SYNGENE "Putting Science to Work" Annual report synopsis FY20-21

SYNGENE - An Introduction

Delivering science that makes a difference

Syngene International Limited is an integrated research, development, and manufacturing organization providing services from early discovery and development to commercial manufacturing for small and large molecules. Researchers work in multiple therapeutic areas to meet the needs of bio-pharmaceuticals clients. It also serve the nutrition, animal health, consumer goods, and specialty chemicals sectors. Their ability to deliver world-class solutions is driven by highly qualified team, including over 4,700 scientists, and supported by state-of-the-art infrastructure and market-leading technology.

Syngene is headquartered in Bangalore, India. They have one research campus and two sites in Bangalore, one research campus in Hyderabad and one manufacturing campus in Mangalore. Syngene USA Inc., a US-based wholly-owned subsidiary of Syngene, supports US-based clients.

These facilities regularly clear regulatory inspections by the world’s leading regulators including the USFDA, EMA and PMDA. Sustained investments in world-class technology and systems underpin the Company’s ability to meet global compliance and quality standards, accelerate R&D activities, and respond with agility to evolving client needs.

Vision - To be a world-class partner delivering innovative scientific solutions.

As a strategic partner to its clients, often working as an extension of their internal scientific teams, it bring them the flexibility and efficiency to scale up rapidly and respond to challenges and opportunities in a result oriented, safe, and compliant manner. Scientific solutions benefit not only the life sciences sector but also the animal health, consumer goods, nutrition, agro-chemicals and specialty chemicals sectors.

Throughout the year they leveraged science to make a difference. Examples include: performing small and large molecule drug discovery projects, developing a drug substance for the treatment of a rare genetic liver disease, producing complex multi-drug combination formulations for companion animals, and making advances in specialty platform programs such as antibody-drug conjugates (ADCs) and proteolysis targeting chimeric molecules (PROTACs).

As the world emerges from the pandemic, more aware than ever of the power of science, we will continue to offer our expertise in integrated discovery, development, and manufacturing of novel molecules to our clients. In our laboratories, in every project, for every client, we remain committed to exploring the boundaries of science, driving innovation, and delivering speed and agility, with one objective: making a difference.

Business Divisions

Discovery Services

Engaged in early-stage research from target identification to delivery of drug candidates for further development. Capabilities include Chemistry, Biology, Safety Assessment, and Research Informatics for small molecules; recombinant DNA engineering, cell line development, Next Generation Sequencing, and protein sciences for large molecules.

Development Services

Manufacturing Services

Engaged in the manufacturing of small and large molecules for commercial supplies through cGMP-compliant facilities, a state-of-the art API manufacturing campus and a biologics manufacturing facility.

Dedicated R& D Centers

Dedicated R&D facilities for strategic clients providing exclusive access to research teams, infrastructure, and project management to support the client’s R&D requirements.

Clients & partner relation

We aim to build strategic, long term relationships with our clients and partners by offering a range of integrated research services from initial planning of research programs up to candidate selection, preclinical and clinical development, and manufacturing. We help leading pharmaceutical and biotechnology companies navigate regulatory requirements and increase speed to market. We apply our scientific expertise to deliver innovation in segments beyond life sciences, including specialty chemicals and consumer products. We provide high-quality, customized, and cost effective services – compliant with regulatory standards – irrespective of the size and scope of the client’s project.

Partnering Model

Fee For Services (FFS)

Client collaboration to deliver agreed services within a defined scope. Flexible, on demand personnel and research infrastructure deployed to achieve the project objectives. Engagements may be short or long-term

Full Time Equivalent (FTE)

Pre-defined numbers of scientific personnel from pre-determined disciplines work full-time on client projects. Deliverables and team composition evolve as the project advances. Agreements are typically renewed annually.

Dedicated Centers

Clients are provided with customized and ringfenced infrastructure. Dedicated scientific and support teams work exclusively on the client’s project. Long-term strategic alliances that last usually five years or more.

Risk & Rewards

Across a portfolio of stage gate-driven research projects, client benefits from reduced upfront payments in exchange for significant success based milestone payments against pre-agreed criteria.

Digital Client Engagement

Part of establishing new client relationships involves client facility visits to meet the team and see our campuses first-hand. With travel restrictions in place, a portfolio of 360° InstaVisit videos of our facilities was created. These are interactive videos designed to give a 360 degree virtual experience of Syngene’ s world-class facilities and capabilities, anytime, anywhere.

Regulatory and client audits are also an important part of client agreements. To avoid delays and maintain our compliance assurance activities, virtual audits were introduced leveraging advanced technology to facilitate real-time interactions customized to the requirements of each stakeholder. Testimony to the accuracy and transparency of our approach are the 36 virtual audits by top biotech/pharmaceutical companies and regulatory authorities in the past 12 months, all of which were successfully cleared.

Assets

We have solid foundations based on our laboratory infrastructure, technology investments, skilled workforce, strong leadership, and financial strength. These assets underpin our ability to deliver great science for our clients

Services

We deploy our asset base to offer integrated services across scientific discovery, development and manufacturing tailored to the requirements of every project.

Value Created

We create value for our clients by delivering innovation while providing them both time and cost-to-market benefits. Our business activities also enable us to create value for our employees, shareholders and the community at large.

Reinvestment

We will continue to invest in additional capacity and new technology to ensure that we keep pace as science evolves.

To meet the urgent need for testing kits, our discovery research scientists developed an IgG (immunoglobulin G)-based ELISA test (ELISafe 19), which was launched by bioscience company HiMedia Laboratories. The antibody testing kit, which detects COVID-19 infection and also assesses the immune system’s response to the virus, was approved by the Indian Council of Medical Research in September 2020.

