Syngene International Ltd

NSE:SYNGENE

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to Syngene International's Fourth Quarter and Full Year Ended March 2022 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.

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

[Neha Shroff]

Thank you, Stephen, and good afternoon, everyone. Thank you for joining us on this call to discuss Syngene's Q4 and FY '22 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 will 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 risk pertaining to the business. The safe harbor clause indicated in the 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 will hand it over to Mr. Jonathan Hunt for his opening remarks. Thank you and over to you, sir.

[Jonathan Hunt, executive]

Okay. Thank you and good afternoon, everybody. Thanks for joining us on the call today to discuss Syngene's fourth quarter and full year results. Let me start with an overview of the fourth quarter financial and business highlights, and then I'll summarize the full year financials, then hand over to Sibaji to give you a more detailed account of the numbers and maybe talk you through some guidance for the year ahead.

Syngene's fourth quarter revenue from operations grew by 15% over the corresponding quarter last year, and I was delighted to see the total revenue in the quarter cross USD 100 million. It's the first time it's hit that mark. As you know, there are some elements of seasonality to our quarterly performance, and the fourth quarter is often the largest of the year. That said, the growth was nicely balanced driven by solid delivery across all 4 of our divisions.

Development Services had a particularly strong quarter as it caught up on projects that were deferred from the previous quarter due to supply chain delays and other COVID-related disruption in addition to good underlying organic growth. EBITDA for the quarter was up 13% to INR 265 crore, while profit after tax before exceptional items was up 7% year-on-year at INR 148 crore. Profit growth was depressed a little by a higher effective tax rate in the quarter compared to last year. You'll recall we mentioned over the last few quarters that we expected a rise in the effective tax rate driven by the expiry of some of the historical tax benefits that we've enjoyed on a number of our facilities that are covered under the SEZ tax benefits.

Turning to business highlights in the quarter. Our research businesses, that's Discovery Services and the dedicated centers, delivered very solid sustained growth. We're seeing good demand in the marketplace for chemistry and biology as many of our Western clients come out of the pandemic and getting back into their offices. Our integrated drug discovery platform, SynVent, continues to gain traction and is proving to be an attractive proposition in the marketplace. Although this approach is still relatively new, I'm delighted by the progress in its first full year. We have 15 integrated drug discovery projects up and running with clients. And this gives us, I think, a solid foundation for the year ahead.

In Manufacturing Services, biologics manufacturing continued to make progress. And I think the team has done an excellent job in the year overcoming supply chain challenges stemming from long lead times of some raw materials due to COVID. Again, we're seeing good demand in the marketplace for biologics manufacturing, though the lead time to deal conclusions are a little bit longer than is the normal say in our research services businesses.

During the quarter, we continued to work with clients on diagnostics, treatments and vaccines related to the coronavirus. And while we retain the voluntary license for remdesivir, we are committed to continue to manufacture this product as long as the pandemic persists. We've not seen much demand in the fourth quarter. Clearly, how the pandemic evolves through FY '23 is not possible to know. So we'll take a conservative approach to forecasting COVID-related revenue, and the intention now is to keep you updated each quarter of the year ahead.

In recent weeks, global markets have started to open up for travel, in-person scientific and sales events, which provides the best opportunity for us to engage directly with clients, and they're starting to pick up. I'd expect this to lead to an increase in our sales and marketing activity in the year, and consequently, an increase in our overall sales and marketing expenditure.

So let me now spend a few moments reflecting on the full year. We're pleased with the performance for the full year. On the financial side, we reported revenue from operations growth of 19% to INR 2,604 crore. Profit before taxes in the mid-teens translated to a profit after-tax growth of 10% year-over-year versus the higher tax rate than the practice at worked now. These results were ahead of our original full year guidance and came in towards the top end of the upgraded guidance range that we gave you last quarter. I'll let Sibaji talk a bit more about that in a moment.

As we hopefully start to leave the pandemic behind us, I'm going take a moment just to reflect on the last 2 years and [indiscernible] of our achievements for a number of reasons. Firstly, Syngene's strong financial fundamentals and business continuity planning delivered a very reliable service to our customers and this, in turn, delivered sustained growth. Secondly, this performance allowed us to create more than [ 1,000 ] new jobs, continuing to invest in new infrastructure and capabilities. Thirdly, we continue to win investors -- we continue to win new customers in addition to our existing collaborations. And I'm proud that Syngene has continued to operate at these normal levels throughout the pandemic. And for many clients, we continue to take their science forward when their own laboratories are shut. And finally, we continue to build capability and capacity to support our growth strategy.

In the research business, we upgraded technology capabilities across platforms therapeutic areas. We've completed Phase III of the expansion for our Hyderabad facility with lab capacity to prefer the 200 scientists. That brings that total number in Hyderabad to around 600. This center will meet the need of the next phase of growth, and we're already planning a further expansion in FY '23.

In Development Services, we expect the injectable finished facility to be completed in the first quarter of FY '23, and that will bring a new capability to our formulation business. We also expanded our biologics manufacturing capacity. The growing demand for biologic manufacturing has encouraged us to continue to build capacity year-on-year. And to small molecules, the facility in Bangalore is making good progress towards the required regulatory approvals.

