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Edited Transcript of SYNGENE.NSE earnings conference call or presentation 23-Jan-20 10:30am GMT

Q3 2020 Syngene International Ltd Earnings Call

BANGALORE Jan 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Syngene International Ltd earnings conference call or presentation Thursday, January 23, 2020 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chanderlekha Nayar;Investor Relations Professional

* Jan-Olav Henck

Syngene International Limited - SVP of Development Services

* Jonathan Hunt

Syngene International Limited - CEO & Whole Time Director

* Kenneth Barr

Syngene International Limited - SVP of Discovery Services

* Mahesh Bhalgat

Syngene International Limited - COO

* Sibaji Biswas

Syngene International Limited - CFO

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Conference Call Participants

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* Ankush Agrawal;Stallion Asset

* Charulata Gaidhani

Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst

* Cyndrella Carvalho

Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals

* Krishna Prasad;Franklin Templeton Investment Management Limited

* Prakash Agarwal

Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals

* Shaleen Kumar

UBS Investment Bank, Research Division - Associate Director and Analyst

* Surya Narayan Patra

PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to Syngene International's Third Quarter Financial Results Conference Call. (Operator Instructions) Please note that the conference is being recorded.

I now hand the conference over to Ms. Chanderlekha Nayar from Investor Relations. Thank you, and over to you, ma'am.

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Chanderlekha Nayar;Investor Relations Professional, [2]

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Thank you, Margaret, and good afternoon, everyone. Thank you for joining us on this call to discuss Syngene's Q3 performance.

On this call, we have Mr. Jonathan Hunt, Syngene's Chief Executive Officer; Mr. Sibaji Biswas, Syngene's Chief Financial Officer; and Dr. Mahesh Bhalgat, Chief Operating Officer, to discuss the financial and business performance for the third quarter. After our prepared remarks, we will be happy to answer any questions you 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 risk pertaining to our business. The safe harbor clause indicated on our Investor Relations presentation also applies to this conference call.

The replay of the call will be available for the next few days immediately after the call, and the transcript would be made available in a week's time.

With this, I will turn over the call to our CEO, Mr. Jonathan Hunt. Over to you.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [3]

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Thanks, Chanderlekha. And once again, thank you all for joining us on this call to discuss Syngene's third quarter performance.

I'm delighted to be accompanied today by Sibaji Biswas, our new CFO as well as various members of the executive team. So after my opening remarks, I'll take you through some more details on our financial performance. So let me start by giving an overview of the quarter's key financials, followed by operational highlights.

So firstly, if we take a look at the top line, third quarter revenue grew from INR 484 crores to INR 539 crores in the quarter at growth of 11%. Key growth drivers were strong performances in our Discovery Services group and also our Development Services.

To move down to 1P&L, EBITDA was up 10% from INR 158 crores to INR 173 crores, and while profit after tax was up 6%, that took it from INR 87 crores to INR 92 crores. During the quarter, we continued with our ongoing investments in safety, quality and technology. And we also made 3 important new appointments to the leadership team. These investments are critical in strengthening the foundation of the company and to ensure that our growth is sustainable over the long term.

I'm going to leave it to Sibaji to give you more details on the financial performance in a few moments. But let me now move to some of the business and operational highlights.

Now as you know, we've had a theme over the last 2 years of investing in new technologies, new capabilities in the development of new scientific skills. And I just wanted to call out one, and it's an illustrative example, but it shows you a little bit about where our ambitions lie in terms of innovation. So I've mentioned in my earlier comments that we really see Discovery Services as a strategic growth area. And within Discovery Services, we've done quite a lot in terms of developing our capabilities in CAR-T therapy. And as you may be aware, some of the more recent, and I think important breakthroughs in cancer treatment, have come in this area. It's a rapidly expanding field of personalized medicines, and here through the genetic modification of the patient's own immune cells, and that's then used at -- is there to specifically target into tumor cells. This technology is really a combination of cell and gene therapy, chimeric antigen receptors, T-cell therapy or, as popularly known, CAR-T therapy.

Now Syngene scientists have been engaged in cutting-edge discovery and preclinical research in CAR-T therapy and our work includes hypothesis testing and validation of new biological targets as well as the exploration of novel mechanisms related to CAR-T therapies. And I like that our clinical division also offers clinical trial monitoring and data management services to those physicians that are going to want to deliver CAR-T treatment.