Syngene also joined an international consortium of 19 organizations in the healthcare space, led by longtime research partner Bristol Myers Squibb. The consortium aims to improve and accelerate various aspects of COVID-19 testing, from research to clinical diagnostic applications, because fast, reliable, and widely available testing is a critical defense against current and future waves of the disease.

We also entered into a voluntary licensing agreement with Gilead to manufacture the novel intravenous drug Remdesivir for distribution in India and other global markets. The drug received US FDA approval in October 2020 for the treatment of COVID-19.

Market Overview

In 2020, the value of the global Contract Research Organization (CRO) services market was estimated at USD 47.77 Bn, while the global pharmaceutical contract manufacturing market was valued at USD 109.67 Bn. During the forecast period of 2020 to 2025, the CRO market is estimated to grow at a CAGR of 9.1% to reach USD 73.77 Bn. During the same period, the Contract Manufacturing Organization market is expected to grow at a CAGR of 6.4% to reach USD 162.1 Bn.

Key trend driving the market

Increasing R&D investment and outsourcing

R&D investments by the global pharmaceutical industry stood at USD 186 Bn in 2019, an increase of over USD 5 Bn from the previous year. By 2026, R&D spending by the pharmaceutical industry is estimated to reach over USD 230 Bn. This continued growth in R&D investments will drive the growth of the CRO market. The other source of growth is increased outsourcing penetration which enables service providers to access a greater proportion of the R&D budget of the client companies. In 2018, the share of outsourced services expenditure in the global pharmaceutical market stood at 37.7% and this is expected to increase to over 49% in 2023. This points to a significant shift over a relatively short timespan.

2020 was one of the best years for biotech financing, with over 73 life science firms raising more than USD 22 Bn through initial public offerings. Private fundraising also grew, with a 37% increase in funds compared to the previous year. A large part of this money is expected to be routed towards R&D outsourcing.

Increasing number of small biotech companies

Emerging and virtual biotechnology companies often lack the internal infrastructure to run their own research. To complete their R&D programs, these biotech players are increasingly accessing the services of CROs. With a growing number of small biotech players in the market and their important contribution to the global R&D pipeline, the demand for CRO services is expected to further proliferate.

Increased complexity in drug development

The complexity of the drug development process has increased the duration and cost of bringing a drug into the market. Moreover, the synthesis and formulation of next-generation biologics, such as ADCs, gene therapy, cell therapy, and peptides, are highly complex. With CROs aligning their capabilities for the development of these innovative therapies, biopharmaceutical companies are calling on them to access expertise that might not be available inhouse, navigate the complexities of the regulatory environment and expedite time-to-market.

Focus on core competencies by pharmaceutical companies

Pharmaceutical companies are increasingly focusing on their core competencies. For the big pharma players, it is about balancing their fixed and variable costs while optimizing resource utilization. For the small and medium players, it is about accessing scale, experience and infrastructure that they do not have nor want to build in-house.

Focus on cost optimization by biopharmaceuticals

Innovator companies are increasingly seeking the services of CROs as expert partners to optimize their internal cost structures and remain flexible. By outsourcing their research activities, companies can avoid capital investments and save on resource cost, infrastructure cost, and other overhead expenses. At the same time, by working with many customers, CROs can drive higher capacity utilization and optimize resource utilization in comparison to biopharmaceutical companies.

Growing demand for generics and biologics

Generic medicines continue to play an important role in increasing patient access to affordable healthcare. This rising demand is fueling the growth of the CMO market. The increasing demand for biological therapies, growing focus on specialty medicines, and advancements in cell and gene therapies are also stimulating the growth of the CMO market.

Strategic Priorities

We believe that global demand for high quality scientific services will continue to grow and evolve and that the prospective outlook is a positive one for those companies that can successfully anticipate the evolving needs of clients and deliver services and solutions that meet those emerging needs.

Message from CEO & MD - Jonathan Hunt

During the year, we also made meaningful progress on the strategic development of the Company by adding to our Integrated Drug Discovery portfolio, expanding our footprint in Hyderabad, completing the qualification of our manufacturing site in Mangalore and building our presence in the animal health sector.

During the year, we added 10 clients to the IDD portfolio, including signing a five-year R&D collaboration with Deerfield Discovery and Development Corporation (3DC), the drug discovery and development subsidiary of Deerfield Management Company.

The scientific breadth and depth of our portfolio is contributing to the development of new therapies for a wide range of diseases, with each offering the prospect of making a meaningful difference to the lives of people living with such conditions. As an example, we are proud of our work to help Albireo Pharmaceuticals develop a new treatment for a genetic liver disease that affects children. The compound is currently on track to become the first approved drug for affected patients. During the year, our scientists also worked on research projects that focused on leukemia, Parkinson’s disease, inflammatory disorders, and fibrotic disorders, demonstrating our growing capabilities across complex therapies. In addition to serving the pharmaceuticals and biotechnology sectors, we also strengthened our position in animal health and executed our first fully integrated development project in this sector.

Across the Company, we acquired an additional 40 new clients and expanded the scope of engagement with many existing clients. We continued to serve a broad range of client requirements ranging from the largest pharmaceutical companies to small and medium-sized companies lacking research capacity or technology of their own. A significant milestone was the extension of our strategic partnership with Bristol Myers Squibb (BMS) to 2030. The dedicated facility we have for BMS is its largest research facility outside of the United States and the partnership has gone from strength to strength since it was first set up in 2007.

