Earnings Edge | Syngene's Jonathan Hunt On Q3 Performance | NDTV Profit
Syngene delivered a muted set of numbers and revised their guidance lower for FY24, and brokerages have pointed out to a possibility of a muted FY25 as well.
Jonathan Hunt speaks about all of the above with Niraj Shah.
Jonathan Hunt speaks about all of the above with Niraj Shah.
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00:00 Sanjeev is a business in focus.
00:02 You saw the numbers earlier last week.
00:05 And the revenue numbers and the bottom line numbers
00:09 are flattish, single digits, if you will.
00:12 And the bottom line number also almost very flattish.
00:15 And the other aspect was the guidance
00:18 that they've brought down slightly from mid-teens
00:21 to lower double digits.
00:23 Jonathan Hunt joins in to talk about that,
00:25 and a couple of comments that I read in the press release,
00:27 and about the quarter as well.
00:29 Jonathan, good having you.
00:30 Thanks so much for joining in.
00:31 Pleasure.
00:33 I know we discussed about two months ago
00:36 that variations can happen in a quarter, in two quarters,
00:40 in half years.
00:41 But over a five-year period, the things look OK.
00:43 But since we are talking at the end of the quarter,
00:45 I want to understand what went into the quarter for the growth
00:48 rate to taper off a little bit from the double digit numbers
00:52 that you've shown thus far in the half year,
00:55 and why this cut in guidance as well.
00:57 Yeah, no, I think that's fair actually at the quarter end,
01:00 is to sort of unpack some of the moving parts in the quarter.
01:04 Overall, I'd say though, the fundamentals have not changed.
01:07 It's a good industry to be in.
01:09 There's some real opportunities for the medium to long term.
01:12 So the fundamentals are intact.
01:14 What we were working through, as are just about all of our peers
01:18 in the industry in general, is an impact
01:21 that we're seeing in one segment of the industry,
01:24 namely the US biotech segment.
01:27 It's slowed down quite a lot through the year.
01:30 It actually hit us a little bit later
01:32 than it hit many other people.
01:33 Saw it in their numbers earlier in the year.
01:36 Ours has been very much in the second half of the year.
01:40 And it reflects some of the macroeconomics
01:42 we're all adjusting to.
01:43 Interest rates have gone up globally
01:45 over the last year or so.
01:47 Capital, post the pandemic, is moving
01:50 in many different directions.
01:52 And there's been a real slowdown in the new capital formation
01:56 into those startup biotech companies in the US.
02:00 Now that's part of our business.
02:02 It's not all of our business.
02:03 So outside of that, if you look at big biotech, big pharma,
02:08 they're not relying on the capital markets
02:10 for their funding.
02:11 They're pretty self-sustaining.
02:12 They deploy their own capital.
02:14 That bit of our business and that bit of the market
02:17 is going along pretty well.
02:20 And the fundamentals are very much intact.
02:22 And you can see that in our numbers.
02:23 That's where the growth has come from this quarter.
02:26 The other thing I would say is this quarter's not really
02:29 a surprise.
02:30 It's very much in line with the expectations and the narrative
02:34 that we had at the half year.
02:36 We thought the third quarter would slow a bit,
02:38 coming through our research services business,
02:41 driven by those capital market factors in US biotech.
02:46 And we thought that we would see in our development
02:49 and manufacturing businesses and then
02:51 customer segments like large pharma,
02:53 animal health, and other regions of the world out of the US,
02:56 Europe, and Asia, all of those would
02:58 continue growing quite nicely.
03:00 That's pretty much what's happened.
03:02 Adjustment on the guidance is just
03:04 us looking out to the year end.
03:06 Bit more of the softness was in this quarter.
03:10 And I think that just is going to slow the exit
03:12 rate to the year.
03:14 But it's a factor that I expect to work through.
03:17 And it'll take maybe a couple of quarters, maybe three.
03:20 And we should be through it.
03:22 And we'll be back to that good growth
03:24 environment on the research side that
03:26 matches the good growth environment we're seeing today
03:29 in development and manufacturing.
03:32 Jonathan, there was a note which suggested
03:35 that your exposure to medium and small biopharma firms
03:40 is generally about 15% to 20%.
03:43 And that may face the revenue growth pressures
03:47 for a better part of 2024.
03:49 Now, just trying to understand, I
03:50 heard you say that these pressures, they
03:52 are not all of your business, which you highlighted.
03:54 But I heard you say that this will probably
03:55 last for a couple of quarters or three quarters.
03:57 Do you expect for now, as things stand, there is pressure?
04:01 It may change towards the latter half of the calendar.
04:04 Is that your belief or assessment?
04:07 That's pretty much the comment I just gave.
04:11 Is it two quarters?
04:12 Is it three quarters?
04:13 I'd also say it's not a firm specific issue.
04:16 This is not a question for Cengene.
04:18 This is a question actually what's going on globally--
04:20 Globally.
04:21 --in the biotech sector, and also for all of our peers.
04:25 Very, very well discussed.
04:26 Read across the market.
04:28 Read across the CEO commentary in the US, Europe, Asia,
04:32 in the research services, and into the CDMO sector.
04:35 We're all pretty much saying the same thing.
04:38 There's a bit of a feed through from the rate of new capital
04:40 formation in biotech.
04:42 It's slowing bits of the industry.
04:44 We're all coping with it.
04:46 But the other parts-- the big pharma, big biotech,
04:48 and then in our case, also the animal health industry--
04:52 pretty much unaffected.
04:54 And it's business as usual there with some good growth
04:57 and some good growth opportunities.
04:59 Just wondering, because another firm which
05:02 has had a bit of a pushback on the animal health CDMO
05:07 side as well--
05:08 I heard you use that term twice.
05:09 So you reckon that there is a bit of an uncertainty
05:11 around that vertical individually as well?
05:15 And could it last for longer?
05:17 Is there any--
05:17 Oh, no.
05:18 Maybe I misspoke or not being clear.
05:21 Just the opposite.
05:22 I'm saying big pharma, big biotech, animal health--
05:26 It's strong.
05:27 --they're all going along very nicely
05:29 and was making real progress in those segments.
05:32 OK.
05:33 Because the same note that I said the other thing from also
05:36 says that could there be--
05:38 and this is what I want to ask you--
05:40 that could there be challenges for large pharma
05:42 companies in the US in 2024?
05:44 Because there could be increased risk of additional measures
05:47 on drug pricing in an election year.
05:49 Is this something that happens?
05:51 Any thoughts here, Jonathan?
05:52 Oh, I think unlikely in an election year,
05:56 precisely because everybody's eye line
05:58 is going to shift to who wins the presidential election
06:02 and then what comes in terms of their policies beyond that.
06:06 So I think you can kick that down the road a little bit.
06:10 So no, I'm not sensing any real concerns coming out of that.
06:14 What happens after that, but calling the US election cycle
06:19 is not something I'm going to try and do.
06:21 Yeah, yeah, completely understandable.
06:24 Jonathan, what happens in a period like this?
06:27 I mean, do you still--
06:29 because you would maintain some of the overheads costs,
06:32 et cetera, because of the lower revenue numbers,
06:34 do margins come under pressure?
06:36 Or do you have the ability to kind of pull out some levers
06:39 to manage operational metrics?
06:41 Always.
06:41 I mean, I'm going to be a little pedantic.
06:43 Lower revenue numbers, lower growth.
06:45 Lower growth, yeah, sorry.
06:47 Top line still grow at 10%, 9%.
06:50 There are many parts of the world
06:52 and many parts of the global economy
06:54 where 9% growth to be in a particularly strong performance.
06:58 Now, as a firm, we're used to doing more than that.
07:02 But yeah, it's still giving lots of opportunities.
07:05 I think that's just day-to-day management.
07:07 I wouldn't call that out.
07:09 Looking after your cost base, finding efficiencies,
07:11 we should be doing that every day anyway.
07:14 Whether we're growing at 20%, 15%, or 10%,
07:17 you still have to be very careful with shareholders'
07:20 money and look for efficiencies.
07:22 OK, what stood out well, Jonathan?
07:25 We've spoken about the issue that is probably staying.
07:30 What was the positive highlight for the quarter for you?
07:34 Good operational delivery.
07:36 I think, come out and think from a strategic perspective
07:40 and fundamentals, I was looking at it this morning.
07:45 We took the decision really about five years ago
07:49 to sort of create this twin-engine strategy,
07:51 both research services, but also development manufacturing.
07:56 We've doubled the size of our development manufacturing
07:59 business through those five years.
08:01 We're now at 40% of the overall company's revenue
08:05 comes from that CDMO sector when you put
08:08 all the elements of it together.
08:09 And it's experiencing pretty good growth.
08:11 So that's a strategy going from ideation into implementation.
08:16 Now, we're ambitious to do more.
08:18 That's why we invested in the quarter and the acquisition
08:22 of the Stellis facility.
08:23 That gives us headroom for growth over the next five
08:26 years, the next strategic cycle, as it were.
08:30 But I'm pretty happy.
08:32 If I come out of the hurly-burly, as it were,
08:34 of a quarter and look at the overall shape of the business,
08:38 Cengene's now both a CRO research services
08:42 business and a CDMO.
08:43 And that CDMO's finding its place in the market
08:46 and doing well.
08:48 So you mentioned with regards to the Stellis facility
08:51 that you expect it to be ready for operations
08:53 in the second half of the Scalia 25.
08:56 So arguably, the last quarter of the calendar
08:58 is when you might start to see some benefits out
09:01 of that facility, safe to assume?
09:02 Yeah.
09:05 That's the plan.
09:05 Open for business, we've got some client work already
09:09 starting to queue up to go in there.
09:11 But that strategy, that facility,
09:14 that's bought for a long-term growth ambition.
09:17 That's not about what we can do in the first quarter
09:19 of operations.
09:21 Yeah, of course.
09:22 Point well taken.
09:23 Just one more thing, because we're
09:25 talking about growth here.
09:29 The last quarter-- and I know you mentioned that.
09:32 It is growth.
09:33 It's just lower growth.
09:34 But the last quarter of the previous year
09:37 now also has Zoetis revenues embedded in it.
09:42 So therefore, the Bayes effect being higher
09:44 would also impact growth in quarter four.
09:47 And could that be other reason why this slight lowering
09:50 from mid-teens to lower double digits?
09:53 Yeah, mathematically, you're correct.
09:54 The year-over-year comparison on the quarter
09:57 will be a little bit suppressed because
09:59 of the strong growth in the year-ago period driven
10:03 by one business driver, the Zoetis contract.
10:08 Sequentially, if you go third quarter to fourth quarter,
10:11 we expect the usual sort of step up.
10:13 Our fourth quarter is normally our biggest and busiest
10:16 of the year.
10:17 I expect, in an absolute sense, the fourth quarter
10:20 to have higher revenue than the third quarter.
10:23 And then if you look at the year-over-year fourth quarter
10:26 growth rates, of course, you've got that Bayes effect
10:29 to account for.
10:30 I think you've got the math spot on.
10:31 OK.
10:32 I'm just trying to put two and two together.
10:34 One final question, because I know
10:36 I understand I have a paucity of time
10:37 to talk to you this time around, unlike the previous times.
10:40 But you would have been asked about this Mangalore API ramp
10:44 up.
10:44 We spoke about it as well.
10:45 And you were hopeful of things working up
10:47 sooner rather than later.
10:49 What's the status there?
10:51 Yeah, nothing's changed.
10:53 Same strategic intent, actually, to some,
10:56 except the comment I made earlier around progress
10:58 we're making in the CDMO business,
11:02 doubling that over the five-year period.
11:04 That's all wrapped up in that strategy.
11:06 It's not a site-specific strategy.
11:09 It's a CDMO work we do in Bangalore, Mangalore.
11:13 It's small molecules and large molecules.
11:15 And when you put those all together,
11:17 I think we're making reasonable progress.
11:20 Fair call.
11:21 OK, I understand I have to thank you right now,
11:24 because you have a busy schedule.
11:25 But Jonathan, lovely talking to you.
11:28 All the best for the quarters ahead.
11:30 And may this situation become or turn favorable
11:33 sooner rather than later.
11:35 Thank you.
11:36 All right.
11:36 And viewers, thanks for tuning in.
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