So as these investments hit their stride in the years to come, we expect to see a gradual rebalancing between our research businesses, Discovery Services and dedicated centers, and the development and manufacturing side of the business with manufacturing starting to make a more prominent -- take a more prominent role in the company.

So in conclusion, I think Syngene is well positioned to meet the positive demand that we've seen around the world. Barring any adverse impact due to COVID-19 here on our client markets, we see the outlook as a positive one. Overall, in terms of guidance for FY '22 is to take a conservative assumption but no further contribution from remdesivir. And we expect to deliver revenue growth in the mid-teens with an EBITDA margin of around 30%, single-digit PAT growth.

So with that, let me hand over to Sibaji.

[Sibaji Biswasb, executive]

Thanks, Jonathan, and a very good afternoon to you all. I'm happy to take you through our results for the fourth quarter and the full year ended 31st of March 2022. I'll also talk about the guidance for financial year 2023 and our outlook for the future as it stands today.

As we look back, the last 2 financial years reaffirm the significance of resilience in the business. Our ability to continue our operations through a combination of prudent management, disciplined implementation of COVID-appropriate protocols in our campuses to active supply chain management by advancing purchases and securing supplies helped us mitigate the pandemic impact on our operations.

In a challenging year, we grew our revenues by 19%, maintained margins above 30%, increased our net cash position and ended up with a strong balance sheet. With a healthy demand environment, we believe this provides a good platform to set our investment to take -- step up our investment to take advantage of our growth momentum in the market and strengthen the business over the next few years.

As Jonathan mentioned, a strong financial quarter 4 enabled us to deliver financials for the full year at the higher end of the upgraded guidance that I gave in the last quarter. Let me start by analyzing the fourth quarter first.

Revenue from operations for the fourth quarter grew by 15% versus the same quarter in the previous year. This growth is on back of a strong fourth quarter in FY '21. Then we also dealt with an accumulation of clients' projects from the previous quarters. This year, much of the credit is due to a particular strong performance from the Development Services division. We are encouraged to see sustained growth in the research business as we upgraded our technology capabilities at cross-platforms and therapeutic areas.

As Jonathan mentioned, we are continuing to expand our footprint in Hyderabad to ensure that we have the liberty capacity to absorb future growth. The manufacturing plant in Bangalore is expected to be in a position to trigger key market at regulatory approvals in the next 12 to 18 months. As you will remember, we have always described this plant as a long-term asset, which will provide a full return on investment once it has a proven regulatory track record and can attract a wider scope of projects.

Moving to EBITDA performance. The reported EBITDA margin for the quarter was at 34.3%, broadly at the same level as compared to the previous year of 34.5%. The expenditure on raw material increased by 390 basis points. As explained in our last call, this increase is partially attributable to a change in mix with more early-stage manufacturing projects. The increase in cost is also attributable to price inflation on certain key raw materials.

Employment costs reduced 5% year-on-year due to a special bonus provision that we had made in the quarter 4 last year to reward our staff for their efforts during the peak pandemic period. In addition, like many other companies, we have seen some increase in staff attrition, which has resulted in lower retirement benefit accrual during the quarter. With good forward planning, our ability to hire kept pace with the increase in staff turnover, which ensured that we are able to remain fully staffed to deliver client projects without any delays. Adjusting for these factors, underlying staff cost increased by 9% year-on-year for the quarter, in line with the increase in number of employees.

Our expenses, which comprises of selling -- other expenses, which comprises of selling expenses, IT costs, maintenance expenditures and other general overheads are up by 24% from INR 89 crores in quarter 4 FY '21 to INR 111 crores in the current quarter. Our continued investment in increasing digital capabilities, expansion of commercial activities and the return to international travel led to an increase in other expenses during the quarter. We are also seeing the impact of higher inflation, which is putting pressure on costs, and we expect to see this trend continue somewhat into FY '23.

Moving to hedge gains. The hedge rate for the 12 months was INR 77 per U.S. dollar against a spot rate of INR [ 75.5 ] per U.S. dollar. And this delivered an improvement in margin by 50 basis points. Overall, profit before tax growth was at 14%, broadly in line with the total revenue growth. [indiscernible] tie during the whole of pandemic period to ensure that operating leverage remained intact. As you will see in the guidance later, this is set to change somewhat in FY '23 as we come out of the pandemic with increased confidence to invest in an accelerating growth in the coming year.

Turning to tax. As mentioned in the previous calls, FY '21 had a one-time tax we were selected a favorable court order, which reduced the effective tax rate of FY '21 to 12%. The effective tax rate for FY '22 was around 18%, and this increase of the effective tax rate provided a headwind for the PAT growth. Due to this onetime tax reversal in FY '21, our year-on-year PAT growth for the quarter stands at 7%, although our underlying growth in profitability remained much stronger, broadly tracking the top-line growth.

Now let me proactively address one question I often get in my discussions. Over the past decade, Syngene's business has expanded both in size and diversities. A decade ago, the company was mainly a research services company. We now offer a growing range of services and solutions included -- including integrated drug discovery, development and manufacturing solutions for both small and large molecules. Today, we have a well-established position in the contracts and search market and a strong emerging presence in the contract development and manufacturing services. This is reflected in our business portfolio where [ over ] 80% of our revenue came from the research business.