We continued to enhance our technical capabilities as well as expand infrastructure to ensure that we were able to meet clients’ future needs. The phase II expansion of our Hyderabad research facility was completed during the year, while phase III of expansion is currently underway. Towards the end of the financial year, we completed the qualification activities for our API manufacturing plant at Mangalore and the facility has been awarded GMP certification by the Indian regulatory authority. The focus is now on gaining other key regulatory approvals over the next two years. Meanwhile, we are actively engaging with clients to showcase the new facility and the latest technologies available at the site.

The introduction of artificial intelligence and machine learning tools will increasingly allow us to leverage the power of data science and gain useful insights for expediting innovation. In the context of the ever-present threat of cybercrime, our security measures continued to evolve.

Message from CFO desk - Sibaji Biswas

For Syngene, the year turned out to be a positive one, with growth in both revenue and profits despite the obvious challenges posed by the COVID-19 pandemic. We faced a production slowdown in the first quarter as operations were temporarily suspended while we introduced COVID-19 safety protocols on all campuses. We also saw a slower build-up of client orders in the early part of the year due to the reduction in global travel affecting trade shows and reducing direct contact with customers. We believe this has created some pent-up demand and a more positive trading environment today as clients begin the process of catching up on projects delayed by their own pandemic shutdowns.

Revenues, before taking export incentives into account, grew 12% to Rs. 21,802 Mn (USD 295 Mn). Excluding the first-quarter performance, revenue growth for the remaining quarters was at 14%. As a prudent measure, we have not accounted for government export incentives in the reported period given the lack of clarity pending the announcement of continuity of the previous export incentive scheme by the Government of India.

Growth in revenue from operations was driven by steady performance across all businesses. Discovery Services constituted 35% of revenues, Development and Manufacturing Services accounted for 33% and the Dedicated R&D Centers formed the remaining 32% of revenues for the year.

The digital platforms have proven to be an effective way to showcase our latest science and technology to new and existing clients. During the year we added 40 new clients, taking the total count to above 400, as well as expanding our relationships with existing clients.

On cost and margins

Earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 5.3% to Rs. 7,364 Mn (USD 100 Mn) in FY21. EBITDA from operations, excluding interest income and export incentives, grew by 21% over the prior year. The growth was driven by our focus on optimizing costs while building scale. EBITDA margin from operations increased by 220 basis points from 28.4% in FY20 to 30.6% in FY21, reflecting a strong underlying performance. Despite the absence of the export incentive, which is equivalent to almost a 300-basis point dilution in margins, the reported EBITDA margin dropped only by 70 basis points from the previous year to 32.7%, evidence of strong underlying margin growth.

Profit after tax (PAT) grew 4% to Rs. 3,821 Mn (USD 52 Mn) as compared to Rs. 3,662 Mn (USD 49 Mn) in the prior year before an exceptional gain from an insurance receipt. PAT margin was lower by 50 basis points to 17% as depreciation increased due to expansion at our main Bangalore facility, new investments in Hyderabad facility and the commissioning of the Mangalore commercial API plant towards the end of the previous year (March 2020).

Capex

Capex for the year was Rs. 4,669 Mn (USD 67 Mn), lower than planned by around 25% as we deferred certain projects due to the pandemic. Lower capex was also due to the release of additional capacity resulting from the introduction of shift working, especially in Discovery Services. Of the total capex, 15% was deployed in the API manufacturing facility, 31% in Discovery Services, 13% in the Biologics manufacturing facility and the remaining 40% in the Dedicated Centers, Development Services and common assets. Capex currently stands at Rs. 35,634 Mn (USD 510 Mn) as on March 31, 2021.

On strong balance sheet

A key focus during the year was on maintaining a strong liquidity position. This focus on receivables delivered the highest ever collections, reducing the overall outstanding days of receivables to 58 days as on March 31, 2021. Calibrated spending contributed to a 79% growth in the net cash balance to Rs. 6,475 Mn (USD 88 Mn) as on March 31, 2021.

Our improved liquidity position and healthy financial risk profile, along with growth visibility, strong fundamentals, sound business model, and strong client base, contributed to an upgrade in our credit rating. We are now rated AA+ by both CRISIL and ICRA for the long term up from AA in the prior year.

On Dividends

While the Company anticipates good growth opportunities, there remains uncertainty as the Indian economy and those of our client markets, recover from the impact of the past twelve months. In line with this, the Company has taken a decision to retain surplus funds instead of distributing dividends in order to focus on maintaining a healthy cash and liquidity position in case of unforeseen events.

Way Forward

The extension of our strategic collaboration with Bristol Myers Squibb until 2030 will provide scope for new areas of R&D within that relationship. We have initiated multiple expansion and capability building initiatives. The phase-III expansion of the Hyderabad laboratory is ongoing and will offer capacity for an additional 300 scientists. We are collaborating with the Biotechnology Industry Research Assistance Council (BIRAC), under the National Biopharma Mission, to build a viral vector development and manufacturing plant for cell and gene therapy. We have added capacity to our mammalian cell biologics manufacturing capabilities as well as commissioned a new microbial facility, further enhancing our services in biologics. The Mangalore API plant has completed the qualification stage and beyond the GMP approval from the Indian regulator, we are working towards other regulatory approvals while adding clients and projects.

Overview of different Services offered

1. Discovery Services

Discovery Services delivered strong growth by expanding relationships with existing clients and initiating relationships with new clients. We converted several Fee-for-Service (FFS) contracts into more durable, Full-Time Equivalent (FTE) engagements, reflecting the perceived value addition that we offer to clients.