On the operational front, you may recall the appointment of Dr. Kenneth Barr about a year back as Senior Vice President, Discovery Services. And that's really helped us consolidate our Discovery Services portfolio and offer more integrated service offerings to clients. Now that integrated approach, I think, has gained significant traction in the Discovery Services business. So on a very similar line, we've appointed Dr. Jan-Olav Henck to the position of Senior Vice President, Development Services. And Dr. Henck brings with him more than 20 years experience in the area of drug development for both large and small molecules, and he'll be responsible for integrating of all development in clinical services to mirror that approach that we've taken over the last year in Discovery Services. I think this integrated approach will allow us to extend our relationship with key customers across multiple service lines and really help us grow our share of the R&D wallet.

I've mentioned this already, but a second, particularly important appointment for this audience, I think, is Sibaji joining us as CFO. As you know, he replaced Mr. Chinappa back in December, who's moved to a new role within the Biocon Group. Sibaji is a seasoned finance professional, has been associated with Vodafone, Hutchison Essar, Fascel Telecommunications and the ABP Group in the past. And of course, last but not least, the newest member of the management team is Vinita Shrivastava, who's the Chief Human Resources Officer. Vinita brings with her over 2 decades of experience in HR and has been associated with Unitherm, HARMAN International, Tesco and HCL Technologies in the past. And she was most recently Senior Vice President and Chief Human Resources Officer at Sasken Technologies.

I think also, while we're talking about people and management changes, I'm sure you'll have noticed one management change within the company that we announced today. And that's the separation of the Managing Director and Chairperson roles. I'm delighted, of course, that Kiran Mazumdar-Shaw will be continuing in the role as Nonexecutive Chairperson, and I'll take up the role of Managing Director and CEO, effective from the 1st of April.

Looking at some operational factors then. During the quarter, we received GMP or Good Manufacturing Practice approval from the Russian Health Ministry, and that's going to enable us to supply drug products to the Russian market. So it's an opening up of a new geography for us, and I think that gives potential for future growth in that area. The viral testing facility that we have also received another certification, that's GLP certification, this time from the NGCMA. And that makes us, I think, India's first, and I believe only GLP-certified viral clearance study service provider. So a bit of a first for us. And these approvals, really, I think, confirms Syngene's commitment to operating at that very highest standards of quality and compliance.

A little bit of an update on Mangalore. The facility is now nearing construction completion, and we expect it to move into being operational towards the end of this current financial year. And then, of course, and we've talked about this, I think, on numerous occasions in the past, while starting those operations, we'll also be going through simultaneous qualification and validation processes as we ramp that up over the next financial year to full-scale commercial operations.

So if I can sum up, overall, the third quarter, I think, showed steady growth, sets us up well for the final quarter of the year. I think we're making good progress on our strategic priorities.

We continue to invest in fundamentals that I think really build the stronger foundations we need for the long term. We see attractive growth opportunities in Discovery Services and Development Services across the business. And I think our investment in areas like CAR-T, I would point out, as an illustration, are good examples of us really moving our science towards the leading-edge of what's possible. And against this backdrop, I expect to see our core businesses of Discovery Services, Development Services and Manufacturing Services continue to drive growth as we move towards the next financial year.

So with that, let me hand over to Sibaji to maybe make some more detailed comments on our financial performance.

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Sibaji Biswas, Syngene International Limited - CFO [4]

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Thanks, Jonathan, and a very good afternoon to all. I'm delighted to take you through our third quarter 2020 financials. This is the first quarter in -- for me in Syngene and I had the benefit of working alongside Mr. Chinappa for a few weeks, and I'm already feeling very well integrated into the company. I am looking forward to meeting many of you in person in the near future.

Now coming to the financials for the quarter. Let me start with the top line growth. The third quarter delivered a steady revenue growth year-on-year. Revenue increased 11% to INR 539 crores compared to the same quarter last year. Our core sales improved by 11% during the quarter, which reflects growth in Discovery Services and Development Services.

In quarter 3, the average exchange rate was $71.22 compared to $69.82 in the same period last year. Adjusted for that, on a constant currency basis, third quarter revenue grew at 9% year-on-year. Gross margin at 43% during the quarter is compared to 44% in the same period last year and is impacted by the strategic staff additions and associated increase in payroll costs.

Let me take a moment to explain these items. During the quarter, staff cost increased by 28% to INR 152 crores compared to INR 119 crores in the same period last year. This increase is attributable to 3 main buckets: First one, being employment as usual, which was -- which grew in the range of 10% to 12%. This is almost in line with the growth of top line. Then comes the hiring to be it -- for it to be scaled up investment in assets like the Hyderabad site, and that contributed to about 3 percentage points. And then additions to the senior and the middle-level leadership to build an organization capable of scaling up contributed to the rest. As a percentage of total revenue, staff cost represents now 28% compared to 25% in the same period last year.

The raw material and power costs, as a percentage of revenue at 29%, was down by 2% due to shift in sales mix compared to 31% in Q3 of the previous year.

Now coming to the company's other expenses, which comprises of professional fees, selling expenses and other general overheads, that's up by INR 14 crores to INR 70 crores compared to INR 56 crores in the same period last year. This is coming from additional operating costs incurred in the new Hyderabad facility and the S2 facility at Bangalore. And also, from a planned increase of, say, in business development activities. Our efforts to build one of the finest quality cultures in the industry and then increased investment in safety and compliance also resulted in additional expenses, but we strongly believe that our commitment to quality, safety and compliance will be up in the future as we scale up our business in the next few years.

EBITDA for the quarter was up by 10% to INR 173 crores compared to INR 158 crores in the same period last year, while profit after tax was up by 6% at INR 92 crores compared to INR 87 crores in Q3 last year. Depreciation stands at INR 57 crores up from INR 43 crores in the same period last year, and this is owing to the investment in the Hyderabad facility and expansion in Bangalore facility. EBITDA and profit after-tax margin for the quarter are at 32% and 17%, respectively, and this compared to 33% and 18% in the same period last year.

During the quarter, we recorded an interest income of INR 20 crores and a finance charge of INR 9 crores, which includes the INR 2 crores towards the facility lease charge. Associated with this interest income, we recorded a INR 6 crores of income tax. Our adjusted EBITDA margin for the quarter, excluding this interest income and finance charge is at 16% compared to the same quarter last year, and adjusted EBITDA is at 30%, and that compares to 18% of last year.

As you may know, Syngene follows the practice of hedging all foreign currency revenues. Currency movement during the quarter has been less than anticipated, resulting in a hedging gain of INR 10 crores in the quarter. This reflects the difference between the ForEx versus the prevailing spot rate. The hedge rate was at INR 72.7 and the spot rate was INR 71.2 during the quarter. In comparison, the hedging gain in the same period last year was around INR 1 crore.

With this, I'll come to the 9-month results. During the first 9 months of financial year '20, revenues have grown to INR 1,466 crores. This is 9% up compared to INR 1,346 crores in the same quarter of the previous year. If you recall, we reported a onetime pass-through billing of INR 40 crores during the first quarter of fiscal year 2019. If I exclude that impact of the onetime pass-through billing, the revenue for the first 9 months actually grew at 12%.

EBITDA for the period was INR 475 crores, which is up by 10% compared to INR 431 crores in the same period last year. Profit after tax was up by 6% to INR 246 crores compared to INR 232 crores in the same period last year. EBITDA and PAT margins for 9 months are at 32% and 17%, respectively.

The effective tax rate for the first 9 months of financial year '20 is 16%. Last year, this was at 19%. The decline in the effective tax rate is mainly due to the impact of the new units that are expected to go live during the year. It also takes into account the true-up in relation to income tax returns filed for the previous year in the current quarter.

With regard to the insurance claim related to the S2 facility, the total amount received to date is INR 177 crores. This is against the total loss of INR 106 crores. We expect to file the final claim over the next few months, and this is the last installment in the next fiscal year.

Now I'll come to the balance sheet. And during the first 9 months of the year, we have invested approximately USD 81 million in our ongoing CapEx programs, of which USD 34 million pertains to the commercial API manufacturing facility. Another $23 million has gone into Discovery Services and the balance of $24 million has gone into dedicated centers and Development Services.

With this capital infusion, our fixed assets currently stand at USD 425 million. This includes an asset under construction of USD 70 million. Overall, we are very much on track to have a total asset base of USD 550 million by the end of the next financial year.

The construction of our commercial API manufacturing plant at Mangalore is on track and is scheduled to be operational as planned by the end of this financial year. As Jonathan has pointed out many times in the past, this project, once commissioned, will go through a process of qualification and validation. We are very happy with the progress of the project and the fact that it is absolutely on plan, and I would urge you to take the ramp-up period into consideration while building up your projections.

Finally, turning to the full year. We continue to deliver steady revenue growth in the third quarter, which keeps us on track for the coming quarter. Despite this positive momentum, the lower-than-expected growth in the first half impacts our overall annual performance, which we expect to be in the low- to mid-teens for the full year consistent with our ambition to deliver upper quartile growth in our industry context.

As outlined earlier, we have invested significantly in future growth, which comes with a mid- to long-term ramp-up period. The results in fixed costs are putting some pressure on the margins at present. However, we believe this trend will neutralize as these investments start to generate returns. Overall, we are on track with our growth plans for the company, and we strongly believe that we are investing wisely for our anticipated growth trajectory in the coming years.

With that, my commentary is complete. I'll now hand back to the operator, and Jonathan, and I'll try to answer any questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [2]

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Yes. Welcome onboard, Mr. Sibaji. Sir, first question is on -- just clarification on your guidance of low- to mid-teen growth. This is on the adjusted basis which we saw in Q1, some aberration? Or this is on the reported basis?

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Sibaji Biswas, Syngene International Limited - CFO [3]

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Both will be in the same range. Obviously, the adjusted will be a couple of percentage points higher. But even the reported will be in the same range.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [4]

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Okay, understood. And secondly, just more color on what is leading to a softer growth than anticipated. I was reading through the last Q1 and Q2 transcripts. Q1, we had said that there has been some rephasing of a couple of projects and we expect second half to improve and so did -- was the commentary in H -- Q2. So what is really leading to a softer growth than expected? And how do we -- I mean, since we have made the investments, how do we see a year after?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [5]

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Yes, Prakash. Thank you for the question. I'd sort of split the difference with you. Actually, our sort of comments in the first and third -- in earlier quarters, turned out to be reasonably accurate. We did expect growth to step up during the year. I'll remind you, first quarter of the year was 4%, second quarter was 11%, third quarter was 11%. We've just suggested the fourth quarter is going to be a little bit ahead of that in that low teens range. So certainly, your second half versus first half comparison when we get to the end of the financial year will show that growth accelerated through the year and the second half had stronger growth than the first half. That said, I think, tonally, you're right, a little bit behind where we thought we might have been, but I wouldn't call out anything specific or significant about it. We've got a good deal pipeline that's starting to build. Sometimes these things take a little bit longer to pull through than you would hope. But it's good to have that demand there. So in terms of outlook for the new financial year, I think we're feeling pretty positive. We're certainly seeing very good demand for our Discovery Services, we're seeing a picking up in our Development Services. So there's lots of opportunity out there.

As for specific growth rates for the new financial year, we have a policy, really, of not commenting or guiding on that. But I'm sure when we get to the year-end in April, we'll give some sort of directional hint, but we still got a whole quarter to go before we're at that point. But hopefully, those comments are helpful.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [6]

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Right. No. So I mean, basically, I mean, what I'm -- I was trying to ask is H2 typically is a 15%, 20%-plus growth. And this -- I mean, Q3 is 11%, and even if you do 15%-plus, we're still at the lower spectrum. We have been investing in safety, quality, which is leading and business development in the last 6 quarters, which has led to some higher cost also. So when is that inflection point, we see that our revenue growth is higher than the cost growth is what I'm trying to understand.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [7]

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Yes. No, I understood the question. And I think I gave the best hints that I can in terms of we expect the fourth quarter to come in low- to mid-teens. And for next year, very happy to talk about that at the full year results.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [8]

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Okay. Last one on Hyderabad. So what I understood was the costs are baked in, in the current quarter, has the revenue seen the full impact? Or is it going to pick up as we speak? And how much of it, I think 50,000 is what you said has started and another 50,000 by end of the year. If you could just give some broad color on Hyderabad dynamics that would be great.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [9]

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Yes, you're going to have to help me understand the units, 50,000 what?

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [10]

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Square feet.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [11]

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Square feet. Okay. Largely, that unit, we had a soft launch in the quarter. We're doing all the things you'd expect when you're opening a brand-new site. We're recruiting staff, building up the headcount, getting people up and running. And that's gone, I think, pretty well. From memory, we're up to little bit over 100, maybe 150 people or so in that facility. And I look forward to it growing not just within the infrastructure we've already opened. By the way, the actual formal opening of that is next month. So we're not at the official launch of it, but we are in that soft launch period. But I think if our inclinations around future demand are right, then I can see us building further buildings in Hyderabad and expanding and developing that site a bit more, which I think would be a good thing. There's some real talent in Hyderabad in terms of scientific talent.

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Operator [12]

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The next question is from the line of Surya Patra from PhillipCapital.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [13]

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Yes. Just wanted to have some clarity on the investment towards the biologic manufacturing front. Since in the presentation, we have mentioned that the biologic manufacturing facility is likely to see full-scale operation in next couple of quarter time. So what is the kind of investment that we have already made there? And what is the position there? And what kind of activity that we are currently doing there? I mean in terms of revenue, whether we have seen something meaningful to report or say?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [14]

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Yes. Well, as you know, we don't break out segmental reporting, but I'll do my best to sort of paint a picture. The biologics plant, as you know, it's state-of-the-art and we chose to go for the more modern forms of those biologic manufacturing facilities. So it's a 2,000 liter scale disposable state-of-the-art single-use unit. And we are in the process of bringing 4 of those, so that's sort of scalable, repeatable units up and running. We've got 2 up and running at the moment, and I'm pretty sure we'll have the other 2 commissioned and ready to go quickly. That gives us, I think, a reasonable amount of capacity. And from that, we're just waiting in parallel to make sure that the order book is full. So I think your question got it right. Biologics is one to watch throughout the next financial year. And I'm sure we'll update you quarter-by-quarter, how we're doing with that. But as yet, it's not something we've chosen to break out in a line of its own in the P&L.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [15]

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Okay. And what is the total investment so far that we have made? And what is likely in the near future for the biologic plant? Yes.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [16]

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Yes, yes. Investment in the biologics were sort of done for this first phase. So there's no incremental capital investment going in on that immediately. But the actual number, we've never disclosed.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [17]

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Okay. And in fact, we have been saying that whatever growth that we have been reporting, though it is one of the lowest over last 10-year period, that is largely led by this Discovery Services and Development Services. So are we seeing kind of a growth concern in the manufacturing?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [18]

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I'm just trying to actually do the back calculated math and see if your comment that this is one of the lowest growth period in 10 years is right. I suspect it's probably not. I can think of more than 1 quarter where we've had lower growth. First quarter of this year, we had 4% growth. And if you go back 2 or 3 years, we've had others. I -- at this point, while I'm sure I'd be delighted that the revenue was growing more than 11%, I actually see it as fairly steady, solid performance. If you think about who our customers are and when you think about global GDP, 11% growth is a multiple of global GDP, and it's also a multiple of the sort of growth rates you're seeing in the pharma and biotech industries, which are our principal customer groups. That sort of suggests that we are continuing to gain market share at growth rates like this. So double-digit growth is pretty solid. That said, we're ambitious to do more.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [19]

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Yes. Yes. Sir, I was just trying to compare the growth momentum or trajectory of Syngene with that of the leading Asian WuXi AppTec. So they are maintaining around more than 30% kind of trend throughout last couple of year and even in the current YTD. So whether we are losing market share to our competitors, is my question.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [20]

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I'm sorry, I missed which company you were using as your reference point.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [21]

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Chinese WuXi AppTec.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [22]

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Yes, we'll -- a proportion of that business is much more centered in biologics manufacturing, and they've been in that area, I think, for a much longer period than we have. And that suggests, I think we should have some optimism about the investments we've already made in biologic manufacturing capacity. So I'd go back to your early question around is biologics something we should be watching over the next year or so? I think the performance you've seen with WuXi AppTec, very good organization, I would say, indicates that there is global demand for those sort of services, which sort of gives you a sense of the strategy of why we were happy to invest in that area.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [23]

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Okay. Just a clarification from Mr. Sibaji. So you have, sir, indicated that so far, CapEx is something like $425 million. And by the end of the next financial year, you are targeting something like $550 million odd. So is that means you are targeting something like $150 million -- near about $1 million kind of spend by -- throughout next 1-year period?

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Sibaji Biswas, Syngene International Limited - CFO [24]

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That's correct. We have -- we are targeting $125 million in the next 1-year and 3 months period.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [25]

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And the...

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [26]

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And just to be clear on that, that's no new disclosure. I think that's the same math, same comment that we've updated each quarter for the last couple of years. And I think the assumption -- take the delta between the 2 straight line it, it's probably the best advice we could give you on modeling it.

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Sibaji Biswas, Syngene International Limited - CFO [27]

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Yes. And if you see how -- sorry, please carry -- please go on.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [28]

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Yes. So again, sir, I wanted to have some sense on the cost side also, what you cautioned that since the Mangalore facility would be commissioning soon, there would be some kind of a cost pressure that would be there. You mentioned in your opening remark, if you can clarify a bit more on that.

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Sibaji Biswas, Syngene International Limited - CFO [29]

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Yes, that's correct. But the plant will be commissioned by the end of the quarter. And the cost, either in terms of operating cost or depreciation will start building up from the quarter 1 next financial year. We can guide you better in the next call on that subject.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [30]

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Sure. Just last one question on -- to Dr. Henck. If you can share your thoughts on the trends that you are witnessing in the Discovery and Development Services front globally? And where do you see Syngene going ahead?

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Jan-Olav Henck, Syngene International Limited - SVP of Development Services [31]

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Yes. I think if we look on a global basis, there was a time not so long ago where the debate was how much of the science would be done in-house and whether or not you could do any of it in a partnership model. I think the industry, and when I say the industry, I'm largely referring to the pharmaceutical and the biotechnology industries, have moved way beyond that. Certainly, most of the chief executives and heads of R&D that I meet couldn't conceive of innovating and delivering Science without some mix of in-house science, academic collaboration and then partnerships with organizations like ours. So I think it's become an integral part of the industry model. That said, I still think there's an awful lot of structural growth available because they haven't fully maximized their ability to do that. We do, for example, and we've seen quite a lot of this in the last year in our Discovery Services group. We're now seeing a much more accelerated rate at which start-up companies, those with good venture capital funding and maybe small to midsize biotechs point principally to the U.S., but you're also seeing this in Europe, are getting much more comfortable that from the very beginnings of the creation of those companies, they're going to hybridize their R&D strategy, partner with organizations like us.

That, in turn, I think, reflects a maturing of the capabilities that we have, companies like Syngene and some of our peers, where we're now operating at a much more deep and detailed level of capability. And the comments I made in my remarks, and I think in maybe 1 or 2 press calls today around the work we're doing. And it's only an example, so don't overemphasize on it. And CAR-T therapy is actually quite a good bellwether. It shows you that the CROs, particularly the leading ones around in all modesty put Syngene in that group, are capable of operating right on the leading-edge of science.

So if I summarize that, good structural reasons to think that this continued growth is available. You have to be competitive, you have to be value-creating for your clients, and then you have to bring the science, and we're increasingly doing that.

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Operator [32]

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

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [33]

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My question pertains to the 2 new certifications, one for -- from the Russian government and second from India's viral testing facilities. What kind of a -- what kind of an outlook would you see for both these businesses coming into Syngene?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [34]

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Okay. Thank you. I think we could just about hear it. I don't know if you could turn the volume up on your phone. But if I just rephrase to make sure whether the question is right. A few comments on the Russian approval, the cGMP approval, and then what does that mean in terms of commercial outlook? And then I think the same question on the viral testing approval. So Mahesh, if I can ask you to maybe make some comments and explain what the viral testing is.

But before you do that, I'll take the Russian question. This is just another regulatory inspection. As you know, it's almost a routine matter for us or certainly a regular matter to have regulators from around the world come and inspect our facilities. We've had a number of those, principally the FDA and other regulatory authorities. In this occasion, it was the Russians, Russian regulators came in and inspected our facility. What triggered that was some work that we did with a client who wished to supply product that we'd helped them develop into the Russian market. Of course, I can't comment on the value of that because that's proprietary for them in terms of their expectations.

I wouldn't call it out today as being significant from a revenue modeling point of view. But I do think it's one validation of our operating standards that yet another global regulator has inspected our facilities and approved them. And secondly, it does open up for the future for our BD teams to be able to tell our potential clients that we -- our regulatory approved and we can supply the Russian market. Think of it as a door rather than -- to go through rather than a business certainty. But that's a good opportunity to open up. Mahesh, viral testing.

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Mahesh Bhalgat, Syngene International Limited - COO [35]

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So on the viral testing bit, let me tell you that we talked about the fact that we are focusing our emphasis on the biologics component of our business, which is, of course, a very high potential component of it. One of the things that is required for successful biologics is viral testing. We have now started making sure that this viral testing is done in a GLP environment, which is a good laboratory practice environment, certification for which is given by NGCMA and we believe we are the only laboratory in India that actually has this certification.

So this further reinforces our commitment in biologics and actually makes this service available to other biologics manufacturers around the country and around the world.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [36]

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So when do you expect this adding on to the top line?

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Mahesh Bhalgat, Syngene International Limited - COO [37]

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So it's already an approved service and it's already something that we use for our own processes.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [38]

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Okay. So how do you see this scaling up?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [39]

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I'm sorry, I really can't hear the question.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [40]

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My question was, how do you see it scaling up?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [41]

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I think it'll scale up as a derivative of our biologics business. And I'd refer you to the comments I made earlier, which is something that I think you should track over the next year to 2 years and see how we progress with that. So thank you.

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Operator [42]

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The next question is from the line of Ankush Agrawal from Stallion Asset.

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Ankush Agrawal;Stallion Asset, [43]

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Sir, my question was, can you just give me some color as to how much of Syngene's business is actually on the manufacturing side versus on the services side? I assume that all the 3 services that we provide, dedicated services, development and manufacturing and discovery, all are split equally, right? On the development and manufacturing side, how much would be actually manufacturing? How much would be on the services side, like clinical trials, process research and everything?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [44]

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Yes, happy to give you a comment on that. As you know, I mean, the heartbeat of the organization traditionally has been chemistry services and over time, they've grown and scaled. But if you -- so the way I would look at it is sort of 3 buckets. If you think about Discovery Services, it's between a 30% and 40% or so, something like that. Add on to that same again in terms of Development Services, maybe a little bit less towards the bottom end, 30%. And then you put the dedicated centers, which leaves us with a pure-play manufacturing bit is probably running around 10% of the business today, a little bit over than it.

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Operator [45]

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The next question is from the line of Krishna Prasad from Franklin Templeton.

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Krishna Prasad;Franklin Templeton Investment Management Limited, [46]

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First one, if you can just talk about what has been the pricing trends in the core Discovery and Development Services market? And if you can share any outlook on the same, that will be helpful.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [47]

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Sure. Do you want to give me the other question, so we can take them as a basket?

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Krishna Prasad;Franklin Templeton Investment Management Limited, [48]

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Oh, yes. Sure. So the second question I have is, if you can also share what was the preoperative expenses for the Mangalore facility for the current quarter and the 9 months for the current year?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [49]

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Okay. So the quick answer to that is, no, we don't give that level of disclosure. Was there a third question?

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Krishna Prasad;Franklin Templeton Investment Management Limited, [50]

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No, I have just 2 questions.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [51]

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Okay. So we go back to the general sort of pricing trends. I mean, there was a correlation in our business that the simpler, more repeatable the type of work you do, the more commoditized or generic the pricing is. General trend on that is reasonable stability actually. We haven't seen prices shift too much. They are constant. If you want to really increase your pricing or at least the value creation you have in the services, one of the ways to do that is either to add singular services that have got more complexity or maybe have some proprietary element to it or are unique. Or the other way to do it, and we've done a lot of that over the last years is to integrate them into an integrated service offering.

So if you take chemistry and you ally it to biology and then you wrap informatics around it and you put it in the context of safety, toxicology, you go from offering functional services to actually answering scientific questions. And that, if you can do it with speed and reproduce-ability and high-quality, adds much more value.

So if you want to drive pricing power in the business, it's partly around integrating those services and making them more added value. In terms of outlook and certainly, a comment on where we've been over the last year, I'd say, no big change. Good pricing stability. I'm sure there's always the give and take and swings and roundabout in every procurement negotiation, you win some, you lose some. But overall, it's a fairly stable environment for us.

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Operator [52]

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The next question is from the line of Cyndrella Carvalho from Centrum Broking.

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Cyndrella Carvalho, Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals [53]

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My question is, we are trying to move from a CRO to CRAMS module, which is like a forward integration. Could you help us to understand what are the key drivers of this change? And if you could add to it by some key monitorables that we could assign to it? And is there any color on the order books that you could help us.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [54]

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Okay. There's a sort of dramatic theme coming through there in terms of questions, which is can we help you model for the next financial year. Forgive me, if I remind you that our policy on that is, no. We're happy to talk about our strategy. We'll try and give you a sense of the dynamics between the industry, but line-by-line guidance is not something that we do as a policy.

That said, I will pick up an element in your question because I think the integration of Discovery Services, into Development Services, into forward integration, into commercial manufacturing, at one level is very similar to the comments I made around the previous question that we got, which is how do you drive price and value accretion.

Fundamentally, our clients are looking to solve the scientific problem. And in answering that, create value by creating a product they can take to market to serve patients. And therefore, it's a slow process. There's a beginning and middle and an end. And if you can put

(technical difficulty)

you can increase the speed at which you do it, the accuracy you can do it and often you can take cost out as well. And that's quite compelling.

So for us, the ability to be a one-stop shop, to start with fundamental scientific questions at the front end of discovery help our clients elucidate is something a good target, is the molecule you selected a good molecule to engage with that target, whether it's to inhibit it or to accelerate it, to take that forward and prove that it's ready to go into human studies with an IND package. And then as it goes through its clinical testing in patients to be able to develop the processes, the manufacturing, the form function of formulation to get you all the way through to a drug and then commercially manufacture it is quite compelling. Because if you don't do them all in one place, you have to do them in separate parts with disparate organizations and you lose speed and you lose clarity and momentum in those handovers.

So that's the fundamental philosophy. And while it may look new from a CRO to CDMO to CMO to a fully integrated service provider, actually, all it's doing is rebuilding the value chain of our client organizations anyway. So you start to mirror the processes that they're most familiar with. And I think that creates value. Did that -- hopefully, that makes sense, at least from the strategic bit of it. And I'm sure you'll understand if I demur in giving you line item direction on how to model that for the coming year.

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Cyndrella Carvalho, Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals [55]

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That's helpful. But at least, if you could help us understand like what you just beautifully did, is the philosophy, if you could help us understand because we have invested heavily into the next forward integration. So at least some sense in terms of how should we look at it, at least the time line say you can say over another 2 years we should be here or 3 years we should be looking forward for this milestone. Anything that you could give strategically, indicatively would be helpful.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [56]

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Oh, yes. Apologies. I don't -- I've misunderstood the depth you wanted to go from the question. And I can take you back to the comments that we've made just about every quarter for the last 2 years, which is that from the biologics side, we've made the capital investments we need to get the foundations in place for biologics manufacturing business. We're starting to see that already in the P&L. So some of the growth that we're delivering today in revenue is coming from that. And I think the next 12 months would be quite an important period for that particular unit, and I'll look forward to reporting on that at the end of each quarter throughout the coming 12 months.

