Syngene International Ltd

NSE:SYNGENE

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to Syngene International's First Quarter Ended June 2023 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Ms. Avantika Mishra from EY. Thank you, and over to you, ma'am.

[Avantika Mishra]

Thank you, Nirav. Good afternoon, everyone. Thank you for joining us on this call to discuss Syngene's Q1 FY '24 financial and business performance. From the management side, we have Mr. Jonathan Hunt, MD and Chief Executive Officer; Mr. Sibaji Biswas, Chief Financial Officer; and Dr. Mahesh Bhalgat, Chief Operating Officer. Post opening remarks from the management side, we will open the line for Q&A, and we'll be happy to answer any questions you may have.

Before we begin, I would like to caution that comments made during this conference call today will contain certain forward-looking statements and must be viewed in relation to the risks pertaining to the business. The safe harbor clause indicated in the Investor Presentation also applies to this conference call. The replay of the call will be available for the next few days and the transcript will be subsequently made available.

With this, I hand over the call to Mr. Jonathan Hunt. Thank you, and over to you, sir.

[Jonathan Hunt, executive]

Well, thank you, and good afternoon. Thank you to everybody for joining the call. I'll start by outlining the headline numbers, then move on to the key operational and strategic highlights. And then Sibaji will provide a more detailed insight into the financials in his remarks.

Pleased to report the strong revenue performance in the first quarter. The performance was led by development in manufacturing services divisions and was well supported by steady delivery from Discovery Services as well as the dedicated centers delivering to plan, really puts us on track with our full year guidance that we gave at the start of the year. So let me give you key headline numbers. Revenue from operations grew to INR 808 crore, up 25% over the corresponding quarter last year. Operating EBITDA was up 23% to INR 212 crore. Profit after tax was up 26% over the corresponding quarter to INR 93 crores. Sibaji will make more comments on the P&L in his presentation.

So the highlights, I think, for me, were 3 important steps we took on our strategic priorities with the acquisition of additional biologics manufacturing capacity here in Bangalore, the regulatory approval by the FDA of the API manufacturing site in Mangalore and the land acquisition in Hyderabad being the key events. So let me spend a moment on those.

As you know, from a strategy perspective, we took the decision some years ago to forward integrate, firstly, into the development and then the manufacturing parts of the value chain. Initially, we did this on a smaller scale with clinical stage development and clinical manufacturing and small molecules. And then more recently, we expanded this to include large molecules. And then most recently, some 2, 3 years ago, we took the decision to forward integrate a step further by entering into commercial scale manufacturing. But this strategy builds on our leadership position in research services, the CRO part of the business, and add to that by building out both the development and manufacturing services to become a leading CDMO, which gives us the ability to meet the full range of customer needs to deliver greater speed to market to customers and allows us to follow the molecule through its life cycle. It's a strategy we like as it matches the value chain of our customers, and it's one that's well balanced and offers a good degree of synergy and resilience. And it's a strategy, I think, is seeing as both make progress and it's delivering results.

As you know, last year, we signed a 10-year contract to manufacture biologic with a long-standing client Zoetis. This deal plus the contracts we have with a range of other clients has moved us very quickly to near to 100% occupancy of our existing biologics capacity. And that triggered the decision to bring forward our expansion plans, which we've now addressed through the deal to acquire a multimodal biologics facility from Stelis. That adds an additional 20,000 liters of installed manufacturing capacity. It's got room for further expansion, and it also brings with it a high speed fill-finish facility.

This transaction brings forward and actually replaces our internal CapEx plan and will give us the headroom we need for many, many more years of growth as a commercial-scale biologics manufacturing.

On the small scale side -- small molecule side of things, we hit an important enabling milestone in the quarter, having received regulatory approval from the U.S. FDA for the API facility in Mangalore. With this approval in hand, we'll continue the work to build scale in the small molecule part of our manufacturing business. As these investments hit their stride in the years to come, we can expect manufacturing to play a more prominent role in the company. And this gives us what we think of as a twin engine business strategy. Each were 2 growth drivers. The first engine, research services is driven by discovery services in the dedicated centers and the second engine is powered by our development and manufacturing services.

