to Syngene's strength. Added to this is, of course, the geopolitics of our times, which is also favoring companies like Syngene in a China Plus One model. CDMO is central to this ambition. We see CDMO as Syngene's most significant long-term growth opportunity, particularly as the industry moves towards increasingly complex biologics, advanced modalities and diversified manufacturing networks. Our investments in biologics manufacturing in India and the United States, together with our expanding capabilities in peptides, oligonucleotides and other specialized modalities, we believe position us well to participate in these emerging opportunities. An important milestone in this quarter was the signing of our first manufacturing agreement for the Bayview Biologics facility in the United States. This is more than a commercial win. It is an important validation of our India U.S. integrated biologics manufacturing strategy, which combines India's scientific and operational strengths with a U.S. manufacturing presence to offer customers greater flexibility and supply chain resilience. While the full commercial potential of these investments will take time to materialize, we are encouraged by improving customer engagement and expanded opportunity pipeline. Our second -- strategic priority is to reposition Discovery Services for the next phase of innovation. The future of drug discovery will be shaped by the convergence of biology, chemistry, artificial intelligence, automation and data-driven science. We believe that Syngene has the scientific depth, multidisciplinary expertise and experimental infrastructure to participate meaningfully in this transformation. Our investments in peptides, antibody drug conjugates, translational sciences and other advanced capabilities are strengthening our capability to support increasingly complex discovery programs. At the same time, we are embedding AI, automation and digital technologies into our scientific workflows to improve productivity, shorten development cycles and enhance the quality and speed of decision-making. Our ambition is to evolve Discovery Services from a predominantly execution-led research model towards a more integrated intelligence-driven scientific solutions platform. This transformation will take time, but it is essential to building a more differentiated and competitive business operating model for the future. So we are pursuing a more agile, efficient and accountable operating model with a clear emphasis on cost competitiveness, capacity utilization and, of course, returns on invested capital. The sequential improvement in revenue and profitability this quarter is encouraging and suggests that our corrective actions are beginning to yield results. However, we do recognize that these are green shoots. We have more work to do to restore consistent growth, improve operating leverage and fully realize the potential of our investments. Our immediate priority is to convert an improving commercial pipeline into sustainable revenue growth while maintaining strict execution and cost discipline. I'm confident that Siddharth and his leadership team have the right strategic focus and operational commitment to deliver this transformation. Syngene, I believe, has built its reputation on scientific excellence, quality and customer trust. Our task now is to leverage these strengths to build a more technology-driven globally competitive and profitable organization. We are not simply seeking to restore growth. We are -- repositioning Syngene for the next generation of scientific innovation and global biopharmaceutical manufacturing. And with that, let me hand over to Siddharth for a detailed review of the quarter. Over to you, Siddharth.

Thank you, Kiran, and very good morning to everyone. As Kiran outlined, FY '27 is a year of transition for Syngene with a clear emphasis on restoring growth momentum, strengthening execution and improving operating efficiency. At the beginning of the year, we identified three immediate priorities, which are accelerating commercial execution, improving operational performance and building a leaner, more agile and cost competitive organization. Now during the second quarter, we made tangible progress on all these three fronts. Our revenue grew sequentially by 13%. Operating EBITDA margins improved by 6 percentage points, and we returned to profitability. While we remain below last year's performance, these results demonstrate that our corrective actions are beginning to translate into improved business outcomes. Let me highlight the key developments during the quarter. Our CDMO business continues to be a central focus of our commercial strategy, and we are encouraged by the improving quality and momentum of our opportunity pipeline. A significant milestone this quarter was the signing of our first manufacturing agreement for the Bayview Biologics facility in the United States with a large pharmaceutical customer. Under this agreement, process development activities are expected to commence in India during the current financial year with drug substance manufacturing at Bayview scheduled to begin in FY '28. This contract represents an important first step in commercializing our U.S. biologics manufacturing platform and demonstrates the strategic value of our integrated India-U.S. delivery model. We secured additional manufacturing business during the quarter, including a clinical supply agreement for our biologics manufacturing facility in Bangalore, Unit 3. This represents the latest in a series of contract with an existing partner and reflects continued customer confidence in our scientific capabilities, manufacturing quality and execution. We also successfully completed a technically complex oligonucleotide manufacturing program for a leading global pharmaceutical company. The program involved the development and manufacturing of challenging siRNA molecule, demonstrating our capabilities in process development, optimization and scale-up for advanced therapeutic modalities. These developments reinforce our strategy of building a diversified CDMO platform capable of supporting increasingly complex molecules across clinical and commercial stages. Moving on to Discovery Services. Our focus is on creating a more integrated, differentiated and productivity-driven offering. Effective October 1, 2026, Dr. Jayashree Aiyar, our Chief Scientific Officer, assumed additional responsibility for Discovery Services bringing chemistry, biology and biotherapeutics under unified scientific leadership. Now this is an important organizational step by integrating these disciplines, we aim to strengthen scientific collaborations, improve program execution and offer customers a more seamless discovery experience. As drug discovery becomes increasingly multidisciplinary, our ability to integrate scientific capabilities across modalities will be an important competitive differentiator. Our Discovery Services customer base remained stable during the quarter, providing a foundation as we strengthen our commercial engagement and work towards restoring growth. We are also accelerating the deployment of AI, automation and digital technologies across research operations. During the quarter, we implemented ChemVoyager, an AI-enabled synthesis planning platform alongside automated analytical systems and end-to-end sample tracking solutions. These initiatives are designed to create more connected, data-driven scientific workflows, reduce manual interventions and improve research productivity. Over time, we expect these technologies to enhance our ability to deliver faster, more efficient and higher-value research solutions to customers. We also commissioned a new clinical translational science laboratory in Bangalore, expanding our capabilities in biomarkers, precision medicine, biobanking and bioanalysis. This investment strengthens our translational research capabilities and enhance our ability to connect early discovery with clinical development. And this also aligns with our objective to make discovery services more scientifically differentiated, technologically enabled and commercially competitive. Before turning to our financial performance, I would also like to share an important leadership update. Deepak Jain, our CFO, has decided to leave Syngene for personal reasons and will pursue an opportunity outside the company. Deepak will continue in his current role at least until the close of third quarter's financial results to support a smooth transition of his responsibility and to ensure continuity. We thank Deepak for his contributions and wish him success in his future endeavors. Now turning to financial performance. Revenue from operations for the second quarter was at INR 833 crores, representing a 13% sequential increase, supported by improved traction in the CDMO business. On a year-on-year basis, revenue was 9% lower than quarter 2 of the previous fiscal year, primarily reflecting the absence of Zoetis revenue in the current quarter. Discovery Services contributed 65% of quarterly revenue, while CDMO accounted for the balance 35%. Operating EBITDA stood at INR 147 crores with margins improving by 6 percentage points sequentially to 18%. This improvement was driven by higher revenues, improved operating leverage and the initial benefits of our cost optimization initiatives. On a year-on-year basis, operating EBITDA margin was lower by 22% reported in Q2 of last year, reflecting, of course, lower revenues from Librela and a foreign exchange hedge loss of INR 61 crore that we accounted during the quarter. Adjusted for this hedge loss, the operating EBITDA margin would be in the mid-20 range for the quarter. Profit after tax, but before exceptional item was at INR 38 crore. We recognized an exceptional charge of INR 6 crores net of tax relating to employee termination benefits, resulting in a reported profit after tax of INR 32 crore. This compares with a reported loss of INR 9 crores in the previous quarter, marking an encouraging return to profitability. Now alongside commercial recovery, we are implementing structural improvements to enhance our cost competitiveness and operating efficiency. Our manpower cost optimization measures have been completed, while initiatives targeting other operating expenses remain underway. We expect the benefit of these actions to become progressively more visible over the coming quarters. We are also increasing the use of AI automation and digital technologies across our operations to improve productivity, simplify workflows and strengthen execution. Our emphasis is not simply on reducing cost, but on building a more efficient operating model that can deliver stronger margins and improved returns as revenue growth resumes. Capital investment during the first half was approximately INR 200 crore directed towards strategic capability development, Bayview enhancements, automation and infrastructure upgrades across our research and CDMO business. We remain disciplined in capital allocation, prioritizing investments that strengthen our competitive position, support customer demand and improve long-term returns. Our balance sheet remains strong with a net cash position of INR 1,392 crore at the end of the quarter, providing financial flexibility to support our transformation and growth priorities. The second quarter represents an encouraging step forward in Syngene's recovery. We have seen stronger commercial engagement, secured important manufacturing contracts, improved operating performance and made tangible progress on our efficiency initiatives. However, we do recognize that one quarter of sequential improvement does not constitute a sustained recovery. So our focus for the second half remains clear, which is converting our commercial pipeline into business wins, delivering consistently on quality and time lines, improving capacity utilizations and embedding greater cost discipline across the organization. We will continue to prioritize growth, operational excellence and disciplined capital deployment as we work towards building a more resilient and competitive business. The actions taken over the past two quarters are beginning to show results. Our task now is to sustain this momentum and translate into consistent performance. And Syngene is moving from a period of transition towards a more focused, technology-enabled and globally integrated business model. The early signs of recovery are encouraging, but our real measure of success will be sustained revenue growth, stronger profitability and improved returns on capital. So with that, we would be happy to take your questions. Thank you.