The Discovery Services division houses most discovery-stage research services required by pharmaceutical and biotechnology companies under one roof. Combining these capabilities seamlessly along with those offered by Development Services allows Syngene to deliver high-quality innovation with speed and efficiency at every stage of a project, from program initiation through clinical evaluation.

Syngene SynVent™, our proprietary platform for executing integrated drug discovery projects, is designed to provide the most effective and efficient means to advance programs through target validation, translational interrogation, therapeutic discovery, and preclinical development for both large and small molecules, as well as specialty modalities such as targeted protein degradation.

During the year, we signed a five-year strategic collaboration agreement with Deerfield Discovery and Development Corporation (3DC) to execute a portfolio of fully integrated drug discovery programs. Many of these programs will represent novel biological targets with first-in-class opportunities.

In addition to human health, Syngene has a growing business among CROs offering animal health services. This year, we added our first IDD project in animal health. The project was initiated with the assay biology and screening teams developing, optimizing, and validating several requisite assays in an aggressive timeline of fewer than eight weeks, as compared to the typical twelve to sixteen weeks. Medicinal Chemistry to optimize the lead series is underway.

For the past three years, the Company has conducted several research projects for C4 Therapeutics, seeking to discover innovative treatments for cancer and neurodegenerative conditions. Two new programs were added to this collaboration during the year. Key scientific accomplishments include the successful delivery of two drug candidates for clinical development. Another project delivered a library of 600 compounds with a success rate of >95%.

Advancing Innovative science

Significant accomplishments in the year include generating critical data to enable candidate selection of a bispecific antibody for cancer treatment and achieving an important milestone towards discovering lead candidates for the potential treatment of inflammatory disorders. Scientists from Discovery Services were named co-inventors in nine patents filed during the year, underpinning our contribution towards delivering the science targeting unmet medical needs. Syngene scientists also continued to publish scientific outcomes including a co-authored article titled ‘Selective recruitment of γδ T cells by a bispecific antibody for the treatment of acute myeloid leukemia’ peer-reviewed and published in the renowned journal, ‘Leukemia’.

Accomplishment in Discovery services

Development and validation of several surrogate neutralizing antibody and T-cell assay formats, enabling point-of-care assessment of acquired immunity toward SARS-CoV-2, the virus that causes COVID-19
Discovery of several novel, high-affinity monoclonal antibodies (mAbs) and receptor-binding domain (RBD) proteins of SARS-CoV-2
Supporting a research program in the discovery of a broad-spectrum antiviral for the treatment of COVID-19, in collaboration with Sosei-Heptares
Co-recipient of a grant from Biotechnology Industry Research Assistance Council (BIRAC)* to discover the measles virosome-based COVID-19 vaccine
Recipient of a BIRAC grant for the generation of a human-ACE-2 transgenic mouse to support studies targeting the prevention or treatment of SARS-CoV-2 infection. The human ACE-2 cell surface protein engages the viral SPIKE protein to facilitate entry into the cell

Strengthening Research informatics

Continuing our focus on strengthening our research informatics capabilities, we are building an immuno-oncology platform that will enable mechanistic assessment of immune response, intelligent clinical trials for checkpoint inhibitors, and combination therapies to further strengthen our capabilities.

We are also integrating informatics capabilities across other operating units and enabling functions to leverage the power of data science, machine learning, and artificial intelligence. The adoption of these transformational technologies is enabling strategic engagement, improved processes, and faster turnaround time.

New Capabilities

We continued to invest in adding new capabilities to further enhance our drug discovery offerings, including specialty platforms such as antibody-drug conjugates (ADCs) and proteolysis targeting chimeric molecules (PROTACs). While numerous traditional therapeutics rely upon inhibiting a biological target molecule’s function, PROTACS engage the target molecule in a way that triggers its destruction within the patient’s own cells. We initiated an EPSA (Experimental Polar Surface Area) assay which uses a supercritical fluid chromatography (SFC) technique, to enable improved permeability design for PROTAC targets in a high-throughput environment.

Plans are also underway to augment our Drug Metabolism and Pharmacokinetics (DMPK) capabilities through investment in automation. Our growing expertise in areas that hold the promise of discovering the medicines of the future is attracting new clients to Syngene.

Infrastructure

Syngene recognizes the need for timely investments in infrastructure to support growth in a scalable and efficient manner. During the year, we commissioned 23,000 sq. ft. of additional laboratory and office space to support Discovery Biology at the Biocon Park campus in Bangalore. The phase I expansion in Genome Valley, Hyderabad was commissioned in February 2020, adding capacity for up to 175 scientists for Discovery Chemistry services. Phase II of the facility was recently completed, housing an additional 90 scientists. Phase III construction is underway to further support the increasing demand for both Discovery Chemistry and Discovery Biology services.

The installation of sophisticated equipment and deployment of new and better technologies, as part of our digitalization strategy, continue to bolster our research capabilities across our various operating units. These include implementing an electronic laboratory notebook (ELN) across all FTE projects in Discovery Chemistry, installing new 400 MHz Nuclear Magnetic Resonance (NMR) instruments with high sensitivity probes, and the use of DEREK Nexus and SARAH Nexus toxicology modeling tools. These toxicology tools deliver fast and accurate toxicity predictions and statistics-based Ames mutagenicity predictions while meeting ICH M7 guidelines.

Alliance in Discovery services

Our strategic alliances aim to unlock the positive impact of partnership. This year, we signed an agreement with the Foundation of Neglected Disease Research (FNDR) in Bangalore to facilitate SARS-CoV-2 in vitro and in vivo research combining Syngene’s multidisciplinary skills in integrated drug discovery and development and FNDR’s capabilities in conducting BSL-3* infectious disease research.

We have established strategic partnerships with institutions in Netherlands and Japan to provide access to industry-leading high throughput screening (HTS) collections for small molecule discovery. We similarly signed a partnership agreement with a China based organization to provide our clients access to their world-class DNA-encoded screening library (DEL). These partnerships strengthen our ability to provide integrated discovery services, expand our client base, and enhance our global footprint.

Case study just in case you are curious to know how discovery services works!!

2. Development Services

The division reported a steady performance for the year. New clients were added across the various scientific disciplines, while many existing clients established broader relationships by expanding the scope of engagement.

Odevixibat, a lead drug for specialist biopharmaceutical client, Albireo Pharma. This drug, which treats a genetic liver disease, achieved its two primary endpoints in phase III clinical trials. Our scientists delivered several campaigns of the drug substance - from registration batch to phase III trials - to assist in the overall success of the product. The US FDA has accepted Albireo’s new drug application for odevixibat and has granted it priority review status.

Within Formulations Development, our scientists helped to develop a complex multi-drug combination formulation for a client with extensive interests in animal healthcare. In this project, our scientists demonstrated their ability to deliver a solution using a minimum quantity of API - and against stringent timelines - while considering the need to develop a comprehensive risk assessment for scalability with an associated mitigation plan.

In another complex and time-critical project, our scientists developed a robust, scalable process for a small molecule inhibitor that blocks a specific cancer target. This was a significant milestone in the overall project, which is currently in the process performance qualification (PPQ) studies stage.

Other highlights include delivering GMP# supplies for a leading pharmaceutical company to support its pilot bioequivalence studies in humans within accelerated timelines. Additionally, a US-based client filed a New Drug Application (NDA) for immediate-release tablets for treatment of vaginal yeast infections (vulvovaginal candidiasis) with the United States Food and Drug Administration (US FDA), the registration batches of which were manufactured at Syngene’s GMP facility.

Integration

Aligned with our strategy to integrate multiple service lines within Development Services to offer integrated solutions, we restructured the Division in the previous financial year. This transformation gained momentum during the year under review. We also set up the Analytical Development function, which will further boost our ability to offer integrated development services. With this addition, the Development Services structure mirrors that of large pharmaceutical companies, designed to facilitate the smooth flow of molecules from the Discovery to Commercialization phase.

Capabilities

We are continually enhancing our capabilities to provide a more efficient and broader range of development solutions to our clients worldwide. A non-GMP (nGMP) technical support testing laboratory was commissioned in Bangalore to test all nGMP batches for in-process, intermediates and finished products. This facility will enable us to implement phase-appropriate quality services and reduce the turnaround time for nGMP sample analysis by an estimated 30-50%.

Another significant achievement was the setting up of the Highly Potent Active Pharmaceutical Ingredient (HPAPI) laboratory at the Bangalore campus. This facility completed the validation process towards the end of the fiscal year and will develop chemical processes for high potency molecules at a laboratory scale.

Curious for another case study on development services? Here you go

3. Manufacturing Services

When it comes to drug commercialization, clients increasingly prefer to collaborate with service providers who have been involved in the discovery and development process. The primary reason for this is to leverage the extensive process knowledge gained while advancing the molecule along the value chain making drug commercialization simpler, seamless and faster. Partnering with a single service provider eliminates the need for knowledge and technology transfers throughout the process accelerating time to market. Syngene’s proven performance of solid multi-year, multi-project execution puts us in a strong position to serve clients who need manufacturing support to advance their product to commercialization.

Capabilities

Our scientific solutions are differentiated by our ability to deliver manufacturing of both clinical and commercial supplies across modalities. We have a state-of-the-art cGMP facility for chemical entities, an API manufacturing facility, a modern, disposables-based mammalian manufacturing facility with multiple 2,000L bioreactors, and a microbial manufacturing facility.

The construction of the new microbial manufacturing facility was completed and operations have commenced, reducing our dependence on external service providers. Other highlights include: the addition of pDNA and mRNA segments as a new line of the process development and clinical manufacturing service; the increase in the capacity of the microbial testing laboratory; a new 5,000 sq. ft. process development laboratory; and a new quality control laboratory housing the latest infrastructure.

The establishment of a new fill-finish facility for injectables has started. This will enable our clients to manage the complete product lifecycle from one single location.

API Manufacturing

The API manufacturing facility in the Mangalore Special Economic Zone (MSEZ) completed its qualification process by the end of the year under review. The first commercial project was executed in the intermediate areas where equipment had already been qualified and the facility is on track to take on larger volume production in the coming financial year.

Additionally, we have embarked on an ‘Anytime Audit Readiness’ verification process to ensure that the site is fully prepared for scheduled or unscheduled regulatory audits. As activity at the facility scales up, virtual GMP training is being delivered to all the relevant employees to build awareness of current regulatory requirements and Syngene quality system procedures.

Biologics Manufacturing

Our biologics manufacturing facility can handle multi-product production campaigns simultaneously based on our single-use technology platform, and we continue to build on our capacity year-on-year to meet the growing demand for outsourced biologics manufacturing. Our mammalian manufacturing plant added two new 2000 L bioreactors. This approach of ‘scaling-out’ instead of ‘scaling-up’ gives us more flexibility in meeting client demand.

The biologics manufacturing is supported by Syngene’s own cGMP viral testing facility, which is currently the only one in India. Most India based biopharmaceutical companies send their samples overseas for testing. Our unique service will enable us to capitalize on this significant business opportunity.

4. Dedicated R&D centers

Syngene’s clients value the dedicated R&D center model because of the advantages this approach brings to their R&D programs. This includes operating as an extension of the client’s facilities, seamless and secured information exchange and a dedicated infrastructure and a team of cross-functional scientists.

The four dedicated R&D centers represent some of our deepest client relationships, including Bristol Myers Squibb (BMS), Baxter Inc., Amgen Inc., and Herbalife. Each center is customized to the client’s requirements with dedicated infrastructure and exclusive multidisciplinary scientific and project management teams.

Biocon Bristol Myers Squibb Research & Development Center (BBRC)

Syngene and Bristol Myers Squibb’s collaboration dates from 1998 and the dedicated Biocon BMS Research Center (BBRC), Syngene’s first dedicated R&D center, was established in 2007. The center is the largest research alliance for Bristol Myers Squibb, covering integrated drug discovery and development in multiple therapeutic areas, including cardiovascular, fibrosis, immunology and oncology. The center provides integrated services in target identification, lead discovery, lead optimization, early stage pharmaceutical development, molecular and cell biology, protein sciences, assay biology, clinical biomarkers, amongst others.

During the year, the collaboration was extended until 2030 and the breadth of research was expanded to include translational medicine and pharmaceutical development. The extension also provides for a 40% increase in the number of scientists. Part of this increase was executed during the year and the remaining expansion is expected during the next two years.

Baxter Global Research Center (BGRC)

The strategic alliance with Baxter Inc. was initiated in 2013. Syngene’s contribution to Baxter’s R&D programs is evidenced in the scope of engagement that has consistently expanded over the years. Today, we are partnering to deliver scientific solutions across product and analytical development, preclinical evaluation in parenteral nutrition and renal therapy and medical products and devices.

During the year, the collaboration was further expanded to include microbiology research and preclinical assessment projects for medical devices. Aligned with the enhanced scope of work, the bench strength was increased to more than 200 scientists.

During the year, the dedicated center delivered four new product development projects for registration in the US and European Union markets.

Herbalife Nutrition Research & Development Center (HNRD)

The research center for Herbalife has been in operation since 2016. The facility is Herbalife’s first nutrition R&D center in India and includes a cGMP laboratory. The center provides support for product development, sensory evaluation and testing, scientific content writing, project management, formulation development, analytical services, stability studies and other related areas.

During the year, our scientists worked closely with the Herbalife R&D teams to launch five nutritional/well-being products for the Indian market. The scope of collaboration was enhanced to include services for outer nutrition including development, analysis, and feasibility (pilot scale-up and stability) studies. In line with this enhanced scope, an R&D feasibility study for outer nutrition products was also completed.

Syngene Amgen Research & Development Center (SARC)

The strategic collaboration with Amgen Inc. focuses on medicinal and process chemistry, biologics, drug metabolism, pharmacokinetics, bioanalytical research and pharmaceutical development. The dedicated center, Amgen’s only R&D facility in India, was founded in 2016. During the year, the SARC leadership team was reorganized to drive greater collaboration and efficiency. With the launch of the ‘OneSARC’ governance model, a team combining leaders from both Syngene and Amgen is now in place. This will drive greater alignment in SARC operations and provide better scientific and operational oversight. In addition to advancing Amgen’s research programs, operational excellence initiatives were introduced to improve productivity across functional areas.

COVID-19 RESEARCH AND PROJECTS

Since the outbreak of the coronavirus pandemic, Syngene has been actively contributing its scientific expertise and resources in the fight against the virus. It has developed high-quality, mammalian derived viral proteins such as S1, RBD, and N protein meant for diagnostic testing and assays. The Company has also developed proprietary antibodies (monoclonal and polyclonal) with high affinity and specificity for use in viral antigen detection and other such tests.

The Company developed an IgG based ELISA test kit for COVID-19, ELISafe 19TM, at its research facility in Bangalore. The Company partnered with bioscience firm HiMedia Laboratories for manufacturing and distribution of these kits. Approved by ICMR and the Central Drugs Standard Control Organization (CDSCO), the ELISA test is intended for the qualitative detection of IgG SARS-CoV-2 antibodies in blood samples. It delivers higher throughput and generates faster results than other similar tests

Syngene collaborated with the Centre for Cellular & Molecular Biology (CCMB) to deliver a high throughput Next Generation Sequencing (NGS) based genomic screening assay that can test 5,000-10,000 samples simultaneously. It has also tied up with Mylab Discovery Services to manufacture and supply oligonucleotides (primers and probes) for use in their diagnostic kit

In collaboration with the National Centre for Biological Sciences (NCBS), Syngene is to develop a novel human ACE2 transgenic mouse that is anticipated to phenocopy the full spectrum of human COVID-19. This will be a valuable animal model for in vivo screening of potential COVID-19 therapies and furthering the understanding of SARS-CoV-2 pathogenesis. The project is being funded by the Biotechnology Industry Research Assistance Council (BIRAC). Financial and legal due diligence by BIRAC is in progress.

Syngene has entered into a partnership with the Foundation for Neglected Disease Research (FNDR) to facilitate SARSCoV-2 in vitro and in vivo research for clients. The Company’s multidisciplinary skills in integrated drug discovery and development and FNDR’s capabilities in conducting biosafety level 3 (BSL-3) infectious disease research are being combined in a strategic alliance to provide state-of-the-art support for academia and industry involved in COVID-19 research. A project evaluating the in vitro cytotoxic effects of a peptide based antiSARS-CoV-2 therapeutic has been completed in collaboration with FNDR.

Syngene has collaborated with Sosei Heptares on a program focused on the design and development of compounds for the treatment of infection from SARS-CoV-2 and related corona viruses. The research has made significant progress and the lead compound, suitable for further optimisation as an oral drug, has been identified.

Management Discussion & Analysis

Research & Development

Recognizing the importance of research and development (R&D) in driving pharmaceutical innovation and competitiveness, governments and industries globally continue to make robust R&D investments in pharmaceuticals. To put this into context, global R&D expenditures have increased more than three-fold since 2000 - from USD USD 676 Bn to USD USD 2.0 Tn in 2018.

The pharmaceutical and biotechnology industry, propelled by the imperative to bring breakthrough drugs in the market, is among the leading R&D spenders as a percentage of revenue. In 2020, estimated R&D spend by the pharmaceutical industry stood at USD 188 bn, and by 2026, R&D spend by the pharmaceutical industry is estimated to reach over USD 230 bn. Around 17,700 prescription drugs were in the 2020 R&D pipeline, a number that has been growing year-on-year.

Beyond the life sciences sector, companies in the segments of specialty chemicals, agrochemicals, animal nutrition, personal care and nutrition are also investing in R&D to keep their innovation pipelines flowing.

While R&D spending is increasing, innovator companies continue to be challenged by the declining rate of investments in R&D. In the pharmaceutical industry, a considerable proportion of drug candidates fail during the regulatory process. This increases the average cost to develop and secure marketing approval for a new drug. The declining returns are encouraging many drug developers to outsource large parts of their R&D activities, along with leveraging new technologies, to make drug discovery and development cost-efficient and faster.

Contract Research Services Market

Contract Research Organizations (CROs) provide research services on a contractual basis to R&D-focused companies across multiple sectors such as pharmaceutical, biotechnology, nutraceuticals, animal health, medical devices, and speciality chemicals. CROs also provide support to academic institutes and government research organizations. In 2019, the pharmaceutical and biopharmaceutical companies segment accounted for the largest share of the global CRO services market.

In the biopharmaceutical industry, activities that are typically outsourced span from basic research to late-stage development, encompassing genetic engineering, target validation, assay development, hit exploration and lead optimisation, safety and efficacy tests in animal models, and clinical trials involving humans. The biopharmaceutical sector’s growing dependence on CROs can be inferred from the fact that the latter were involved in 50% of drug development work in 2018, up from 18% in 2006. There is ample scope for growing the CRO services market as industry experts believe that 70-75% of R&D spend by the global pharmaceutical industry can potentially be outsourced.

The global CRO services market is projected to reach USD73.77 bn by 2025 from USD 47.77 bn in 2020, at a CAGR of 9.1% over the five years.8 Growing R&D expenditure, increased outsourcing of R&D activities and the increased number of clinical trials are the major factors propelling the market growth. The CRO market for early phase development services which includes chemistry, manufacturing and control (CMC) services, and preclinical services is also poised to register a robust growth rate as pharmaceutical firms outsource to counter the complexity of the drug development processes and meet stringent regulatory requirements. Among therapeutic areas, oncology accounts for the largest share of the global CRO services market and this segment is expected to maintain a strong growth as increasing incidence of cancer drives demand for development of new drugs.

Growth Drivers

1. Expertise to manage complexities: With their extensive scientific expertise and regulatory knowledge, CROs help client companies to efficiently navigate the complexities of the drug development process. CROs are also increasingly adopting and integrating advanced technologies, such as high-throughput screening, bioinformatics and cheminformatics, to accelerate the discovery and development of a compound and improve R&D efficiency. According to research by Frost & Sullivan, the development duration for a new drug can be reduced by one quarter to one-third with the help of CROs.

2. Partnering innovation in newer areas: The emergence of novel biological targets and therapeutic modalities offers promising opportunities for breakthrough drugs. The rising demand for personalised medicines also calls for innovation. However, biopharmaceutical companies, especially startups, do not always have the necessary expertise in-house to make the most of these developments. Entering into strategic collaborations with specialised CROs and leveraging their broad spectrum of services increases the possibility for client companies to discover and develop advanced therapies.

3. Driving flexibility in costs: Under the outsourced model, the client’s need to invest in in-house facilities, equipment, technology and manpower has significantly reduced. This enables them to convert their traditional fixed costs into variable costs, thereby minimising their investment risk. Small and mid-sized firms also find externalization of R&D attractive as they can access high-quality services without committing to longer-term investments.

Pharmaceutical Contract Manufacturing Services Market

Partnering with a contract manufacturing organization (CMO) is a strategic choice by many pharmaceutical companies – from big players to smaller speciality entities. The capital intensive nature of the business and complexity of the manufacturing requirements are among the primary reasons driving pharmaceutical companies to outsource commercial manufacturing. Additional factors providing a solid foundation for the growth of the CMO services market include growing demand for generic medicines and biologics or large molecules.

The manufacture of biologics entails a far higher degree of expenditure and technical capabilities in comparison to small molecules. While a small molecule manufacturing facility calls for an investment of USD 30-100 million, the cost of building of a large biotechnological facility can be USD 200-500 million. The influx of small and virtual biotech players who lack the expertise or the infrastructure to manufacture their products in-house is also augmenting the global pharmaceutical CMO market. As stated in a recent report from Frost &Sullivan, over 40% of innovative molecules are being developed by emerging biotech companies without later-stage manufacturing capabilities.

The combination of these factors contributes to a CAGR of 6.4% over the period 2020-2025, resulting in global pharmaceutical CMO market valued at USD 162.1 bn by 2025 from USD 109.67 bn in 2019.11 An important trend being witnessed in the CMO market for biologics is that innovators prefer to enter into a strategic alliance with a one-stop-shop service provider who has been involved in the discovery and development process because it helps to make the transition into commercial manufacturing more efficient and faster.

Management Outlook

The fundamentals of Global Biopharma industry remain strong. There is good momentum of new chemical entity and new biological entity approvals by regulators underpinned by a strong pipeline of drugs under early stage discovery and development. The continuing drive to reduce the cost of drug discovery and increase productivity is expected to increase outsourcing further, with significant interest in the integrated drug discovery and development model. On the manufacturing side, growing demand for biologics, the capital-intensive nature of the business, and the complexity involved in pharmaceutical manufacturing is further driving demand for outsourcing. We believe Syngene is well positioned to capture many of these market opportunities.

The Company has laid a strong foundation by expanding our laboratory footprint beyond Bangalore with the ongoing capacity additions in Hyderabad. The Phase 3 of our expansion in Hyderabad will allow us to build additional capacity for another 300 scientists.

In Biologics manufacturing the Company has added capacity to under mammalian capabilities with additional two 2000 L reactors. The construction of another 500 Litre microbial facility has been completed which gets added as a new technology platform to our suite of offerings. This will help the Company cater to the production of a wide variety of biologics drugs ranging from anti-cancer to hormonal disorder therapies and many others. The Company is also planning to invest in a viral vector manufacturing facility and is being supported by BIRAC i.e. the Biotechnology Industry Research Assistance Council in the process. BIRAC has provided a grant to the Company to part fund this project to support the Company’s endeavor to be at the cutting edge of cell and gene therapy manufacturing and provide India with landmark scientific capabilities. The plant is expected to be ready for operations in 2 years.

The Company is in the process of strengthening the on-ground sales presence in certain key markets like the US and UK. The Company believes this will lay a foundation for being closer to our clients, driving stronger client relationships and helping us gain market share.

The Company sees growing opportunities in the areas of animal health; virology and vaccine-related services; and cell and gene therapy. Investments are being made to capture these prospects by building relevant capabilities. Syngene is already a leading research provider in animal health. The development of new services that reflect evolving client needs will be a key area to further consolidate the Company’s position in this domain. In the context of virology and vaccine-related services, the impetus will be on providing a wide array of solutions that cater to the demands of biotech firms. Finally, with cell and gene therapies being important new modalities in drug development, the Company remains focused on scaling-up its services and entering into strategic partnerships to build its expertise.

Regulatory Inspections Update

During the early weeks of the pandemic, our clinical laboratory in Bangalore was certified by the National Accreditation Board for Testing and Calibration Laboratories (NABL) as per ISO 15189:2012 for RT-PCR testing of COVID-19 samples.

The National GLP Compliance Monitoring Authority (NGCMA), Department of Science and Technology, Govt. of India has extended the scope of GLP certification for the Syngene facility (for compliance with the Organization for Economic Co-operation and Development principles) for biocompatibility testing of medical devices.

The safety assessment laboratory was also certified for ISO IEC 17025:2017 by the NABL for testing medical devices and the Clinical Laboratory was re-accredited as per ISO 15189:2012 by the NABL for clinical and molecular diagnostics.

IT Infra

Information technology further consolidated its role in every aspect of Syngene’s business, with a special focus on data protection, information security, compliance, productivity and a cyber-attack defense shield.

Increasing digitalization across all areas of operations is helping us effectively mitigate data integrity risk, improve regulatory compliance and enhance productivity.

Another critical project completed during the year was the digitalization of the hazard analysis method selection (HAMS) documents. With better traceability, availability and easy access to hazard control, this digital tool will help prevent accidents at our laboratories, thereby enhancing workplace safety.

The IT team rolled out the phase appropriate quality system for late phase GMP manufacturing. This SAP-based calibrated approach facilitates greater efficiency in our R&D programs by improving turnaround time.

Implementation of MS Projects Online helped create an organization-wide unified platform for all project monitoring activities, standardized templates and integrated it with SAP. This has helped in real-time collaboration leading to faster decision-making and reduced time spent on manual data consolidation/analysis.

The Clinical Development team implemented an advanced cloud based Electronic Data Capture (EDC) tool to capture clinical trial data. The tool will help us cost-effectively improve clinical trial management.

We are also implementing an Early Warning System (EWS). This automated web-based tool continuously analyzes and monitors electronic data and logs generated from analytical instruments in the Quality Control laboratories to identify potential anomalies. As this is a web-based tool, it is accessible from anywhere and eliminates the requirement of physical monitoring of quality compliance and improves the speed and efficiency of reviews.

A project initiated during the year will transform Syngene’s business enabling environment to build an IoT (Internet of Things) platform for real-time monitoring of process safety, infrastructure, and utility critical parameters across all locations. The IoT platform will cover our facilities at Bangalore, Mangalore and Hyderabad and connect them to a central monitoring station at Bangalore. The project will also support remote controlling of critical parameters, an alert mechanism, and advanced analytics.

Cyber Security

Our IT systems are ISO 27001:2013 certified, the internationally recognized standard for information security management systems. Underscoring our continued focus on cybersecurity risk management, robust plans have been mapped out to maintain our IT systems’ confidentiality, integrity, accessibility and scalability. We are setting up a next-generation Security Operation Center (SOC) that gathers threat intelligence by using AI and ML. The SOC will be part of our cognitive cyber-defense platform, which will monitor and pre-empt cyber-risk and cut response time.

We are also reducing third-party risk through a vendor risk management program and enhancing our phishing programs. