Will scale up contract mfg; $200 mn capex for key arms: Syngene

Biocon's contract research and manufacturing arm Syngene International has had a particularly strong growth in discovery research services and discovery biology, said Jonathan Hunt, CEO of Syngene International. Further, the company has had a forex boost this quarter, he told CNBC-TV18.The company posted 28.32 percent increase in standalone net profit to Rs 59.8 crore for the June quarter. In all, 95 percent of revenues are ex-India—Japan, US and western Europe— and majority of contracts are dollar denominated, Hunt said, adding, the company will scale up contract manufacturing plans going forward. Of USD 200 million capex, USD 100 million will go into four key areas- Syngene Research Centre, biologic centre, formulation center, viral testing and the rest in commercial manufacturing, he said. Below is the transcript of Jonathan Hunt’s interview to Latha Venkatesh and Nigel D’souza on CNBC-TV18.Latha: First up, just a worry. Your growth rates, we thought would be in the 25-30 percent range. You gave us to expect that, but this time 17.5. Is this a one-off? Why the slowdown?A: I am not sure if I follow the maths on 17.5 percent. Revenue growth rate for the quarter year-on-year (Y-o-Y) was 23 percent. So, pretty much where we expect it to be, in line with our mid-term forecast. We have given very clear guidance to the market that we would do USD 250 million revenue in FY18 and everything I am seeing this quarter and over the course of last year tells me that we are on track for that.Latha: You do not look at revenues as a Rs 274 crore that is 2.74 billion versus 2.3 billion?A: One of the things that you are pointing to there during this quarter we had a number of moving parts. 23 percent topline growth in terms of revenue, again at the sales line, a little bit below that, high teens. But again, that is a very creditable performance and exactly where I expected it to be. So, key three verticals in the organisation are delivering well. That is the dedicated centres discovery research services or discovery chemistry and biology. Very happy with their performance. They accelerated through the course of last year and we have seen that momentum continue into the first quarter of this. And then the cost control through the business so if you drop down through the profit and loss (P&L) look at the earnings before interest, depreciation and amortisation (EBITDA) line, look at the profit after tax (PAT) line, you saw 30 percent and 28 percent growth on both of those, so very happy with that performance.Nigel: Could you give us some numbers? How did the three segments perform? That is the first part. And also, you have commissioned two new facilities. What is that going to add in terms of revenues? Has it got all the approvals? By when can we see that reflecting in your numbers?A: If you look at those elements, we do not actually break a segment by segment report, so I cannot give you the specific numbers. I can give you a general sense of it. We have seen particularly strong growth and I think I highlighted that at the beginning of the year in the discovery biology segment that we operate in within discovery research services. And really the driver of that just reflects what you are seeing going on globally in the bio-pharma industry. 30 percent of the industry’s revenues are biotechnology based, 50 percent of their pipeline you have seen over the last 5-10 years, the seismic shift in our client organisations where they are as likely to have a biologic programme in play as they are a traditional chemistry one. And you can see that reflecting in the services that were offering them. Going to the capital expenditure (Capex), we are very happy to report that we have brought both of those projects in on time and on budget. The Syngene Research Centre (SRC) is very much a front loading of capital investment to make sure we have got the right capacities in place to meet what we see as future demand. So, it is a 2,00,000 sq ft laboratory space. in the first phase we have opened up 50,000 thousand sq ft and we are already occupying that. So we have got both some of our own staff in the very first phases of seeing client work go through that. What it will do in terms of revenue, it will take one or two years to build that up to peak capacity and that is captured already in the mid-term guidance that we have given you.Latha: Will your margins continue to be as elevated as they are – 33 percent?A: Your question at the beginning pointed to that. We saw a strong foreign exchange (FX) boost in the quarter, 5 percent, very much triggered by what was going on in Europe with the Brexit which led to a strengthening of the US dollar. And you will know this about our business we are very much export led. 95 percent or more of our revenue is ex-India. It is on a global basis, so western Europe, Japan, the US and nearly all of those contracts are dollar denominated. And because of that, with that strengthening of the US dollar, we have had a boost when we repatriate that back into Indian rupees. That of course drops through with no cost. So, you get a marginal boost to your profitability in the quarter.Nigel: If I remember right, you had earmarked close to around USD 200 million for expansion. Only 30-35 percent of that has been used. What plans, how do you plan to use the remainder of them and by when can we see that reflecting in your books?A: It is a multi programme, you got the numbers absolutely right, USD 200 million of Capex. It is going into five key areas. So, the SRC is one, I mentioned that. We have got an expansion here in Bangalore on our biologics capability in terms of manufacturing. That should come online by the first half of FY18. We have got a formulation centre, that is a new capacity for us that will be in the second half of FY17. There was a viral testing that is now up and running, so we can commission that in this quarter and then there is the commercial manufacturing. If you split those into two groups, the first four that I mentioned are about USD 100 million and the second group, the commercial manufacturing which is centred in Mangalore is another USD 100 million. That will come online by FY19 and the run rate so far is 30 percent. So 30 percent of that has been invested to date. We were at 25 percent at the end of last quarter. So you are seeing good execution, good delivery from the engineering group as they put these new facilities in place.Latha: You are planning to get into contract research, contract manufacturing?A: Yes, as I had said exactly, we already do some contract manufacturing, but it is on a small scale and it is pre-commercial, so we will do that to support people with their clinical trial development. We are doing that both in the active pharmaceutical ingredient and a little bit in the biologics space. Once we have built the facility in Mangalore and that will come online by FY19, we will have the capability to do that at a much greater scale. And at that point, the Syngene transitions from being a pretty much pure play discovery focused clinical research organisation (CRO) to this hybrid Contract Research and Manufacturing Services (CRAMS) model.Nigel: Your top-10 clients were contributing around 72-73 percent approximately, that has dipped over the last few quarters. What is it currently and going ahead as well, are you looking to reduce the dependence on the top-10 clients? And you are talking so much about Capex. 2020, what should your revenues look like?A: If you go back to where we were at the full year, we had indicated then we tend to do this on an annual basis. Too much volatility to comment on the quarterly breakdown of client numbers. But we have built the client base to 256 clients, there is a reasonable amount of concentration in those top-10. You gave the numbers there. It does not move materially on a quarterly basis and frankly, I do not see it as a problem. We have got some very deep seated long-term relationships with a number of those clients and they are growing very nicely. So, overall expansion of services and I am quite happy with where we are in terms of those key client relationships.Latha: Anymore marquee clients that we will get to hear?A: I am always hopeful of that, but I am not going to give you a forward looking statement on it. Soon as it happens, it will be very clear and I would be delighted to talk to you about it then.