Despite the strong and consistent growth in research services, the share of research business now is 66% of revenue, indicating a visible shift in Syngene's revenue mix towards development and manufacturing. While we are relatively new in the drug development and manufacturing businesses, we are seeing encouraging results. As we scale up into commercial-scale manufacturing for both small and large molecules, we expect the share of business from the services to other increase. FY '22 laid the foundation, and we see FY '23 as an important year as manufacturing takes a larger role in driving future growth.

Let me now take some time to explain the full year performance of the company. Overall revenue from operations grew 19% year-on-year for FY '22. This growth in revenue from operations was driven by solid performances from all business divisions. Discovery Services grew by 24% driven by good traction across new and existing clients and the added momentum from the integrated drug discovery portfolio that Jonathan mentioned.

The dedicated centers -- in the dedicated centers, revenue grew in double digits in FY '22. The renewal for 5 years of the contract with Amgen, together with the 10-year contract extension signed with BMS in FY '21, provides a good visibility on the future of these facilities. The Development and Manufacturing Services grew by 21% year-on-year. In Development Services, we were able to [indiscernible] our technical capabilities in process development or complex chemistry and expand our capabilities in oligonucleotide polymers and highly potent APIs. These have helped to build plan confidence on scale-up manufacturing for clinical supplies and win repeat orders.

In Manufacturing Services, we have been investing in biologics, adding key capabilities in process development and scaling up our clinical and commercial care manufacturing. We expanded the manufacturing capabilities to commissioning our micro PL facility, and added capacity in mammalian cell manufacturing facilities. While supply chain challenges and long lead times constrained the biologics growth in FY '22, we expect things to improve in FY '23 and expect biologics to contribute an increasing share of revenues going forward.

The growth reported in Manufacturing Services included the manufacturing of remdesivir during the year. As Jonathan mentioned, we do not know how the pandemic will play out in the future. However, we are prepared to manufacture the product as long as the pandemic persists, but we don't expect it to play any key role in our financials in the current year.

Now moving to margins. The EBITDA margin for FY '22 was at 31.9% compared to 32.7% in the prior year. The expenditure on raw materials increased from 23.4% of revenues to 28.2% due to a shift in the mix of our business towards manufacturing driven by early-stage development projects, the manufacturing of remdesivir and acceleration of biologics manufacturing in the later part of the year. The increase in raw material cost was offset by other cost elements, which increased less than the revenue growth.

Employment cost increased by INR 58 crores, an increase of over 9% to INR 780 crores as compared to INR 660 crores in the same period last year. The increase was in line with headcount additions and the salary increment during the year. As I mentioned a few minutes back, the increase was offset by year-on-year reduction relating to a special bonus paid at the end of FY '21 and due to lower accruals of return and benefits in FY '22.

Coming to other costs, which consists of selling expenses, IT costs, maintenance expenditures and other general areas. This declined from 12.7% of the revenue in FY '21 to 12.5% FY '22 driven by effective management of discretionary costs despite inflationary pressure. As the global markets open up for travel and other business activities resumed at pre-pandemic levels, we expect some of these costs to increase as is already visible in quarter 4.

Now moving to currency and the impact of our currency hedges. The company recorded an exchange gain of INR 55 crores for the full year versus a gain of INR 17 crores in the last year. This reflects the difference between our core rate versus the tabling spot rate. As I mentioned earlier, the hedge rate was INR 77 per U.S. dollar as against the spot rate of INR 75 per U.S. dollar during the year.

In summary, for the full year, EBITDA for the for the year was at INR 849 crores versus INR [ 736 ] crores in the previous year, an increase of 15%. Depreciation for the year increased by 13%, in line with the fixed asset additions. I will cover CapEx in a bit.

Overall, our profit before tax increased 19% year-on-year, which is higher than the upgraded guidance we had given in quarter 3. Profit after tax before exceptional items increased 10% year-on-year to INR 420 crores, exceeding the single EBIT PAT growth guidance given earlier. The effective tax rate for the year, as I mentioned, was around 18% compared to 12% in the previous year.

As mentioned in my earlier part of the commentary, the onetime tax reversal in FY '21 due to saving tax position benefited the effective tax rate of FY '21. There are 2 other factors which are also contributing with increasing effective tax rate. There is a gradual increase in effective tax rate on some of our -- if there's a gradual increase in the tax rate as some of our units moved out of SEZ tax benefit period, and also an increasing share of business is coming from locations not enjoying SEZ benefits. Adjusted for this tax headwind, our underlying PAT growth would be very much in line with the PAT growth during the year.

Now let us move to some of the other items, such as CapEx and cash flow. Investment during the year was INR 621 crores, approximately USD 80 million. And this included capital projects under progress and capitalization of lease centers from long-term lease management. This is in line with upgraded guidance provided last year. Total assets capitalized in AR was at around INR 512 crores, approximately USD 68 million.

Out of the total USD 80 million, we invested approximately 70% in the research business, while we added labor capacity in Hyderabad in 2 phases and expanded facilities in Bangalore as part of the contractual commitment for dedicated centers. Around 10% was invested in Development Services, mainly in completing the clinical-scale sales finished facility of our formulation operating unit. Another 10% was invested in the manufacturing business mix before the capacity addition of a fourth reactor in biologics as well as completing the micro BL development and manufacturing facilities. The remaining investments were in common assets, including the added power grid capacity, which is commonly used by all divisions.