So having noted the rising importance of development and manufacturing, it would be wrong to leave you with an impression that our research services are any less important. During the quarter, we saw a solid business performance, decent growth. While growth rates in the market are back to more normal levels than the unusually high rates we saw last year, you'll recall I made comments to you throughout last year about the additional demand we were seeing as clients try to catch up on lost ground that they lost during the pandemic. We also took the decision to invest further in Discovery Services through the acquisition of 17 acres of land in Genome Valley in Hyderabad. Our first research center in Genome Valley was inaugurated in 2020. And over the last 3 years, has grown to over 900 scientists. This acquisition will give us the space we need to continue this type of growth. Construction is scheduled to commence in 2024. But once we've received the necessary statutory clearances and approvals, and I'll be in a better position to guide you about that next year.

Other noteworthy events in Discovery Services during the quarter was the opening of our new centralized compound management facility, which will be the repository for all compounds discovered across the company.

So before I hand over to Sibaji, let me try and summarize. This quarter, we made good progress on our strategy. The acquisition of additional biologics manufacturing capacity gives us headroom to keep growing 2 or 3 years quicker than our internal plan. The U.S. FDA approval of the API facility in Mangalore gives us a positive endorsement and removes the barrier to building that business in earnest.

The acquisition of more land in Hyderabad gives us the space we need to continue to build in our Discovery Services business there. And the quarter delivered good revenue growth led by a strong performance in development and manufacturing, supported by decent research services growth, and together, this keeps us firmly on track to deliver our full year guidance. So enough from me. Let me hand over to Sibaji.

[Sibaji Biswasb, executive]

Thank you, Jonathan, and good afternoon to everyone. Let me begin by discussing revenue performance, followed by an overview of margins and profitability, and then I'll share the outlook for the remainder of the year. I will start with the key highlights of the first quarter performance.

Revenue from operations for the quarter came in at 25% growth, a strong performance. At constant exchange rates, revenue from operations was up 19%, in line with the guidance given for the year.

Looking at the various elements of growth, we saw growth in all 4 of our divisions, with the strongest performances in our Development and Manufacturing businesses. Development Services is seeing steady demand, good repeat orders and has maintained the high levels of operational delivery we have talked about in the recent quarters.

Our biologics manufacturing services business is stepping up production as we fulfill the contract we signed with Zoetis. Here, we had a positive quarter progressing well in delivering our contractual commitments.

The Dedicated Centers delivered a steady performance, and we also saw decent growth in Discovery Services, which comes from the top of the higher base of last year as clients try to catch up on grounds lost during the pandemic.

So summarizing the market and divisional trends, it's a solid start to the year, and we are on track to achieve our guidance for the year.

Turning now to the P&L. I'll start EBITDA. EBITDA from operations grew by 23%, surpassing the constant currency growth in revenue. However, we experienced a 38% increase in raw material costs over the first quarter last year. Due to a shift in mix towards Development and Manufacturing Services, we have high initial costs attached to it.

Material costs as a percentage of revenue for the quarter was at 27.6%, which was in the range guided earlier. The staff costs rose by 16%, in line with our increased head count and annual increments. Direct costs primarily comprising of power and utility expenses declined by 3% year-on-year. This favorable development was attributed to softening of utility input costs and an increase in green energy consumption compared to the previous year.

Other operating costs grew by 24% year-on-year, staying consistent with the run rate in the previous quarter. The year-on-year increase was mainly a result of increased expenditures on repairs, maintenance and facility costs, which are incurred during the commissioning of new laboratories and installation of fresh equipment and infrastructure over the past 12 months, particularly in Hyderabad and Bangalore.

Furthermore, other operating investments, including the expansion of the commercial team and the acceleration of digitization and automation across the business contributed to higher costs compared to the previous year.

Hedge losses amounted to INR 15.5 crores as compared to INR 3.4 crores last year. This was influenced by an average spot rate of INR 82.3 per U.S. dollar and a hedge rate of INR 80.3 per U.S. dollar.

Depreciation for the period was at INR 102 crores and compared with INR 86 crores in the same period last year. This increase of 18% on a year-on-year basis is mainly linked to new investments and lease accounting charges.

Earnings from operations before interest and tax increased from INR 87 crores to INR 110 crores, registering a year-on-year growth of 27%, above the constant currency growth of 19% and reported revenue growth of 25%. This positive development highlights effective operating leverage driven by the strong performance of the business and reflects the guidance given previously.

Interest income for the quarter increased from INR 16 crores last year to INR 24 crores in the current year with an increase in cash balance and improvement of interest yields. Finance cost increased from INR 9.4 crores to INR 10.5 crores primarily due to the interest component in the lease accounting.