[Operator Instructions] The first question is from Dr. Kunal Dhamesha.

This is Kunal from Macquarie. Congratulations on a good set of numbers. First one for the Kiran ma'am. We have seen a fair bit of turnover in the senior management in this quarter as well. Would you say that the internal reorganization is now complete or we would continue to take the steps to make the organization more efficient?

Well, thank you, Kunal, for your question. I think most of the reorganization is now in a good place. I would say we will onboard some other capabilities, which we believe are important to drive us to the future. But I think most of the reorganization that we had anticipated and planned are complete.

Sure. And if I remember it correctly, last quarter, we had some bit of attrition in our Discovery segment client base, right? And so is it fair to assume that -- and then we had suggested that we kind of discontinued the low-value services. Is it fair to assume that this reorganization effort is also in those directions where the business requirements are and where the business -- some of the business segments which we don't want to pursue?

Absolutely right. I think we are very, very focused on making sure that we have a differentiated services model. I think the commoditizing services which are very, very low margin or no margin kind of services is something we want to kind of wean away from. And so I think we are really focusing on a very differentiated model. As you know, we are already very differentiated in the biologics model when it comes to CDMO business, which is why we are beginning to see a good traction in signing up our capacities because no one else has such capacities, especially U.S. FDA approved capacities. So I think we are very focused on ensuring that we, again, regain our position as a leading edge CRO, CDMO company.

And if I may add, Kunal, so we are not discontinuing any of the existing business on Discovery. So all -- what we are doing is repositioning and as we mentioned that we are going to be using a lot of AI automation and digital technologies and especially on the new modalities and try and integrate our offerings across discovery services. So Discovery will continue to be a very core part of our overall journey. But we will redo the way we have -- I mean, traditionally, it's been more FTE business. And what we are looking at is embedding AI to make it more fee-for-service value-add business.

So that's an important distinction, right, moving away from one business model to another or there is a mix shift. What are some of the key monitorables that you would be tracking? So while I believe because there is a lumpiness in CMO business, the financial performance could be a little bit lumpy or volatile. But what are some of the metrics which you would think that would show continuous improvement on a quarter-on-quarter basis, given all these efforts that you are taking and reorganizing?

See, the new client additions, the number of new projects we onboard, the number of molecules that we progress from our discovery to development, this will be important. And finally, it's all -- it should all translate into revenue growth. I mean we have seen Discovery business degrow over the previous year as well as previous quarter because of some client attritions that we had at the beginning of the first half, I think, which we had alluded to in our first quarter earnings call. And of course, we will look at building back the base, but in a differentiated way. As I mentioned, in an integrated way because today, Discovery Biology and Discovery Chemistry were running as two separate OUs. And today, I mean, we are going to integrate that into a single offering, and that's what our customers are looking at. So when you really look at what our customers' needs are, we have to be agile enough to address those needs. So we -- as we mentioned that it's not going to be an overnight turnaround. We will have -- we have started to see encouraging client pipeline, client discussions. But to translate into revenue growth, we will need some more time.

Sure., when you move from, let's say, FTE to FFS basis, structurally, how does that impact productivity and profitability in the Discovery business?

It should...

I think -- yes, it should be very positive because we believe that it will add value. And I think it will basically allow us to capture much better programs from clients.

And we would have seen this, right, historically.

No, we are seeing it already because of the differentiated services that we also have. And I think embedding a bit of technology into it and then greater technology into it will clearly give us a leading advantage.

Sure. My last question on this Bayview facility contract that we have gotten. So with this contract, what's the kind of utilization that we are looking at for this facility? And when do you think that the peak utilization in terms of drug substance manufacturing could happen? And also the Unit 3 contract with the existing partner, is it the same partner with whom we had the CMO arrangement earlier?

So Kunal, let me first give you my views on this. First and foremost, we are focused, as you know, on capacity utilization of all our facilities, but Bayview is a facility that needs to be basically brought up to scale because we are -- we have basically identified certain gaps which we need to fix before we get full utilization. What is encouraging is that we have signed up this first contract, which obviously then has to be built upon. I think this is -- as we mentioned very clearly in both our statements, this is just not about indicating that we've actually arrived and we've done everything that is required. It's just an indication that this is a win that actually signals the importance of having a U.S. presence and the confidence of customers to sign up. I would go so far as to say that the capacity demand for biologic manufacturing is huge. And I think right now, the ones who are capturing that opportunity are the Koreans. We would like to be the Indian company of choice, the Indian CRDMO of choice to really basically take advantage of this demand. So give us a little bit of time. I think the fact that we have started focusing on identifying what -- is it that we need to do to really sort of make sure that we have optimal capacity and a very strong business growth driver from CRDMO is what we are really addressing.

Sure, ma'am. And on Unit 3 contract with existing partner?

So we've got multiple customers signed up for Unit 3. And some are doing clinical batches, some are doing development batches, some are doing filing batches. And of course, it will again take time to ramp up, which is based on when they get the approval from the regulators. But at least Unit 3 has got a good set of clients signed on.

We'll take the next question from Harith Ahamed.

This is Harith from Avendus. So my first question is on your FY '27 margin guidance. I think you had maintained it at mid-20s last quarter. But when I look at the implied margins for the second half, that's a sharp improvement from what we've done in the first half. So first question is whether we are maintaining the same mid-20s EBITDA margin guidance? And a related question, if I may add, there's also a fairly significant forex loss that we've seen in the last couple of quarters. So if rupee stays at current levels, are we expecting similar forex loss in third quarter and fourth quarter?

So Harith, no change in the EBITDA guidance. I think as you rightly said, we are -- we have done better. We are excluding the forex loss at mid-20 EBITDA. We continue to work on cost optimization benefits. We are going to see some more benefits coming in, in the second half. But at this stage, we will like to maintain our EBITDA guidance. And as far as the forex loss is concerned, we do have contracts, forward contracts on one of our large dedicated customer contract, which goes on till FY '28. So we will see similar level of hedge losses in the second half as well.

Okay. My second question is on the Bayview facility. Siddharth, if you could confirm the contract that you have announced. And then you also mentioned that we'll commence drug substance supplies from next year. Will this be commercial scale supplies? And is this a product that's already in the market?

So it will be for commercial supplies as well. As I mentioned earlier, the development of the product will be done in Indian process development lab, and it will be tech transferred to Bayview in FY '28. And once the regulators approve it, we will be their commercial manufacturing partner. And it would, of course -- I mean, the product currently is not commercially approved. So that's why we'll have to wait for the regulators to approve the product and commence the commercial supplies in a couple of years.

And just a follow-up on Bayview. The pre-op expenses that we are currently capitalizing, I think you've disclosed INR 66 crore number for the first half. So by when should we expect this to start reflecting in the P&L?

Once we -- I mean, as per our accounting policy, we capitalize the expenses until we receive the first regulatory approval, which we expect somewhere maybe second half of calendar '28, best case.

[Operator Instructions] We take the next question from Shyam Srinivasan.

This is Shyam from Goldman Sachs. Just the first question on the mix. If I calculated Siddharth, when you mentioned 65% Discovery and 35% CDMO, right? So if I do that -- and I think you've alluded to this as well, that the Discovery business, CRO business has declined now for two quarters. And looks like at least the CDMO business, when you mentioned in your opening remarks, the absence of Librela, but that's not declined. It's like over 3% only down Y-o-Y, right? So it's more a function of Discovery being weaker is the reason for the Y-o-Y change. Am I getting that right?

Well, it's a combination of both, Shyam, because we did have a significant number in quarter 2 of last year for supplies to Zoetis. Now this quarter has been 0. So that did have an impact, which was made up by the growth in rest of the CDMO business. But yes, the Discovery business did degrow.