Moving to balance sheet status. Our balance sheet position is healthy, and we have a strong liquidity position. While our inventory levels have increased to INR 179 crores from INR 60 crores at the beginning of the financial year, this was by design to ensure that there is no disruption in client delivery due to the supply chain delays and to compensate for the increased lease time for trials in case of biologics. We expect to continue high levels of inventory for a large part of FY '23 in view of continuing disruptions in the global supply chain.

Our net cash balance increased from INR 647 crores as of March 2021 to INR 732 crores as of March 2022 driven by increase in cash profits. This completes my commentary on the quarter and full year performance.

I will now move to financial year '23 guidance and the outlook for the year ahead. We expect revenue in financial year '23 to grow in the mid-teens. This is after taking into account the base effect of remdesivir in FY '22, which helped our revenue growth. This will mostly play out in the first 2 quarters of FY '23. The underlying business growth is expected to be higher. This is obviously under the assumption that there is no more pandemic-related disruption and the evolving geopolitical contract does not get create any unexpected limiting market access or supply chain.

With the positive demand environment, we see [ FY '23 ] year as a year to sharpen execution across all parameters to capture the business opportunities. This will require investments in talent, facilities and other services, and we plan to incrementally invest to put Syngene on a strong part for the future. Operating investments in FY '23 will focus on building new scientific capabilities, IT and digitization initiatives and continuing to strengthen our commercial activities by expanding our presence in client locations in the U.S., Europe and other key markets. This will lead to additional cost in the P&L with a clear objective of accelerating growth in the coming years.

While this investment will put pressure on margins during the course of the year, the operating leverage from improved performance from the development and manufacturing business will provide a balancing factor, and we therefore expect EBITDA margin to be around 30%. This is close to 200 basis points dilution compared to FY '23 -- FY '22, and we see this as a required step-up investment to accelerate our growth into the future years. With improved growth trajectory, we expect better operating leverage from FY '24.

The effective tax rate, which was around 18% in FY '22, will gradually increase as the needs come out of the SEZ and expansion happens outside of current SEZ units. So for modeling purpose, please build an increase in tax over the next few years, reaching up to 25% level. We expect FY '23 effective tax rate to go up by 200 to 300 basis points. But here, I'll give you a modeling input.

While the effective tax rate is going up, we have net credit balance of INR 173 crores, which will be utilized over the next few years to enable us -- and this will enable us to maintain the cash out for income tax at the minimum alternate tax level. Due to increase in tax, we expect to see some dilution of PAT margin, and we expect PAT growth in FY '23 to be in single digits. CapEx was expected to be around USD 100 million in FY '23 with the bulk of CapEx investment focused on adding biologics manufacturing capacity, laboratory space for future expansion of the research business and capability addition across our service lines. Our investments in infrastructure have closely followed demand to debt. Boosted by a strong demand environment, this year, we expect to get ahead of the demand curve and PFM expect capacity to ensure that we don't lose business due to lack of infrastructure at our end.

Having covered the overall guidance for FY '23, I would now like to set expectations for the first quarter. You will recollect that quarter 1 FY '22 was a big quarter. That growth was driven by a couple of factors: clients started projects that were put on hold in the previous year due to pandemic and also due to the manufacturing of remdesivir. As a result, we posted last year this quarter -- first quarter, a 41% revenue growth.

At present, with the pandemic waning and the benefits accrued from remdesivir the first quarter last year is not expected to repeat again in this -- in the first quarter of this year. Hence, you may see a year-on-year decline in revenue in the first quarter. This will also likely depress the profit line for the first quarter. However, our full year guidance takes account of this impact of quarter 1 both on revenue and profitability. And we still expect to do at new deals for the full year. This indicates that for the remaining 9 months, our respective growth rate will be higher, which is a modern year-end.

With this, I'll conclude my commentary on the quarterly and annual performance for FY '22 and the future outlook and guidance for FY '23. We can now open the floor for questions.

[Operator]

[Operator Instructions] The first question is from the line of Alankar Garude from Kotak Institutional Equities.

[Alankar Garude, analyst]

Sir, my first question is, given the strong demand environment on the biologics side, where are we in terms of biologics manufacturing capacity? You mentioned about doing some CapEx in FY '23 pertaining to biologics. But maybe if you could just highlight where are we in terms of liters of capacity right now? What is the number you are looking forward to in FY '23? That would be helpful. And I have a follow-up on this. I'll just maybe come back after your response.

[Jonathan Hunt, executive]

Well, give me the follow-up question first, and then we can have to think about it.

[Alankar Garude, analyst]

Sure. So the follow-up is broadly, would you say that in terms of progress in this business, is it trending in line with your revenue and profitability assumptions, which we had in our mind when we started this business about 4, 5 years back?

[Jonathan Hunt, executive]

No. I think it's a little bit behind where I would have liked it to have been. But I think 2 years of the pandemic has slowed most things down. But I wouldn't particularly put any great importance in a retrospective comment. I think where we are today is exactly where I'd like to be. Rising demand signals in the market, spare capacity, good capability. And I think if you pass through the comments that we've made on the call and in the guidance, you can see that we're clearly sending a direction of travel, which is, I think, our manufacturing businesses starting in FY '23 going into FY '24 will become increasingly visible and be a driver of growth. We always wanted a twin-engine plane rather than a single engine. There's nothing wrong with the performance of the research services business. It's grown beautifully over many, many years, continues to add value to its clients.