Profit before tax increased 32% year-on-year. Profit after tax increased by 26% to INR 93 crores compared to INR 74 crores last year. The difference in growth rate represents the increased effective tax rate of around 24% in the first quarter this year as compared to 20.3% in the same quarter last year. This increase in the tax rate is due to some of our profit-generating units coming out of the SEZ tax benefit during the year.

Moving on to CapEx. We recorded CapEx of around USD 30 million during the quarter and another USD 30 million has already been released for projects underway across the businesses. This improved expansion in Research Services. Much of it will happen -- of that will happen in Hyderabad. The purchase of land for a new campus at Hyderabad Genome Valley, construction of a new multifunctional facility at Biocon Park and investment in other development service capabilities.

Before we move on to the guidance for the remaining year, let me briefly touch upon the financial implications of the recently announced acquisition of the biologics manufacturing facility from Stelis Biopharma Limited. The companies have entered into a binding term sheet. And on completion of the transaction, Syngene will acquire Unit 3 of Stelis Biopharma on a slump sale basis for a gross value of INR 702 crores, translated in US dollar, it is USD 86 million.

We plan to invest another INR 100 crores to repurpose and revalidate the facility. This acquisition as mentioned by Jonathan, effectively replaces an internal CapEx investment program planned for the next 3 years and will be fully funded through internal accruals and cash. The company will continue to maintain a strong balance sheet, a low debt profile and a good safety margin for debt covenants even after paying for this acquisition.

Both the credit rating agencies, CRISIL and ICRA have reaffirmed their AA+ ratings for Syngene post the Stelis deal in acknowledgment of our ability to fund this acquisition through internal accruals without causing any undue stress to our balance sheet.

As we ramp up utilization, we expect asset turnover to grow at 1x in less than 5 years, with EBITDA margin expected to be in line with the company's average from the fiscal year 2029. The acquisition will not naturally impact the financial guidance given for the current financial year.

In the short term, we expect minor dilution of operating margins as a result of costs to be incurred in this facility, and we expect this plant to start to contribute to the bottom line from the fiscal year 2027.

The FDA approval of the Mangalore plant is an important enabler to build a small molecule pipeline for commercial manufacturing. Business development for pharma manufacturing contracts involves a long [indiscernible] period backed with strong returns on the capability is proven and credibility is established. With this approval, we can now offer clients a complete range of small molecule capabilities from our research, discovery and development of clinical and commercial scale GMP manufacturing. The manufacturing portfolio is built up over a period of time and is expected to generate returns above the cost of capital over the period.

Now coming to guidance. Looking ahead, I would like to reiterate our full year guidance given earlier. While we are maintaining our guidance, we anticipate a shift in the mix of revenue growth compared to our initial projections. The growth profile is balanced with a stronger contribution from the development and manufacturing services. We retained our high-teen revenue growth guidance on a constant currency basis. We expect EBITDA margin to remain around 30% on a hedge basis. That is if the revenues are recognized at an average hedge rate of around INR 81 for the year. If the realized spot rate is higher, the reported growth rate will be higher with subsequent lower margins due to booking of hedge losses in our P&L., very similar to what we have seen in the quarter 1.

Our operating EBIT growth is expected to be in line with the revenue growth. We project the effective tax rate to be between 23% and 24%, marginally higher than what was previously estimated at 23% due to the change in business mix. Consequently, we anticipate PAT growth to get on mid-teens.

With the effective tax rate going up we have -- while the effective tax rate is going up, we have a MAT credit of INR 160 crores, which will be utilized over the next few years, and this would enable us to maintain cash outflow for income tax at the minimum tax level.

With the Stelis acquisition, the biologics expansion CapEx for the mammalian facility will be largely avoided. We expect the overall CapEx spend for the year to be around USD 85 million against the initial guidance of USD 100 million, a net CapEx avoidance of USD 15 million during the year.

To summarize, we had a good start for the year. We also made good progress in managing operating efficiencies and implementing some of our strategic initiatives to reaffirm the guidance for the year, which was given in the last quarter.

With that, I conclude my remarks and invite any questions from the audience. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Tarang Agrawal from Old Bridge Capital.

[Tarang Agrawal, analyst]

Just a couple of questions. One, does Librela have additional approval in U.S. and you increase the potential for you to supply more product to Zoetis over and above the $500 million engagement?

[Jonathan Hunt, executive]

No. That's the shortest answer you'll ever get. We are, in fact, supplying to the U.S. launch. That's what we're doing. That's what the deal was. Makes sense? That's why the FDA approval of the biologics side was one of the key enablers.