Got it. And you would largely attribute that to the... that started at the start, right? Are these -- what type of customers are these? And is it like we have deemphasized some of these commoditized parts of the segment, and that's the reason why there is a decline. And you foresee this to be in the second half as well, is it, Siddharth?

So we -- as I think we have mentioned even in the previous quarter and today's call as well that some of these services are becoming more commoditized and there is a pressure from competition from large CROs in China as well as some of the emerging CROs in India. And we are not playing a price game or the price per FTE game. And I think that's where we are trying to move to a more integrated AI technology-led business and shift from FTE to FFS, which, of course, will take some time to transition out and move into the newer model.

But I would also like to add to what Siddharth is saying, Shyam, that some of the business attrition is actually attributed to large cuts that the companies themselves are announcing in terms of downsizing their R&D spend. So we are seeing some of that effect.

And I think that if you look at traditionally large biotech pharma companies in the West, they have done a lot of discovery work in-house, either in their own labs or through CROs. And now if you look at 1/3 of total number of drugs under trial at different stages of trial are from China in in-licensed models. So of course, that's changing the need for discovery services and which is, of course, going to impact all the CROs.

Okay. That's helpful. Second question is on the -- on the financial side. Gross margins actually improved, right, despite the decline in discovery, CDMO also declined. So I'm just trying to understand, is it the removal of the commoditized part that is leading to the margin improvement on the gross margin side? That is one. And two, when you now maintain your EBITDA margin guidance, is it excluding all the FX losses? Or because if you add the FX losses, we may not end up at mid-20, right? Is that fair?

See, gross margin is calculated, I think, as revenue less the material cost and the material cost, of course, is only applicable in manufacturing business... in the CDMO business. So the research has more people cost and leaves and other things, which are more fixed in nature. So that's why I shouldn't -- I don't think you should really compare gross margin movement because shift of revenues from discovery to development. But on the -- I mean, on an absolute basis in the CDMO business, I would say our gross margins are probably at similar levels. Of course, Zoetis or Librela was a high-margin product and absence did have an impact on lower gross margin, at least on that part of the business. And as far as the EBITDA guidance is concerned, I think, see, I would say let's wait for another quarter. We are, of course, putting in all efforts on cost optimization. We have already done enough in the last two quarters. We have started seeing benefits coming in. We are also looking at where the growth comes from. And of course, discovery and development business comes at different margins. But at this stage, I'd necessarily say that there is a significant change in our -- EBITDA guidance. But on a more sustainable basis, I think I would definitely draw your attention that hedge losses, we have changed our hedge policy, and we will start moving towards more the options rather than forward contracts. And once the current hedges get over, which will be in FY '28, the sustainable level of gross margins, we are already in mid-20s. And I think that's what is very important.

The next question is from Surya Patra.

First question is on the kind of the SG&A cost improvement what we have seen in this quarter. It seems that, okay, we have reached to a kind of a level which used to be normalized kind of spend prior to possibly the difficult period of the last 1.5 years or so. So how sustainable is the kind of a cost-- SG&A cost run rate going ahead? And are we really kind of seeing the benefit of the cost optimization initiative what we have taken and hence, it is likely to sustain even going ahead and that will support the margin profile going ahead? Anything on that, sir?

That will be our endeavor, Surya, that to sustain the expenses at these levels. And as we mentioned that some of the cost initiatives that we have -- undertaken, we will see, in fact, additional benefits coming in, in the second half.

Sure, sir. Second question was on the discovery services front. So sir, if you can share something on the kind of capacity utilization there or what is the kind of headroom that is there we are having on the discovery research side because that has been the kind of a growth driver in all the difficult times. So hence, just trying to understand while the investments have gone towards the CDMO front, but how sustainable growth momentum that we can have on the discovery front? And what investment if that is planned for that, if you can talk about it?

See, we have our labs already and the client attrition we have seen, we have enough capacity to add more customers. We have bench strength to cater to the growth. But we'll be investing, as I said earlier, on two fronts. One is infrastructure upgrades to align with what our customers are looking at and also AI automation and digitalization. I mean some of the investments on automation, digitization are going to be high. And we are evaluating what are the best possible solutions and what scale should we add up, and we will be making those investments in the coming quarters.