But I think now is about the time that we'll start to see the manufacturing divisions, whether it's biologics or small molecules that aren't led by both biologics, will start to pick up some of that slack and help us build momentum. It will be through FY '23. I think there's a subtle comment in the guidance which suggests that FY '24 would show increased growth and the beginning of operating leverage. If you pass the English and turn it into Excel, I think that gives you something to model.

[Alankar Garude, analyst]

Sure. That's helpful. And my second question is more on the investments which you're planning in FY '23. So just checking, we had some plans of expanding our international sales tools over the last 6, 7 quarters. So where are we on that? And these further investments which you're talking about in FY '23, would it be basically a continuation of that? And then, of course, good investments in some of the other areas which are outlined in the presentation, so should we take that more as a continuation? Or is this

-- okay. And what is the...

[Jonathan Hunt, executive]

We should. I think your question -- I'm happy to give you a further comment. I think your question is right. We have done some increase in investment in sales and marketing. Certainly, take a look at things like our website, go and have a look at some of the digital assets, some of the new channels, digital channels that we put in, that's gone from not really being there 3 or 4 years ago to some quite sophisticated digital market. And that's one of the areas that we've invested in. We now do a regular series of sort of client outreaches, digitally enabled scientific lectures, really good ways of connecting and showcasing our capabilities in our science.

Add a little bit of headcount, we're also going to add more in the year ahead. It's competitively sensitive, so I'm not going to give you numbers. But you will see the impact on the P&L this year, which is why we gave you such a clear guidance on where we see the EBITDA margin for the year. That's going into a whole range of things. But to your question, continued commercial expansion is one of them.

And I think as the world comes out of the pandemic, there's an opportunity to catch that wave of rising demand. And I'd much rather invest and give a clear message to you that margins are going to be a little bit suppressed this year than not invest and miss the wave. So it's much more around business growth foundations in '23 becoming operating leverage and growth in '24 and beyond. So there's a strategic thought behind those investments.

[Operator]

The next question is from the line of Prakash Agarwal from Axis Capital.

[Prakash Agarwal, analyst]

My question is on the gross margin side, cost of goods sold. So we have seen some spike there. What is the main reason behind this, we being a service company? And what is the near-term outlook? Are we continuing to see a higher cost of goods sold on this?

[Jonathan Hunt, executive]

Yes. Super. I'm sure Sibaji will give you a comment. As he's collecting his thoughts, we are principally a services company. But of course, remember, unusually for us because of the pandemic over the last year, we have, in fact, also been a product company. Not core to our business, but we have been making and distributing remdesivir as part of our response in our contribution to really sort of fight against COVID-19. And that may well be accrued to why some element of our P&L has picked up more operating and raw materials costs.

Sibaji, over to you.

[Sibaji Biswasb, executive]

Yes. Thanks, Jonathan. Prakash, I kind of highlighted this in my commentary, but I'll try and give an explanation now. As I said, there are a few factors that impacted raw material costs. It moved up by 300 -- 3% of revenue year-on-year. One of them, as Jonathan just mentioned, remdesivir. And in one of the earlier calls, I remember I did a clear understanding to everybody that remdesivir the raw material costs is almost 55%, 50% of the final revenue. So that's definitely impacted in the early part of the year.

Also what happened is that our product -- our project mix changed, and this can happen from 1 year to a similar year. So as you do more early-stage projects, the raw material cost as a percentage of revenue is higher. And as they move forward, it was more matches day that goes down. But this is also playing along with another factor is the increasing of manufacturing and development revenue as a percentage in our revenue mix. So there are multiple factors, but over a period of time, we'll see this stabilize Actually, I expect FY '23 to be very similar to FY '22 because based on our understanding, this is [indiscernible] per going to see a stable pattern of raw material costs as a percentage of revenue.

[Prakash Agarwal, analyst]

Sir, question was more from Q4 perspective -- yes, partly because question was more from Q4 where there was no remdesivir sales again. There is...

[Sibaji Biswasb, executive]

Yes. That's true, Prakash. But we mentioned that one of the biggest drivers of Q4 revenue has been Development Services and clinical manufacturing under Development Services. That also has a high raw material cost attached to it. So again, it's a function of the revenue mix in a particular quarter.

[Prakash Agarwal, analyst]

Fair enough. And just to call out what would have been the full year -- what would have been the remdesivir sales for the year?

[Sibaji Biswasb, executive]

So we have given you an understanding of what the year-on-year manufacturing growth. And as you would see, that is more than what we have seen in the past. So please go and calculate that. We do not give disclosure to that level, but it's built into the manufacturing growth that has been disclosed.

[Prakash Agarwal, analyst]

Okay. Great. And lastly, on the Mangalore facility. So I hear that you said operating leverage kicking in from fiscal '24. So is that the reason by that leverage comes in? Or are you talking about from the base business perspective? And what's the update on the Mangalore side, I mean, especially from the U.S. supplies perspective?

[Jonathan Hunt, executive]

Yes. No update on the Mangalore site. Same guidance we've given 4 consecutive quarters. It's got a regulatory pathway. We're making good progress on that. I think -- what's the timing? 12 to...

[Sibaji Biswasb, executive]

12 to 18 months is what you said.