[Tarang Agrawal, analyst]

Okay. The second, for the Stelis acquisition, what kind of regulatory approvals are we seeking and what is the time line around that?

[Jonathan Hunt, executive]

You have to split it, I think, in 2 elements. Some of it is just the enabling stuff. So we don't complete the deals, we get the keys as it were until October, then we want to put some CapEx in there. I think it is around $10 million effectively to convert it to a very nicely built facility that was built to make vaccines at scale but only to make 1 product to turn it into a biologics facility that can make multiple products. So we're going to move some walls around and rejig some things. Then we have to revalidate it because it's a GMP facility. So that's more what we were talking about, those sort of enabling. Beyond that, you don't get the sort of product-based regulatory approval until a client gives you a product to manufacture and then that triggers it. So you've always got 2 levels of regulatory approval. Some are enabling and then some are individual product -- individual product specific.

The first one is I think we suggested would be done by the beginning of the next financial year. The second group is entirely dependent on clients. So I couldn't guide you on that because it hasn't happened yet. Does that make sense?

[Tarang Agrawal, analyst]

Yes, yes. Just a follow-up on that. In your interaction with your existing set of customers for whom you would be involved in any part of Phase I to Phase III, how are they responding to this? And is this something -- was it a...

[Jonathan Hunt, executive]

No. No, they're not. I wouldn't expect them to. Like I said, we haven't got the keys yet. So I don't own the facility. I've merely entered into a binding contract to buy it at a later date. So it's way too soon. I couldn't show it to a client even if I wanted to.

[Tarang Agrawal, analyst]

Understood. Understood.

[Jonathan Hunt, executive]

Does that make sense? The reason I'm pushing back on the question, I do want everybody to get. I've just bought 5 to 10 years' worth of growth capacity as it were. I bought a new site. That's the point. It's not a revenue-making unit. It was designed to make COVID vaccine. It doesn't come with any revenue. It doesn't come with any product nor is it intended to. If you wanted to interpret what we've done strategically, we have enough confidence in the demand for biologics CDMO, but we've accelerated an internal growth program by 3 years by doing this. After that, you can interpret that how you want. Does that make sense?

[Tarang Agrawal, analyst]

Yes, absolutely. Lastly...

[Jonathan Hunt, executive]

So for me, it's quite a positive step forward. Yes.

[Tarang Agrawal, analyst]

Absolutely, absolutely. The last question, Sibaji, for the Mangalore API facility, are the fixed costs getting capitalized or they being routed through the P&L? And what would be the figure for this?

[Sibaji Biswasb, executive]

So Tarang, we have been routing all costs of Mangalore through the P&L. Mangalore, to be very clear, is not an idle facility. We are doing some small amount of manufacturing for the last few years. It was not FDA approved, and it was not getting used for the kind of manufacturing we want to do in the medium to long term. So all fixed costs and some kind of direct costs like utilities going through the P&L. And in the past, I have kind of indicated, I think in the last call that it's like depending on which quarter you are talking about, it's 100 to 150 basis point dilution in the EBITDA margin, but it all depends on the top line, right? The cost is fixed. The top line is not. So it's your guess thereafter.

[Operator]

Next question is from the line of Surya Patra from PhillipCapital.

[Surya Patra, analyst]

First question is on the Mangalore facility. Sir, if you can tell what is the kind of investment so far that we have made? What is the CapEx of that Mangalore facility currently? And also, if you can share the CapEx that we would have done so far In the biologics CDMO in the Bangalore site?

[Jonathan Hunt, executive]

Okay. I mean, it's totally precise. We'll try and help you as we can. But I think that question may have been asked on multiple occasions every quarter for the last 6 years. So that's obvious, please read the answer that we've given on a quarterly basis because nothing changes. I think every one of you have this number in your model. Sibaji, go on.

[Sibaji Biswasb, executive]

Yes, absolutely. Let me get the Mangalore question first. We have invested close to INR 550 crores in Mangalore for the API manufacturing facility, and that at today's exchange rate should be around $65 million. I'm just converting at INR 82 to INR 83. So -- but the number is around close to INR 550 crores of CapEx in Mangalore.

On the biologics, we had told last quarter, we had invested around $50 million, and thereafter, we haven't invested much because we are preparing ourselves for buying out this facility. So the numbers that we have given in the last quarter still holds good. There is no incremental investment of significance in the current quarter -- or the reported quarter.

[Surya Patra, analyst]

Yes. So wasn't that this investment on the Mangalore facility was the $80 million, $85 million because that is...

[Sibaji Biswasb, executive]

Yes. That was -- as I said, it's actually the thing, right? If you are dividing by INR 72, it will be close to $80 million, right? If you are dividing by 83, it will be much lower. So that's why I gave you the crore number and not the U.S. dollar and then convert it into the U.S. dollar.

[Surya Patra, analyst]

My second question, in fact, about the acquisition, what that you have done, the Stelis biologics plant. It is an integrated site really interesting to see within a vicinity of existing plant that is coming. So that is all that is fine. What I wanted to understand is that you have indicated that, but the commercialization of these plants can happen during 2024. But the incremental contribution in terms of earnings, that can come only FY '27 onwards. So the time in the gap between these 2 periods -- so what is the kind of activities or the kind of approvals or what progress that we should be seeing [indiscernible] specific plant or site is concerned?

[Sibaji Biswasb, executive]

Just to clarify what we said, any plant of that size and nature would have a fixed cost attached to it, right? And what we have said, it would give positive contribution from FY '27, which means between FY '25 and FY '27 will gradually grow our revenues, to lead to a positive contribution on the bottom line from FY '27. That's what we said. In between, obviously, we believe that there will be some production, which will gradually scale up and then that would lead to positive contribution from FY '27 and PAT positive from FY '29. And this is exactly what we mentioned in our press release as well.

[Surya Patra, analyst]

Okay. Sir, this facility is already having some regulatory clearances, may not be U.S. but emerging markets as well as, I think, European approval, right? Is that right? And whether it will lead to kind of incremental business immediately after the acquisition or no?

[Jonathan Hunt, executive]

No, I don't think so. I don't think it has. It was built for the pandemic. So it was built to make a pandemic COVID-19 vaccine, which it didn't make because the pandemic ended.

[Surya Patra, analyst]

Okay. And just an extension to this...

[Jonathan Hunt, executive]

Think of it as a greenfield build as we built it organically, but we didn't build it organically. We've acquired it in one step. So it just brings forward the capacity availability by 3 years. And from an analyst question point of view, it gives you 3 more years to ask me where is the revenue coming from and can you give revenue guidance? But from a strategy point of view, it just gives us that headroom for growth much sooner. And what we tried to indicate in some of our comments, we've done well enough, better than expected over the last 18 months, 2 years in our biologics CDMO business that we're currently in danger of running out of capacity. We complete this acquisition and have lots of spare capacity to grow into, but I wouldn't expect it all to be settled overnight.

[Surya Patra, analyst]

Okay. Sir, since it is a kind of a ready facility that we are achieving through this acquisition, may not be a kind of a greenfield kind of say. So sure, the asset turn, what you have indicated that 1x kind of asset turn that can be achieved within a 5-year time period. But is it fair to believe that, that is a peak potential or the peak potential is something different than the 1x asset turn?.

[Jonathan Hunt, executive]

No, no, that's the potential of the installed capacity today, but it comes with a little bit of land. And if we wanted to put more CapEx on, we could make it bigger. But as an approximation from an analyst sort of modeling perspective, if you started in FY '25 and went at 3 or 5 years, you choose whether you're optimistic or conservative and plugged in a number that was 1x asset value sometime in that. You'd have a reasonable revenue guide path if you just did it linearly. I'm not sure I could give you any more precision than that. But I think that's quite helpful.

[Operator]

[Operator Instructions] Next question is from the line of Abhisar Jain from Monarch.

[Abhisar Jain, analyst]

Congratulations sir, for receiving the FDA approval for the Mangalore API plant. It's been, I think, long overdue. So just wanted to know from you that now with the FDA approval in place, what is the visibility that we have from our clients and from the prospective clients on the small molecule space manufacturing from this facility? And how would you now be expecting the ramp-up from this and over the next 2 to 3 years?

[Jonathan Hunt, executive]

Yes. I think I covered that earlier, which is that I'm not breaking out with that level of granularity. So it's an integrated manufacturing strategy. You've got all of the assumptions you need for you to form your own view, and we'll update you as and when we sign client contracts, but I'm not going to predict the rate at which they're going to come in.

[Abhisar Jain, analyst]

But sir, any time left in terms of what utilization we can hit in the next 3 years because now the approval is in place, and you had earlier indicated that once we have the approval, the client dialogues on the manufacturing and all those things can evolve and you will be able to better guide?

[Jonathan Hunt, executive]

But that's just the same question in a repackaged form, so I'll give you the same answer.

[Abhisar Jain, analyst]

Okay. Understood. And sir, on the biologics, we just wanted to know that what is the current capacity that Syngene has based on the $50 million CapEx that we have done till now? What is the capacity that we currently have on which you have indicated that we are almost close to running on full capacity, so just wanted to understand what are we adding? And secondly, when we go for this future expansion of 20,000 liters, which is an option in the Stelis plant, what would be the CapEx which would be required?

[Jonathan Hunt, executive]

I think we've given you both of those in the opening comments. So it's an acquisition price of the plant, it was $87 million. And then we said we'd add another CapEx -- up to another $10 million of CapEx in the coming months to transfer. So you've got a total CapEx number, and then you're given guidance that say in the next 3 to 5 years, we think we do onetime asset turn. So we've actually given you an implied revenue number, and you just have to choose whether you put it in 3 years, 4 years or 5 years.

[Abhisar Jain, analyst]

I'm not asking -- I thought $12 million just to repurpose for the 20,000 liter existing.

[Jonathan Hunt, executive]

Maybe go back and restate. I think you've asked what is the revenue capacity of the 20,000 liters is already installed. And the answer is onetime the asset turn, $87 million plus up to $10 million in 3 to 5 years.

[Abhisar Jain, analyst]

That's for the existing 20,000-liters, right?

[Jonathan Hunt, executive]

Correct.

[Abhisar Jain, analyst]

Sure. But for the future potential that is there for the expansion, which is mentioned in your release, I'm assuming that there will be a further CapEx other than the disclosed number.

[Jonathan Hunt, executive]

I couldn't give you that because I've made no decision on when and if I'm triggering that further expansion. All the expansion beyond that in the unbuilt space that's at the site.

[Abhisar Jain, analyst]

I understood, sir. And sir, just the previous question on the existing capacity that Syngene has based on the $50 million that we have done till now, what is that capacity?

[Jonathan Hunt, executive]

I know, that's not -- I'm not sure we're going to disclose that on the basis that that's commercially sensitive when negotiating. But we've given you the revenue number. So I'm not sure what you would do with knowing how many liters of capacity we've got.

[Operator]

Next question is from the line of Shrikant from Asian Market Securities.

[Shrikant Akolkar, analyst]

So Sibaji, I would have this question on the CDMO business. So if I want to take out the CDMO business revenue -- biologic CDMO business revenue for this quarter, what would have been the growth for the rest of the business in the constant currency terms?

[Sibaji Biswasb, executive]

Shrikant, obviously, we are not breaking that up, otherwise I would have given that. Having said that, what we are saying is 19% overall growth in constant currency and 25% in reported currency. We are also saying the research business is growing with a decent number attached to it, right? So it's quite a decent growth that we are seeing. But the biologics is clearly leading the pack with a very, very strong growth year-on-year.

[Shrikant Akolkar, analyst]

Okay. Okay. I'm just combining two more questions and that is related to the biologics. So I just want to know on the current biotech funding environment, which we are reading that there is some challenges in the small biotech funding. So do you see there was any impact on the CRO business services this quarter?

[Sibaji Biswasb, executive]

Yes.

[Shrikant Akolkar, analyst]

And the second question will be now that we have acquired one large facility, so how easy or difficult is it for you, to hire right set of people to fill in this facility? Or in fact, you are also doing another center at Hyderabad. So how do you ensure that you get right kind of people to fill in those facilities?

[Jonathan Hunt, executive]

Now that's super set of question. The first one, I am really very happy to give you a comment because I think you already know answer and the capital markets understand it quite well. Zoom in, think about the last 5 years, coming into the pandemic, through the pandemic, we have seen a level of society's capital flow to health care, particularly in the U.S. and particularly in biotech that I think is a once-in-a-lifetime high. We spent an enormous amount of investment, an underlying base, which is some really good innovation going on, new technologies coming through.

On a global basis, you have aging societies and the ever growing set of demographics are the drivers to consume more health care and for more society's wealth to go into it. So if you're a bull on health care, you've got very good fundamental demographic and scientific reasons for that.

At the same time, the pandemic quite rightly, closed large tracks of the world's economy and sent capital flying towards health care. What I also talked about all of last year with you on a much narrower lens on that, which is services within CRO services, we saw not only good underlying demand but also an awful lot of catch-up as Western clients, whether it would be European or American wherever they are in the world, came out of the pandemic, went back to work, got back in their labs. They took the decision last year to try and catch up on lost time.

The economic driver that's really clear. If you're in innovation-based science, you have got an asset that's patent protected and the patent has a clock and the clock is winding down every day. So if during the pandemic, you felt you were growing at half speed, then you want to try and catch up. So we saw some pretty healthy above-normal demand last year in CRO services. Oddly enough, at the same time, as we saw the capital markets closed to biotech funding and slowing down, those two things are sort of working their way through. But it's not the whole market. It's just a subsegment, U.S., D.C. private equity-funded start-up biotech, good science is still getting funded, but it's down off a peak. The peak was a once-in-a-generation high. Does that give you a sense of that?

But I think actually, what we're seeing is a reversion to more normal demand levels, which are value creating and sustaining.

[Shrikant Akolkar, analyst]

Okay. Okay. But the question that would be -- a follow-up on that would be, if there will be any impact of the current funding challenges on your business going in the rest of the quarters of the year?

[Jonathan Hunt, executive]

Yes. I know I think I just answered that. Of course, there are impacts. There are some clients who are struggling to refund and refinance. So they're going to struggle to spend money with us. There are others that have got financing and are thinking rather than trying to refund finance in the capital markets can I make my money go further. One of the ways they can do that is shift their buying point from spending their money with CROs in the west and moving it to India because we can do the same quality of science through a lower price. So it's the net of those two. But I don't think that the biotech funding environment and I'd love to hear your view, it's not closed forever. It's just -- it's a temporary slowdown. Funding around biotech has been cyclical around, I mean, my entire career.

[Shrikant Akolkar, analyst]

Right. And...

[Jonathan Hunt, executive]

What's your perspective? Do you expect biotech funding to never ever come back?

[Shrikant Akolkar, analyst]

No, I think it may stop for a while and it will come back just as we have been during the pandemic time.

[Jonathan Hunt, executive]

There you go, so I spent that too. So that means that any impacts on our business is short term and temporary. That's your view.

[Shrikant Akolkar, analyst]

Right, right. And the other question I asked was about the hiring the right set of people in your biologics manufacturing and the new R&D center at Hyderabad?

[Jonathan Hunt, executive]

Yes. Well, we're pretty good. I mean one of the good things about India is it's not short of people and talent. I mean I can't think in many places in the world where you get quite so many graduates. You've still got a societal previous position for young Indians to go and study what in the west are increasingly considered to be difficult subjects like chemistry and biology and engineering and computer programming. So you've got a large, young graduate workforce that comes pretty well educated and in what are some of the tougher subjects in the world. So that's a good place to be.

We are quite lucky, I think, partly within sort of Syngene, but also within the broader Biocon group. I think we've got reputations in the Indian labor market within science as being an employer of choice. We hire some of the largest number of young graduates and laterals. So from that point of view, I think we did pretty well getting our unfair share of the talent that's available in India.

And on the biologics specifically, we're in a pretty good place. We've already got a reasonable size organization with some very experienced people in it. So I don't think we'll have a problem staffing the Stelis facility once we take it over.

[Operator]

Next question is from the line of Utsav Mehta from Edelweiss Asset Management.

[Utsav Mehta, analyst]

First one slightly long one, so apologies for that. If I strip out an approximate Zoetis number of around $12.5 million, I think I'm getting a growth rate of around mid-single digits year-over-year in the non-Zoetis business, so I just wanted to understand, is that a function of the sluggishness that you've alluded in the previous question? Or is it just a supply side issue in the sense that we're building infrastructure and that will come in over the next few quarters? Or is it just a timing thing base effect or something like that?

[Jonathan Hunt, executive]

Yes. I'll let Sibaji may give a comment in a minute. And just, firstly, I'm not sure that your backing out calculation is accurate. So don't think that any comment I make is an endorsement that your maths are the same as what our internal spreadsheet says. But more than that, from a strategic point of view, our strategy delivered 25% revenue growth this quarter. That's the strategy. The strategy is not to run a business minus Zoetis, plus Zoetis. It's an integrated strategy of becoming both the CRO and the CDMO. We made that clear 5 or 6 years ago, and we're delivering on it. And that's why I took the trouble in my prepared comments to go back and remind everybody that -- and I think this is clear with our shareholders, they understand that the strategy is to be a fully integrated, broad CRO to CDMO research through to development and manufacturing. And that's the strength of the business. It gives you 2 engines, but it also gives you resilience. So from that point of view, I wouldn't disaggregate 25% top line growth because that was the strategy. And with that, I think Sibaji, any comment?

[Utsav Mehta, analyst]

That's right. I just want to...

[Sibaji Biswasb, executive]

I think...

[Jonathan Hunt, executive]

No. Go on. Go on, make your comment.

[Utsav Mehta, analyst]

I was just saying I appreciate. I was just trying to get some flavor of the rest of the business sort of environment from that number. It wasn't to say that the rest of the business are growing fast enough. That's all.

[Jonathan Hunt, executive]

Yes. No, no, I know. And maybe it's my English -- use of English. I was too coded in my last answer. What I think you're seeing on the research side is fairly healthy demand in the market down from an exuberant peak of last year, and the exuberance would have been good underlying demand plus a lot of catch-up, and I think the catch-up is caught up. And if you read across, read Charles River in U.S. and Lonza, 1 or 2 other companies have had results already. And their management has said very similar things, which is fundamentals are okay, but the extra peak of catching up last year is working its way through.

But if you are unusually exposed, which we are not, to just the U.S. biotech sector, then you've got an extra dimension going on at the moment, which is the funding environments are a little bit lower than it has been. It's not 0. There are still good businesses, financing and getting new capital going to them. It's just not at the rate it was 18 months, 2 years ago. But 18 months, 2 years ago, that to me is like a once in a decade high. So I think it's, again, that's a bit of a normalization neither of those things change the fundamentals. And you can look at that strategically.

If I thought there was a fundamental shift going on, I probably wouldn't have invested in 17 acres of land to de-risk our growth for the next 5 and 10 years in Hyderabad. And I wouldn't be going long on manufacturing capacity with the biologics acquisition. So I think these are temporary things and they're all in the wash. Does that help? Is that the sort of strategic sense that you were looking for in the question.

[Utsav Mehta, analyst]

Yes. Jonathan, much appreciated.

[Sibaji Biswasb, executive]

I will add to those numbers, that discussion because I think I really don't understand the calculation, but I think you were calling it up a bit on the lower side. So if I can separate it out in the Development and Services business in the small molecule development and clinical manufacturing business in the small molecule, which is not Zoetis, are not biologics. I'll not like to call Zoetis separately, but not biologics, it is also showing very strong growth.

The research service business consists of 2 parts, one is Discovery Services; one is Dedicated Centers. The Dedicated Center obviously grows incrementally with whatever little expansion has but generally, close to the extent we can take care of the inflationary adjustment that we need to do.

But even the Discovery Services is growing at a rate, which is not as high as last year, as Jonathan mentioned, but it's growing at a rate, which is nothing to be unhappy about. So obviously, biologics is growing very, very well. And Zoetis as well...

[Operator]

Participants, please stay connected. The line for the management is disconnected. Ladies and gentlemen, please stay connected while we rejoin the management back to the call. Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Sir, you may go ahead.

[Jonathan Hunt, executive]

Good. Thank you. Sorry about that. We were cut off on our prime. So I'm not sure who's got the honor of throwing out the next question.

[Utsav Mehta, analyst]

Just me. I could complete my, yes -- squeezing my second question. Just a data point, guys, what was the -- or if you could just share the IRR or the hurdle rate that you guys are broadly using for your acquisition would be really useful?

[Jonathan Hunt, executive]

That's not something I think -- does any company disclose that?

[Utsav Mehta, analyst]

Fair enough.

[Jonathan Hunt, executive]

I've never known any public company do that, partly because if I tell you, I've told everybody I'm ever going to negotiate within the future what my hurdle rate is, and therefore, it really got -- it makes it something of an asymmetric negotiation. So forgive me if we don't, but we've got a pretty good discipline around thinking around returns beyond the cost of capital over the life time of the asset, which is at least what our shareholders and long-term investors would want to hear.

[Operator]

Thank you very much. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference to Ms. Avantika Mishra for closing comments.

[Avantika Mishra]

Thank you, everyone, for joining today's call. We are sorry for the brief interruption in between. However, if you have any further queries, please do get in touch with our team, and we will be happy to get back to you. Have a good day, and thank you once again.

[Operator]

Ladies and gentlemen, on behalf of Syngene International, that concludes this conference. Thank you for joining us. You may now disconnect your lines.