So on the biologics piece, I think that's your timescale to look for some sort of rollout and impact. And I think it's fine. We'll report on it at the end of each quarter.

On the API, the commercial manufacturing of small molecules, again, I'm hoping that the time lines are fairly clear. You've had a good idea of the amount of capital that's gone into that facility. I think in the past, Chini has given you fairly good steer that we look for a one-to-one sort of asset turn as a rough approximation. So from that, you can derive what you think the at-peak future revenue is.

And then the start line really is the end of March, beginning of April, we'll go live with the first phase of operations. I think I would model that as a gentle glide path over the first 12 months. And then in a year from now, I'd be asking the question again on outlook and how quickly can we get towards peak or full utilization and manufacturing plants seldom at 100%. So I think there's enough in there. If you take those jigsaw pieces, you could build a model.

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Cyndrella Carvalho, Centrum Broking Limited, Research Division - Analyst of Pharmaceuticals [57]

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That's quite helpful. And one last thing, if you guys have already spoken about cell therapy, gene therapy. So I just want to understand from Syngene's platform perspective, how close are we to the current research, which is ongoing? Or is there more that we need to bring on our platform to get there? Where are we?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [58]

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Yes. We've got Ken Barr with us who heads up the Discovery Services, but he may be in a better position to comment on that. But I'll make a couple of initial comments. I think where we are is we've -- on the Discovery Research end, so when you're still in that sort of discovery biology phase. We've got pretty good capability. And actually, now we're starting to garner a reasonable time period of track record. We've been doing work in that area for a year or 2, and we've got some good engagements with some major corporations that are very deeply committed to it. I think the elements beyond the Discovery Research are a work in progress. But I -- they're not something I would call out with the capital market share for you to be thinking about from a revenue point of view. Part of the reason we commented about CAR-T is, today, not only is an earnings review, but it's also a media briefing on what's going on in the company. And I rather shamelessly told the world about our CAR-T because I quite like our clients to know about the science and capability we're capable of as well. So we were putting it in a short window. It may not necessarily have been for the analyst community to start modeling, but certainly for our clients to be aware of. Ken, anything you'd add in terms of CAR-T and our excitement and capability?

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Kenneth Barr, Syngene International Limited - SVP of Discovery Services [59]

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Well, it's certainly an area that's of great interest to the industry, and many people are very focused on the growth in that space. And as Jonathan indicated, we're working closely with some of our clients in that area. And I think, really, in the discovery space, on the leading-edge of the technology. And as you said, we're looking forward as well to what happens on the development side. So that's something we'll have to come back to you as time unfolds.

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Operator [60]

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The next question is from the line of Shaleen Kumar from UBS Securities.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [61]

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Can I please request Mr. Biswas to repeat his comment about the capital investment they have done in 9 months?

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Sibaji Biswas, Syngene International Limited - CFO [62]

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So in 9 months, we have invested around $81 million of capital. And as I said, $34 million of that has gone to -- for the commercial manufacturing plant in Mangalore, $23 million for discovery and the remaining $24 million for the rest. So that's about split of the money that we have spent in the last 9 months.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [63]

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And Sibaji, that takes us to...

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Sibaji Biswas, Syngene International Limited - CFO [64]

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$425 million cumulative investment.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [65]

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And we've got $550 million as the overall, so the delta between the 2 is $125 million, and you've got about a year of runway on that. So you could straight line it and you wouldn't be far off.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [66]

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Yes, for sure. So that leaves me, understandably that API manufacturing coming online this quarter. So I doubt there will be a lot more, CapEx will be planned for that. And Jonathan, you just made a comment that biologics is also no near-term investments. So is it fair to assume that a significant part of that $125 million is largely likely towards the discovery space?

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [67]

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Yes, discovery and development, by deduction, yes, and less reasonable.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [68]

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Yes. So significant pushing at the same bucket, discovery and development and less towards manufacturing.

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Sibaji Biswas, Syngene International Limited - CFO [69]

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Yes.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [70]

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All right. That's pretty interesting.

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Jonathan Hunt, Syngene International Limited - CEO & Whole Time Director [71]

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Okay, super. Thank you. And Chanderlekha, how are we doing? Was that the last question?

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Operator [72]

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As there are no further questions, I would now like to hand the conference over to Ms. Chanderlekha Nayar for closing comments.

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Chanderlekha Nayar;Investor Relations Professional, [73]

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Thank you, Margaret, and thank you, everyone, for joining today's call. Hope we have answered all your questions. If you have any questions, please get in touch with me. Have a good day. Thank you.

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Operator [74]

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