[Jonathan Hunt, executive]

Yes. 12 to 18 months from now is the point where we would expect a major regulatory approval. And downstream, that is when you should start to see that plan becomes an attractive supply point for global clients. The operating leverage I was alluding to in FY '23 clearly isn't linked to Mangalore. So it must be linked to something else and on the manufacturing side that leads you very clearly to biologics.

We're seeing good demand signals in the market be delighted to update you on the progress of that through the year. And then I think the guidance gives you quite a clear suggestion that both revenue growth rates and margins start to improve beyond FY '23, but I think FY '22 is a pretty good -- perfectly good top line growth. And our margin structure looks very well compared to many, many of our competitors around the world.

[Operator]

The next question is from the line of Tarang from Old Bridge Capital.

[Tarang Agrawal, analyst]

Three questions from my side. Jonathan, if you could give us a sense on your IDT platforms SynVent. I mean, how many of your peers offer a proposition like SynVent and some sense on how you're differentiating yours? That's number one. Number two, you have spoken about continued investments looking at the growth outlook. How should we see this? Because I would personally think that the quantum would not be materially high in contrast to how the investment cycle has taken place over the last 5 years given how most of the manufacturing capacities remain to be utilized. And the third, given the demand environment, would it be fair to presume that in FY '23, your ex remdes business could post high teens early 20 growth -- early 20% growth on a year-on-year basis? Those are 3 questions for me.

[Jonathan Hunt, executive]

Yes. Super question. I'll take the first and the third. I'm looking at my colleagues and seeing which one volunteer and to the middle one. Let's do them in reverse order. So the last one is a simple yes. Your question was if you could take remdesivir or take the pandemic out of our business, what would be year-over-year growth look like. Would it be ahead of the guidance that we've given you? Clearly, it would. I'm not going to give you a point estimate, but I wouldn't demure or debate it with your number of being in -- above 20 and into that sort of range, so yes. So the organic underlying growth, the outlook is pretty strong.

Going to your first question, IBD. Our platform is one of those words that sort of means something to one person and can confuse everybody else. So we don't think of it as a platform in the sense of a particular proprietary technology or a piece of kit. It is a combination of a whole bunch of things that we can do, brought together into a service offer. Fundamentally, SynVent is most attractive to companies where what they really want is a scientific equal, a partner that can drug hunt with them and for them and has all of the capabilities to take that from initial scientific idea through ideation into finding a molecule, confirming the validity of the target, all the way into the IND stage and getting a drug into human testing for the first time. That's essentially what we're trying to do and are doing with SynVent.

It's got some particular residence at the moment because of our scale, because of our capability because of the operating cost advantage we have. If you're a biotech company in the U.S. at the moment, it's got funding, but he's looking forward with the cash burn rate and thinking about, "Hey, do I make my funding last so much longer given that for many, there's a nervousness about refinancing." It's a fantastic opportunity because, in most cases, if we did the work within Syngene within the SynVent capability rather than did that work in our clients' labs in the U.S. or Europe, we can make their cash burn just that much lower, and that gives them real strategic visibility. So that would be a practical application given the current conversations you hear in the U.S. biotech community they are financing, refinancing.

Another group that's particularly interesting, there are just a lot of companies fall now with an asset-light, science-heavy strategy. They don't -- they're back because whether they're bunch of capital firms or whoever don't particularly want to put money into the investment to buy infrastructure, buildings, but they do want to really move the science as quickly as they can. That sort of partnership with us with SynVent fits really nicely. We've got all the scale, all the capability and all of the infrastructure everybody would need. But they're buying it by the day, by the hour philosophically rather than having to spend the first year of finding a new company building, building, signing leases and all of those things.

So it can increase the speed. It gets you to decision points that much quicker if you're a start-up biotech. And it relieves your owners of all of the concerns if the science doesn't work out we let with an overhang of infrastructure, people and plant and equipment because we just have to roll that back in.

Does that give you enough? Because that was quite a long answer on IDD, but I hope I can try and convey what we're trying to do. You asked also, does anybody else do it. Yes, I would say I'd point to a company like Evotec in Europe, and it may got very sophisticated capabilities. I've got no shame in saying that they got there first and were ahead of us, but I do think we've closed them off a lot of the capability gap. There's plenty of states in the market for more than one. I think some of the Chinese companies do it. I'm less certain that any of our local competitors are at that level of sophistication yet.

[Sibaji Biswasb, executive]

Ready for the second one?

[Tarang Agrawal, analyst]

Yes.

[Sibaji Biswasb, executive]

Yes. So I think there was one more question, which was on the continued investment. As I told you, FY '22, we spent around $80 million. Close to 70% of that going into research business expansion. We expect to spend a similar level of CapEx, close to 50% of our $100 million guidance on research. And in research, we are very clear about our criteria for spending. I have always guided that we look for asset turnover of 1x in 18 to 24 months. I firmly stand by that. We are seeing already that playing out in our business. And so that's -- and we are seeing a strong demand environment with us. So we'll keep on spending that kind of money with that 18 months to 24 months, 1x turnover perspective going forward.

Of the remaining 50%, a large part of that will go to us at biologics, as I said. And capacity for manufacturing doesn't come up in India. So we are actually going to pay this money preparing ourselves for capacity creation in FY '24 and beyond. And this we are able to do because we are feeling a lot more confident as a leadership team on that potential of the biologics business. And that's why a significant [indiscernible] of the money is going to go. That will be on other expansion and gearing digital infrastructure capability at our end. So that's broadly what it is -- how the CapEx guidance constituted of. I hope I answered your question.

