Syngene International Ltd

NSE:SYNGENE

Earnings Call Analysis

Adjusted Guidance on Slower Growth

The company reported a revenue of INR 910 crores, a reported growth of 18.5% and a constant currency growth of 15%. Operating EBITDA increased by 17.4%, reaching INR 254 crores, while Profit after tax before exceptional items rose by 20% compared to the same quarter last year, amounting to INR 122 crores. Growth in the Development and Manufacturing Services was strong, particularly due to a biologics manufacturing partnership with Zoetis and the commissioning of a new quality control lab. However, softening demand was noted in the U.S. Discovery Services division due to adjustments in the biotech funding environment. Consequently, the company has adjusted its annual revenue guidance to mid-teen year-on-year growth in constant currency, from the previously forecasted high teens.

Operational Performance and Strategic Expansion

In the landscape of development and manufacturing, the company has posted a sturdy operational performance with reported revenue from operations growing by 22%. This growth, when adjusted for constant currency, stands at 17%, reflecting a robust demand for the company's development and manufacturing services. Furthermore, the company is on track with its strategic investments, having spent approximately $30 million in capital expenditures (CapEx) in the first half of the year, and is looking to commit close to $80 million for the full year.

Cost Management and Margin Stability

Year-on-year costs have increased by 18%, a consequence of both the expanding infrastructure and recruitment strategies aimed at serving global client needs more closely. The company has seen its operating costs rise due to the build-out of laboratory spaces and the integrating of new equipment. Nevertheless, it has maintained operating EBITDA margins at a stable level of 27.9%, closely in line with the previous year's 28.2%, underscoring its ability to manage expenses effectively.

Profitability Insights

Profit after tax (PAT) growth before exceptional items was notable at around 20%. After accounting for exceptional expenses related to the Stelis facility's acquisition, PAT growth was at 14.4%. The effective tax rate held steady at 23%, despite increased depreciation charges and finance costs, which indicates a strong underlying profit generation capability.

Future Outlook

Looking ahead, the company projects a continuation of demand growth, albeit at a moderated level in the second half of the year. It anticipates a slight rebound in the next quarter with a stronger recovery expected in the fourth quarter. Encouragingly, the firm expects mid-teen revenue growth at constant currency for the full fiscal year, which would translate to high teen growth on a reported basis. This forecast integrates the anticipated effects from ongoing projects in the small molecule business and consistent revenues from the Zoetis contract in biologics manufacturing.

Strategic Acquisitions

The acquisition of the Stelis facility aligns with the company's long-term growth plans and strategic initiatives to build capacity and capabilities. This move signifies a commitment to maintaining operational efficiency and expanding the company's service offerings in the biologics sector. The successful integration of Stelis will likely create additional avenues for revenue generation and enhance the company's competitive positioning in the market.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Syngene International's Second Quarter FY '24 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Suruchi Daga from Syngene International. Thank you, and over to you.

[Suruchi Daga, executive]

Thank you, Yajeshri. Good afternoon, everyone. Thank you for joining us on this call to discuss Syngene's Q2 FY '24 and H1 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, 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, may contain certain forward-looking statements and must be viewed in relation to the risks pertaining to the business. The safe harbor clause indicated in our investor presentation also applies to this conference call. The replay of this call will be available for the next few days, and the transcript will be subsequently made available.

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

[Jonathan Hunt, executive]

Thanks, Suruchi, and good afternoon to everybody. Thank you for joining us on today's call to review our second quarter and first half performance of the financial year. I'll start my remarks with a quick overview of the key financials for the quarter before getting into some of the operational and strategic highlights. I'll then share some thoughts on the first half of the year before handing over to Sibaji to give you more of the financial details. And then, of course, we'll be happy to open up for questions as usual.

Overall, the shape of the quarter was pretty much in line with expectations, positive and strong performances across the divisions led by development and manufacturing services. Revenue from operations came in at INR 910 crores. That's up 18.5% reported that's 15% on a constant currency basis. Operating EBITDA was up 17.4%, INR 254 crore. Profit after tax before exceptional items was up 20% over the corresponding quarter last year to INR 122 crores. You can see some operating leverage through the P&L there, in line with our strategy and the focus on building up the development in the manufacturing part of the business. We continue to add capabilities in our Development Services division.

We commissioned a non-GMP facility, which added capability to do early phase development projects. And -- in what I think it's an agile and cost-effective manner. In Manufacturing Services, we made good progress in the quarter with our biologics manufacturing partnership with Zoetis, and we also commissioned the state-of-the-art, digitally-enabled quality control lab that will support our growing biologics operations.

Looking at the research divisions, which covers Discovery Services and Dedicated Centers. They showed together sustained growth in Discovery Services as well, the global demand has remained generally healthy, we did experience some softening in demand in the U.S.-based biotech segment as it adjusts to a new funding environment.

However, if you look at new capital raising in the sector over the last 2 or 3 months, it's really started to come back to pre-pandemic levels, and we expect that to normalize in due course. Overall, sector fundamentals remain strong, and we expect continued demand growth, but at a slightly reduced level in the second half of the year. Most of this will come in the next quarter. So as our guidance for thinking about your modeling with a strong return to growth in the fourth quarter.

Again, that's teed up as we've seen in previous years for a very strong fourth quarter for us and quite a strong exit to the year. This short-term slowing in demand is reflected in the updated guidance that we gave for the full year on revenue. We've adjusted our annual revenue guidance to mid-teens year-on-year and growth in constant currency from high teens, it's previously announced. I'll leave Sibaji to give you a bit more color on that, if needed.

It's important to note that these nuances really are limited to the smaller biotech companies in the U.S., the major pharma companies in Europe and the U.K. and the large pharma companies in the U.S. are well insulated from this funding dynamic, and we continue to see positive demand from these clients.

As you know, pharmaceutical research is a long-term business. So our planning is based on market growth that we see 3, 4, 5 years down the line. And in that context, none of our plans or our expectations have changed. Hence, the purchase of the 17 acres land parcel in Genome Valley in Hyderabad that we announced last quarter, that's really about giving us headroom and space literally space to grow for the next decade or so in Hyderabad.

Although our routes line research services, in the last few years, we've also focused on building up our development and manufacturing division, the CDMO part of the business. And the long-term manufacturing contract with Zoetis provided the platform to expand our biologics capacity and the proposed acquisition of a multi-mobile facility from Stelis Biopharma would be part of that strategy.

Looking at the first half of the year as a whole, our financial results have been robust, revenue growth of 22% reported, that's about 17% on a constant currency basis, and we've achieved some important milestones but I think are a key part of accelerating and delivering our strategy. As I explained, we're expecting to see a little bit of a slower growth in research in the short term. But notwithstanding that, the order book looks in pretty good shape. And we remain cautiously positive as we head into the second half of the year.

With that, let me hand over to Sibaji.

[Sibaji Biswasb, executive]

Thank you, Jonathan, and good afternoon to everyone. I'm pleased to share with you the strong financial performance of our company for the second quarter and the first half of the year. Let me begin by discussing the second quarter performance, and I will cover the first half and updated guidance before I close my commentary.

In the second quarter, we witnessed close to 18.5% growth in reported revenues from operations, which translates to around 15% on constant currency. This growth was predominantly driven by the development and manufacturing parts of our business with commercial manufacturing of biologics being the key contributor. The Zoetis contract has now reached a run rate of around USD 50 million per annum, as previously guided. And small molecule development services delivered steady growth driven by repeat orders from clients and strong growth in our clinical formulation business.

Our research business has continue to perform well with the Dedicated Centers that we operate for BMS, Amgen and Baxter maintaining steady growth. However, as Jonathan mentioned, Discovery Services experienced temporary softening of demand as companies adjust to the new biotech funding environment. I'm sure that you will have seen this reported by others already. The industry fundamentals for the research business remains strong, and there are already signs that the U.S. biotech funding is getting back to more stable pre-pandemic levels, which should then bring back growth momentum in the research business over the next few quarters.

The demand signals from the large and the medium buyer from the companies are encouraging. So we remain optimistic, although these arrangements generally take a longer period to materialize. In the second half, we'll continue to invest in scientific capabilities and other enterprise projects, and we expect our CapEx investments to run to plan. As usual, we will face this over the coming quarters with the face of execution being determined by the demand environment. Internal cash flows remain strong, and all investments are expected to be funded from internal accruals. So we'll have limited need to resort to external credit.

Now moving to profitability metrics. EBITDA from operations grew at 17.4%, surpassing the constant currency revenue growth rate. Operating profit, which is EBIT also showed strong growth at 18.4%, reflecting the impact of operating leverage on the back of improved capacity utilization in our development and manufacturing businesses.

Let me now turn to some of the cost lines, and I'll explain the key changes and trends we saw in the quarter. The cost of raw material increased by 34% year-on-year, primarily reflecting the shift of business mix towards development and manufacturing services, which, by nature, have higher material cost component.

While the cost of raw materials was at 29% of revenues for the second quarter, we expect this to stabilize around 27% to 28% of revenues for the full year. Staff costs rose by 10.4%, tracking the increased headcount as well as the impact of annual increment cycle although it is worth noting that it is a lower percentage of revenue at 26.5% compared to 28.4% in the previous year. This is driven by the shift towards manufacturing, which is a less people-intensive business. Direct costs, primarily power and utility expenses showed a decline of 4% year-on-year. This favorable trend reflects reduced utility input cost and an increase in [ captive ] green energy consumption compared to the previous year.

At present, 81% of our total energy consumption is from renewable sources, an increase from the 77% last year. Other operating costs grew by 18% year-on-year, which is similar to the trend that we saw in the last quarter. As before, this is -- this increase primarily stemmed from increasing spend on the upkeep of our facilities, which have expanded with new laboratory spaces and installation of new equipment and infrastructure. Furthermore, other operating investments, especially the recruitment of commercial and scientific teams located outside India closer to our clients have contributed to higher costs compared to the previous year.

The hedge loss for the quarter came in at INR 18 crores compared to INR 19 crores in the same period last year. Spot rate averaged around INR 82.7 per U.S. dollar during the quarter against our hedge rate of 81.3 for the quarter. Overall, operating EBITDA margins remained at similar levels in the second quarter at 27.9% of revenues compared to 28.2% in the previous year. Depreciation charges increased by 16% year-on-year, driven primarily by asset additions across business divisions and rent from new leases entered during the period.

The new lease includes a non-GMP facility, which adds such capability to deliver early stage development projects in an agile and cost-effective environment. Operating EBIT margin for the quarter remained flat at 16.4% compared to the previous year. Finance costs increased from INR 11.7 crores to INR 13 crores, mainly due to the increase in interest component on lease centers. Other income increased by 40% year-on-year due to higher cash balances and improved interest yields.

Turning now to tax. Our effective tax rate remained stable at approximately 23%. Our profit after tax growth before exceptional items was around 20%. However, during the quarter, we had an exceptional item of INR 5.3 crores net of tax and this is attributable to the transaction costs relating to the acquisition of the biopharma manufacturing facility from Stelis. PAT after exceptional items grew at 14.4%.

Turning now to the performance in the first half. Reported revenue from operations grew at 22%, 17% at constant currency, primarily driven by development and manufacturing services. Operating EBITDA grew at 20%, while operating profit, in other words, EBIT grew at 22%.

The trend in expenses in the first half broadly mirrors that of the second quarter. The cost of raw material is 36% due to shipping mix was development and manufacturing services. As mentioned earlier, the raw material costs will stabilize around 27% to 28% for the full year. Operating EBIT margins were maintained at 15%, almost in line with the first half of the previous year. Other income increased by 46% attributed to higher cash balance and include interest yield. On the other side of the equation, increased finance costs also reflect higher interest rates. Overall, we had a very good first half of the year with profit after tax before exceptional items growing at 23% year-on-year and talking after tax after exceptional item growing at 19% year-on-year.

We have invested around $30 million in CapEx in the first half of the year with around 60% of that directed to us adding new capabilities and capacities in the research business. CapEx in Discovery Services was mainly in Hyderabad, while we opened and automated compound management facility and the DMPK biology lab for integrated small molecule studies. Hyderabad now [indiscernible] close to 40% of the scientists in Discovery Services, making it a sizable operating footprint with further plans for capacity expansion.

The rest of the CapEx was largely invested in development and manufacturing services, which includes support infrastructure such as quality control and testing laboratory for the biologics manufacturing business and additional [ finish ] capabilities for the small molecule business. Now moving on to the revised guidance for the year. As you have seen, the first half revenue performance was in line with the guidance. The sector fundamentals remain strong. We expect continued demand growth, but at a reduced level in the second half of the year, and most of this will reflect during the next quarter with a little bit strong recovery expected in the fourth quarter.

The biologics manufacturing for Zoetis is on track and will continue to deliver strong revenues. However, please note that we started to build up revenue from the contract from the second half of the last year. So the year-on-year growth will be modest compared to what we had experienced in the first half of the year. This is built-in to the revised guide. In the small molecule business, several ongoing projects are scheduled to complete in the fourth quarter, so we expect reward growth in the third quarter and a strong fourth quarter, which typically is our highest in a year.

Putting these factors together will result in mid-teen revenue growth for the full year at constant currency, which equates to high teens growth for the full year on a reported basis. Overall, we see the current demand growth situation from U.S. biotech as short term and expect it to stabilize as the biotech funding environment normalizes. Signs of which are already visible. The demand situation from other client segments continue to be normal, so we remain cautiously positive in the second half of the year.

Moving on to the CapEx guidance. Against the revised CapEx guidance of USD 85 million that we indicated in the first quarter call, we now believe we will execute close to USD 80 million of CapEx this year, and the balance will be carried over to the next year. USD 30 million has been executed in the first half, another USD 20 million has already been committed for execution. Of the total USD 80 million, more than 50% will be invested in research business, around USD 5 million towards upgrading the multimodal facility being acquired from Stelis and the remaining CapEx will go for small molecule development and manufacturing service businesses and other enterprise initiatives.

The acquisition of the Stelis facility is appropriate and both parties are working towards fulfilling all closing conditions. We will update you on this once we close the deal. To summarize, we had a productive half year, making progress in implementing strategic initiatives while delivering operating efficiencies. We believe we are well positioned to navigate through the temporary U.S. biotech funding challenges, and we will continue to invest in building capabilities and capacity for group in the future.

With this, I conclude my remarks, and we'll now take your questions. Thank you.

[Operator]

[Operator Instructions] We have a first question from the line of Tarang Agrawal from Old Bridge Asset Management..

[Tarang Agrawal, analyst]

Three questions from my side. One, because of the IRA, right, there is an implication that perhaps it would result in the transitioning of investments from out of small molecule developments towards large molecule developments because of the stipulations laid out in the IRA. Are you seeing any signs of that happening in your interaction with the customers? So that's one.

Second, in terms of your large molecule outsourcing business, are there any developments that you're seeing other than the Zoetis contract?

And third, given that we've already received the approval for the Mangalore API facility, if you could comment on the ramp-up of that business, say, in FY '25 and '26. And last fourth, a small bookkeeping one. You said $80 million of CapEx guidance for FY '24. I would believe this is organic CapEx. Stelis acquisition will be over and above, if you could clarify on that.

[Jonathan Hunt, executive]

Yes. The last one is yes. To suppositions correct on the last one. I'll talk around some of the others. The IRA to the inflation reduction, that's quite an interesting question. The really easy answer to your question is no, we've seen no impact whatsoever. But I'm not sure that's particularly informative. I would expect this to play out over the next 5, 10, 20 years to go to the other end of it.

If it has implications for the research strategies of major biopharma companies, the decisions they make today would be about where they invest their -- lead that front hedge of their science, that's 3, 4 years in discovery, 4, 5 years in development before you even get a product. So you're effectively asking questions that are predicated if there was a decision that you would make differently today at the very front end of the R&D process.

When would we see that play out? If the 10-year discovery development cycle. So no, there's nothing immediate happened in the last 2, 3 quarters since the legislation became visible. The other bit is just around scientific technological risk. The challenge of finding a molecule in a target that works that produces a drug I think, I think dwarfs the selection of is it a small molecule or a large molecule. If you look at the success rates that we all understand in drug discovery, the choice is not always there between -- well, let's have a large molecule version of that same thing. So I think it's almost a false narrative to think that will be the choice between them.

That said, what it will do that will make people think around speed to market, how many things traditionally that they would have done in the discovery development phase sequentially and when they want to do them in parallel. So it might increase the amount of investment in any given decision space -- stage for our clients. And then I'm going to pull it back into a net implication for us. We offer world-class science to FDA, EMEA global standards. We do it with speed that's equivalent to our clients and then sometimes quicker.

And we do that with an operating cost arbitrage that lowers the expense. So if they were going to try and do more things in parallel, and they wanted to do it quickly. I can see it being advantageous. That scientific footprint, continuing the trend we already see as moving to places like India and companies like Syngene. But on the immediate premise of your question, have I seen anything in the last 12 weeks? No, I think it's way, way too early. It will play out over years. But let me just pause and see if that answer helped.

[Tarang Agrawal, analyst]

Yes, it did.

[Jonathan Hunt, executive]

On the other 2, we got -- having been helpful on the first question, I'm going to [ duck ] giving you specific product level guidance on either of the other 2 questions, which are really the same one, which is what is the outlook for our manufacturing businesses. It continues same thing, as I would have said last quarter and the quarter before that. We're out there, we're connecting with clients. We continue to see a step-up actually in the number of meetings that we have with clients. We're seeing a healthy environment around client inquiries, but I actually don't have anything to tell you because if I did, I would have put it in the press release earlier today. But our enthusiasm for being a CDMO business as well as the CRO business hasn't changed at all. I still think the capital we're deploying to shareholders is the right thing to do to create long-term value.

[Tarang Agrawal, analyst]

Okay. Jonathan, can I squeeze in 1 more?

[Jonathan Hunt, executive]

Go on then.

[Tarang Agrawal, analyst]

Okay. So I was just thinking, given the interest rate environment in the West and while I understand that it emerges as a -- as a short-term risk in terms of the funding drying up. But purely from a medium to long-term perspective, given that capital is going to be more expensive, does it therefore not increase the requirement of businesses like ours because creating an infrastructure or -- for that matter of fact, getting the drug faster to market will be even more important than what it was before. And in that sense, from a medium to long-term perspective, it works for us.

[Jonathan Hunt, executive]

Yes. I mean if you just reverse the economics in your question, if capital is harder to get, more expensive. You may well only get a smaller amount of investment, in which case, you have to work hard to make it go further. And 1 of the ways you can make any given dollar go further is to spend it wisely. And if you can get equivalent science, equivalent service, world-class regulatory, compliance for a lower dollar remain, which is essentially work companies like Syngene offer that to clients in comparison to doing the work themselves in the west or using western service providers. Then yes, it sharpens the value proposition we have. And that wouldn't be lost on our customers nor would it be lost in our sales people, those are the sort of conversations we're having every day.

[Operator]

We have our next question from the line of Harith Ahamed from Avendus Spark.

[Harith Ahamed, analyst]

Is there's an update on your margin guidance for FY '24, I think earlier, you guided for a 30% EBITDA margin for the year. And could you also share the hedge rate for the second half of FY '24.

[Jonathan Hunt, executive]

I'm sorry, could you -- you are very muffled. Could you just restate the question because I couldn't capture that.

[Harith Ahamed, analyst]

I was thinking there is an update on your margin guidance for the year, you had previously guided for 30% EBITDA margin for FY '24.

[Jonathan Hunt, executive]

Yes, I still think it will be around 30%. Yes. So there's no change in the guidance. The only thing we commented on earlier today in sort of the press release and various media interactions in Sibaji's remarks is high teens constant currency revenue growth becoming mid-teens. By the way, I still think that, that's a gained share, outgrowing our market sector, outgrowing most of our competitors type performance, so it looks pretty good.

On the EBITDA margin, i think we said around 30% was is the phrase we used at the beginning of the year. I continue to think that everything indicates around 30% is the right guidance for the full year.

[Sibaji Biswasb, executive]

And on the hedge rate, we see our hedge is around 81 to 81.5 in that range. And I would like to remind everybody the 30% or around 30% guidance was given for the revenue [indiscernible] at the hedge rate. So you can work out your arithmetic. So the guidance for margins still hold and the hedge rate, as I said, is between 81 to 81.5.

[Jonathan Hunt, executive]

Yes. I mean actually, if you triangulate into it, I'm sure for the analysts on the call that their calculators will be running through this already. If we expect around 30% of the full year, and our average EBITDA margin rate for the first half, Sibaji I'm looking at you, it was how many?

[Sibaji Biswasb, executive]

First half was around 28%.

[Jonathan Hunt, executive]

Okay. So if the first half is 28%, and we're going to do around 30% for the full year. One of the implications you can triangulate into is that second half EBITDA margins will be higher than first half.

[Harith Ahamed, analyst]

Okay. Understood. Sibaji, I also noticed that there's a sharp reduction in working capital by almost 20 days versus March and especially the debtor days have come down. So trying to understand what has led to this.

[Sibaji Biswasb, executive]

Actually, we are running a very focused program on working capital improvement, and that's on receivables, inventory phases. So all are improving. Of course, you must have also noticed a marked improvement in the receivables as well. And typically, that's arithmetic because quarter 4 is the highest quarter for us. So -- and the receivables is [indiscernible] number of days, right, of bidding. So compared to that, there is also some benefit which is coming on the receivable line.

But if you take that out, overall, you will see improvement in all the lines of working capital. And it's coming out of a structured program that we are in. If you recall, during the pandemic, we built up a lot of inventory to kind of de-risk core business. And as we have settled down post-pandemic, we are optimizing inventory across the business. Although in absolute terms, inventory will still go up as our business move towards development and manufacturing. But in terms of proportion of the billing, we are continuously optimizing that and you see that going forward as well.

[Harith Ahamed, analyst]

And last 1, with your permission on [indiscernible] Stelis facility acquisition. Can you share the time line for closing the transaction and the additional CapEx that you've guided for, which is around INR 100 crores, the timeline suspending that. And once you close the acquisition, will there be expenses sitting at P&L from the facility? Or will you be capitalizing the pre-op expenses that you're incurring there.

[Sibaji Biswasb, executive]

You take that.

[Jonathan Hunt, executive]

Timeline. I expect with the rate we're progressing -- I expect it to close in this quarter, but it's not running to a time table, it's running to a checklist, if that makes sense. So there are a number of things that need to be completed, closing items that need to be done, and that will -- is what will govern the closing of that deal. So it's not to a clock, it's to a checklist, but I'd expect us to get through that in the quarter. On the accounting and the financials, Sibaji?

[Sibaji Biswasb, executive]

Yes. So -- as you might remember, the cost of the acquisition was around INR 700 crores, a little bit more than INR 700 crores, and we said we'd spend close to INR 100 crores modifying that facility. 50% of that is actually built into the CapEx guidance we get because we consider that an organic CapEx. So you can take anywhere between $5 million to $7 million is built into the $80 million CapEx guidance that we -- we break for our own facilities that will be incurring.

[Harith Ahamed, analyst]

Okay. And on the costs or the costs that are coming through or you're incurring that you'll be incurring in the facilities, will it come through the P&L? Or will you be capitalizing it once you close the transaction?

[Sibaji Biswasb, executive]

Are you talking about the cost of transaction like due diligence, investment banker's fee...

[Harith Ahamed, analyst]

The operational expenses at the facility.

[Sibaji Biswasb, executive]

Okay. The operational expenses from the date of acquisition til the date of commissioning and starting operation will be capitalized.

[Operator]

[Operator Instructions] We have our next question from the line of Sudarshan Padmanabhan from JM Financial Services.

[Sudarshan Padmanabhan, analyst]

Sir, my question is to understand what is really driving the near term slowdown of biotech spending as you said. I understand that there is cost of capital that has increased very sharply. And current outlook remains that interest rates will remain high for long. In this scenario, smaller biotech companies, I would assume will largely be affected more compared to well capitalized larger names. In this context, do we have the versatility to shift the business from a smaller company in case the slowdown prolonged to larger names and also we look at ramping up the manufacturing a little bit faster in case this related issues continue.

[Jonathan Hunt, executive]

Super. Your question is better than my answer. I think you described all of the elements of it. That's sort of what we were trying to get to in some of the comments earlier and some of the media interviews. We're a broad-based business. We got 450-plus active clients. They cover from, I think, the very largest pharmaceutical company in the world to the smallest newest biotech start-up. I've actually met 1 client where it was a single person entity. They were the Chief Executive and receptionist, all in one. So we span that whole range. It's not a case really of moving from 1 to another because we've always engaged with both, whether it's big pharma, big biotech, medium-sized or start-ups.

That's 1 of the advantages, I think, of the breadth of capability and our strategy is. We've got the ability to go with all sizes of clients from discovery through to development through to manufacturing. But I think your implications are right. If I take bit side of your question, large pharma, large biotech. Those companies are not dependent on the VC environment for funding.

They're super well capitalized, massively cash generative, some of the biggest corporate entities in the world. So for them, it's not an issue in their decision-making. They're more likely to be looking at their long-term distribution of where they need the research, where can they tap into talent...

[Operator]

Ladies and gentlemen, we have lost the management connection connected. [Operator Instructions] Ladies and gentlemen, thank you for patiently holding. We have the management line back on the call.

[Jonathan Hunt, executive]

Could we just go back to the last questioner. And you're going to have to tell me where I got cut off in my prime because I was trying my best to answer your question, but I don't know which -- where we got cut off.

[Operator]

Mr. Padmanabhan, please go ahead.

[Sudarshan Padmanabhan, analyst]

You were saying that smaller companies depend more on VC. The larger companies are well capitalized, but the versatility of the business will play in your favor.

[Jonathan Hunt, executive]

Yes, super good. So that was 1 of my key points. The other bit I was just going to say is if you go back pre-pandemic, I think that the U.S. biotech subsegment will seem to be healthy dynamic, well funded, and a good thing for investors, biotech companies and services businesses. We then -- as we went into the pandemic had couple of factors. One was financial macroeconomics, which was interest rates were super low almost to the point of being negative. So capital within search are placed to be deployed. And we have a global existential threat to the whole world in the pandemic. And we saw a lot of money. Possibly for me, if I look at it, certainly a generational high, maybe a lifetime high of capital going into new funding of biotech around the world and particularly in the U.S.

As we've come out of the pandemic, we had a very busy year in the first 12 months after the pandemic as the world tried to catch up. Some of the growth rates you saw in our business and in other businesses, last year would indicate that.

But simultaneously, we also saw the capital starting to move back into all of the other sectors of the economy. Think about it during the pandemic. There were a whole industry groups that we're not getting funded because they were on furlough or people were closed up. So as the capital is redeployed it, of course, meant relative to an old-time peak, a much lower base.

Now there are a number of investment banks track this and report. I would point you to any number of them report on this, but the date that I've seen over the years, certainly over the last 3 months suggests that U.S. biotech funding is now stabilizing, it's starting to settle back and the level it's settling back up looks very similar to the levels it was pre-pandemic.

So a new normal, but the normal looks very much like the pre-pandemic norm. So what I may think we have is a timing issue between raising new capital, hiring people, restarting the programs, and spending it in the market with people like us. And it's going to take us 1 or 2 quarters to work through that. But we'll have to watch it. We'll have to walk it through the quarter. But we're not the first company to comment on this. I would say we're amongst the last actually to have had any impact on the business.

If I read CROs around the world, particularly those that are publicly listed because they're more likely to make a quarterly comment. We're a couple of quarters into people making exactly the comments I've made today. Does that help? It gives you a beginning, a middle, and the end and a sense of the temple nature of this.

[Sudarshan Padmanabhan, analyst]

Yes, yes, Definitely so it looks like it's probably 1 to 2 quarter phenomena and probably all your investments will pay dividend probably say -- once this -- issues reallocated on your [indiscernible].

[Jonathan Hunt, executive]

Yes. I mean, put it another way, when we deploy shareholders' capital into things like buying land in Hyderabad, we're taking a 20-, 30-year return in value creation view and a belief that we will create value beyond our cost of capital over decades. We're not looking at it over weeks and months.

[Sudarshan Padmanabhan, analyst]

Sure. And sir, the next question from my side before I join the queue is if I take the last 5 years and even post -- you coming into Syngene there has been a lot of investments, not only in the capacity, on the capability side. Now typically, when you work with your plans on the research, I mean, if 1 is to get the quantity of orders, I mean, there have been a lot of low-hanging fruits, which MNC company or an innovator would like to give. The second is the quality of projects, where there are certain complexity involved, probably projects with higher success rates, which unless you demonstrate your capabilities, your clients would be hesitant to give. In your experience over, say, over the last 5 years, have you seen the quality of the projects moving up? And with the current [indiscernible], do you see the quality of the projects moving up further and also help the return ratios in the profile margin profit?

[Jonathan Hunt, executive]

Yes to the first one, definitely. I mean that's essentially our long-term strategy is to move from efficiently doing simple things really well to where we are today, where I think we are, in many ways, is either an equivalent level of sophistication, scientific innovation and complexity to any of our clients. We no longer sit around the sort of Board room table in the labs with our clients.

Is anything other than scientific partners and equals and that's the intention. Many of them, and if you look at some of the smaller companies, would look to Syngene and say 8,500 people, 6,500 scientists coming on for 30 years of experience. They're actually looking to us for insight and advice based on our experience rather than [ to instructure ] and hope that we can follow instructions. So it's changed dramatically.

And for emphasis, that's not unusual in services business. And in India's world leader in IT services. And there's a 30-year journey that looks very, very similar there, starting at doing simple work and following western clients instructions to now maybe setting this -- the technological boundaries of what's possible. Hopefully, that makes sense.

[Sudarshan Padmanabhan, analyst]

Sure, sir. And some more qualitative commentary on the kind of capabilities that you are building, I mean, through the CapEx.

[Jonathan Hunt, executive]

In which aspect of the business, I mean there's so many. If you take, for example, this SynVent model that we've got, it's a particular type of service offering where we will fully integrate all aspects of drug discovery. And effectively, that's us becoming our client as it were, indistinguishable from them in process approach the ability to do not only the chemistry and the biology but then to synthesize and integrate them, and get that through to a decision-making point. It is a simple way of looking at it. There's the difference between being on the bus and driving the bus. And something like the SynVent model, we're actually driving the projects for the client.

[Sibaji Biswasb, executive]

And to do that, we work across therapies and platform. So in a very versatile manner. But may I request questions to be limited to 1 or 2 because I'm sure there is a queue.

[Operator]

We have our next question from the line of Diresh from [indiscernible].

[Unknown Analyst]

I have 2 questions. First question, if you can share what percentage of our, let's say, last year's full year revenue we got from small biotech funds. That will be question #1, please.

[Jonathan Hunt, executive]

Okay. That's your first question. What's your second one?

[Unknown Analyst]

It seems the gross margin there seems to be some one-off this quarter. So is there a one-off this quarter because even assuming a certain mix of manufacturing versus discovery, the margins seem to be subdued.

[Jonathan Hunt, executive]

Okay. So Sibaji, I'll give them to you. The question is are we subdued in our gross margins. While you're thinking about that, I'll do the first 1 on small biotech. We don't normally disclose it. But to give you a sense of it, I would guess about 15% or so of our revenue would come from -- at a total firm level would come from that U.S. biotech segment.

[Unknown Analyst]

Okay. 1-5 you said, right?

[Jonathan Hunt, executive]

The gross margin.

[Sibaji Biswasb, executive]

On the gross margin, first let me clarify, there is no one-off. It's a function of the mix. And even in CDMO part of our business, raw material as a percentage of revenue in small molecules and large molecules, which is biologics are different in a quarter where you have high biologics revenue in the overall revenue, you'll see us move towards higher raw material costs.

In a quarter where you have more -- a small molecule CDMO you'll have slightly lower raw material costs. So it's all in the mix. There is no one-off I can communicate that. In fact, I guess you are also taking utility and power in the cost -- direct cost that has gone down, and that has gone down quite sharply because of the multiple agreements that we have entered for green power, which also comes at a [indiscernible] rate for us. So it's a mixture of all those things, but no one-off as such.

[Unknown Analyst]

One last question. Mangalore API, have you given any utilization guidelines for FY '25 or '26 like at least the guide path in terms of when do you plan to fully utilize it?

[Jonathan Hunt, executive]

No, we haven't, but it's gift so that I can preempt the other questions, it will be the same line of that. We roll up all of our guidance into the annual revenue and margin guidance we don't give breakups on plant level and machine level and line level operating and utilization guidance.

It's progressing in line with our broad strategic direction I'm quite happy actually with the progress we're making in development and manufacturing. We said we would start to rebalance the shape of the business, so that it was more evenly balanced between the CRO side and the development manufacturing, and that's exactly what's happening.

[Operator]

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Ms. Suruchi Daga from Syngene International for closing comments. Over to you.

[Suruchi Daga, executive]

Thank you, everyone, for joining today's call. If you have any further queries, please do get in touch with our team, and we'll be happy to get back to you. Have a good day, and thank you once again.

[Operator]

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