[Operator]

Next question is from the line of Harith Ahamed from Spark Capital Advisors.

[Harith Mohammed, analyst]

So I was looking at the average employee costs for the business, and it's been flattish for the last couple of years. In fact, in FY '22, there's been a decline over FY '21. So any color that you can provide on this? While I see the number of scientist count has increased by roughly 1,000 in the last couple of years, the average cost -- the average overall employee cost as being flattish.

[Sibaji Biswasb, executive]

The overall employee cost for the year is not flattish. If I'm not wrong, it increased by [indiscernible].

[Harith Mohammed, analyst]

Average.

[Sibaji Biswasb, executive]

Yes. On average, yes. So essentially, I'll repeat what I pointed out. There are 2 factors to that in FY '21. We did give onetime bonus towards the end of the year for kind of compensating our employees for the challenges they had to go through during the pandemic period. That was one-off expenditure in FY '21. We don't have it in FY '22. Plus the retirement benefits that we have in our balance sheet, which comes out of actual valuation has also gone down. That benefited us in quarter 4, and it's also playing out for the full year. So these are the 2 broad explanations. The other things play out in the salary mix. So nothing to comment on.

[Harith Mohammed, analyst]

You need to share the percentage of revenues that we have under the FTE model versus the other model that we have?

[Sibaji Biswasb, executive]

Sorry, I'm not able to...

[Jonathan Hunt, executive]

Yes. It's a very bad line. So if you're on a headset, if you could pick up, that would help, but just restate the question.

[Harith Mohammed, analyst]

Yes. Let me try again. Sorry for the bad network. So I was asking how much of our revenues are from the FTE engagement model and -- versus the other engagement model that you have with those clients.

[Jonathan Hunt, executive]

Okay. We don't split out the numbers, but I'll give you a general sense of it. If you think about the business in 4 divisions, dedicated centers, Discovery Services, Development and then Manufacturing, dedicated centers, everything is an FTE model effectively. It's sort of the definition of how it operates.

If you look then at Discovery Services, the vast majority would be FTEs at the moment, but there is a sizable and growing FFS, or fee-for-service, element of it. Strategically, I don't really see a big difference between the 2 models. It just depends on how the client wants to engage. So I don't put too much importance on it. Development and manufacturing are principally FFS, fee-for-service, businesses because the nature of the unit of work is a project or a product or a batch. So you're not really employing people to do specific things. You're buying a particular outcome. Can I have a particular piece of development work done? Can I have a clinical trial product made? Or can I have an antibody discovered and developed to manufacture? Hopefully, that gives you a sense of it.

[Harith Mohammed, analyst]

Yes. That's helpful. And last one, if I may. In one of your slides, you've listed customers from nonpharma segment like animal health and agrochem. So how big is this piece, the non-pharma piece for us today? And how do we see this progressing?

[Jonathan Hunt, executive]

Good question. I don't have the specifics of how big it is, but to give you a sense of it. Animal health is -- it's so close to human health for all intents and purposes scientifically. We need the fundamentally same capability, same infrastructure, same sort of scientific acumen. The only thing that's really changed is the end species of the product and the sciences applied to, humans into a whole range of things.

We've got, I think, one of the better, I'm reluctant to say market-leading positions in animal health. It's not an industry group that traditionally, and by traditionally, I'm looking over the long term, 5 and 10 years, has done a lot of outsourcing. I do think structurally, and again it's an industry we spent any time looking at, you'll know that many, many animal health companies were divisions within big pharma companies a decade or so ago. And then as those sort of consortium-type companies are disaggregated, they've been spun out and there are many, many companies on their own.

That then has prompted them to think about where do they tap into innovation, how can they tap into innovation more globally. If you think about it, they've gone from being part of a great, big scientific organization and now to standalone. That I think is creating opportunity.

I'm not going to give you a percentage of our business split, but I do think it's an interesting area that's adjacent to what we do, and it's one that we do pretty well in. Some of the others, there are many other industries that we connect through. Consumer goods companies, we've done interested in working, helping people with polymers that may form the next generation of contact lenses. That's a scientific problem that we can address. We've done work on chemicals that have been used in the aviation industry, coatings are used in car manufacturing. So there's a lot lots of things. Wherever you need a high-science approach to a deeply complex scientific problem, we may well be able to help. Those are peripheral to our core business, which is deep science in the human space.

[Operator]

The next question is from the line of Abhishek Sharma from Jefferies.

[Abhishek Sharma, analyst]

I hope I'm audible?

[Operator]

Yes, you are. Please proceed.

[Abhishek Sharma, analyst]

Okay. Okay. So just wanted some more color on biologics manufacturing. You said this will add revenues in fiscal '23. So currently here, what are we engaged in? Is it non-GMP manufacturing for developed markets like intermediaries? Or this is trial supplies? Or is this for emerging markets? And by when do you expect FDA inspection for your biologics facility?

[Jonathan Hunt, executive]

Super sought of questions. Would be delighted. Mahesh, do you want to give a comment on that?

[Mahesh Bhalgat, executive]

Yes. Let me take that one. So in terms of what are we doing in terms of the utilization of our current capacity, the maximum amount of work that we are doing is with regards to providing clinical supplies. So this is GMP material that we are manufacturing that goes into clinical trials.

In terms of utilization, we are utilizing both our mammalian capacity for that and our micro bill capacity for that. Mammalian, of course, is then to use specifically to produce a monoclonal antibody. And that's the highest level of demand that we have. That's also the maximum capacity that we have.

As for your question around U.S. FDA, I'm not going to comment on the specific timing of that because, as you know, the way the U.S. FDA approval process work is based on a client who wants to produce commercial material that then triggers a U.S. FDA inspection. And so that's actually something that will be based on getting to that particular milestone.

[Jonathan Hunt, executive]

So structurally, I mean, you understand it from the business as a service provider. We don't control that. It always sits with the clients decide their regulatory strategy and their regulatory time lines. I don't think it'd be appropriate for us to comment.

[Abhishek Sharma, analyst]

That is clear. And second thing -- sorry, you had an additional comment or should I go ahead?

[Jonathan Hunt, executive]

No. No, no, go ahead. Go ahead.

[Abhishek Sharma, analyst]

Okay. Sure. Right. Second thing is jump in trial supplies that we saw in 4Q. Was this related to biologics? Or what is on the small monthly side?

[Jonathan Hunt, executive]

Clinical trial supply. The question was, did we see a step-up in clinical trial supplies in the fourth quarter, and this was small molecules or biologics.

[Sibaji Biswasb, executive]

Yes. It's from a small molecule development space. Biologics, as I mentioned, the process -- the execution picked up towards the end of the year, and we'll see more of biologics coming through the next year. But this was on the small molecule space.

[Abhishek Sharma, analyst]

Got it. And last one, if I may. What is the current bioreactor capacity on the biologics side? And where would you have this by end of FY '23?

[Jonathan Hunt, executive]

Super question. You'll forgive me for not answering it. Sufficient would be the answer to meet the rising demand that we see because that one is commercially, competitively sensitive. So I'm not particularly keen to put that in the public domain.

[Abhishek Sharma, analyst]

Yes. But I mean you used to disclose the bioreactor capacity till last quarter, right? I mean [ 10 k ] is what I remember from our last quarterly call. Has there been an increase on that or...

[Jonathan Hunt, executive]

I'm not sure we did comment on that, but it still wouldn't change the fact that I'm not about to give you the installed capacity base. Happy to guide you through the year as we see progress, and we can pick that up on future quarters.

[Operator]

[Operator Instructions] The next question is from the line of Shrikant Akolkar from Asian Market Securities.

[Shrikant Akolkar, analyst]

Just one question on biologics manufacturing. If you can call out the capacity utilization in the fourth quarter and maybe in FY '22?

[Jonathan Hunt, executive]

Okay. Is that not just the last question repackaged?

[Shrikant Akolkar, analyst]

Yes. That will really help us to understand where we are going in FY '23 also.

[Jonathan Hunt, executive]

I know. And -- but I think there's enough in our guidance of revenue growth top line mid-teens dropping down to single-digit PAT with an outlook for FY '24 of improved revenue growth compared to FY '23 and operating leverage.

[Operator]

The next question is from the line of Rohan ora from Punarta Investment Advisors.

[Unknown Analyst]

My first question was in regards to the CapEx plan in FY '23 of $100 million. I remember you had stated that 50% of it is going to go towards the research side. So I would like to have the breakdown of the remaining -- 50% between development and manufacturing businesses.

[Jonathan Hunt, executive]

I think we said 30% was going into the manufacturing biologics side.

[Sibaji Biswasb, executive]

Right.

[Jonathan Hunt, executive]

Yes.

[Unknown Analyst]

Okay. And the balance would be development, right?

[Jonathan Hunt, executive]

Would be spread across the -- yes. If we had a miscellaneous category, it would be that. So 50% of the $100 million into research services-type business, 30% into biologics, the remaining 20% spread across the business. But covering so many things, we wouldn't break them all down.

[Unknown Analyst]

Okay. Okay. And one last question was in regards to the EBITDA guidance that we have. So it would be 30% EBITDA margin for FY '23. So would just like to know if some of it is coming from GP margin dilution as well?

[Jonathan Hunt, executive]

Just repeat the question. It was a little bit of...

[Unknown Analyst]

Do we also expect -- so as we have the 30% EBITDA margin guidance for FY '23. So does some of it coming down from GP margin dilution as well?

[Sibaji Biswasb, executive]

I just -- so for the margin dilution, which we set only that much part. GP means gross profit you are talking about?

[Unknown Analyst]

Yes. Gross profit margin dilution. So do we expect gross profit margin dilution in FY '23?

[Sibaji Biswasb, executive]

And as I said, I expect the raw material cost to remain very similar to FY '23 -- '22. So if you are calculating gross profit as revenue as raw materials, the answer is no. Depends on what you are adding to gross profit. But yes, there's EBITDA margin dilution, which is going to come from, as we mentioned, increased travel activities resuming to pre-pandemic level and our willingness to invest in commercial execution and other areas of technology operation.

[Operator]

Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Ms. Neha Shroff for her closing comments. Over to you, ma'am.

[Neha Shroff]

Thank you, everyone, for joining today's call. Hope we have answered your questions. If there are 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]

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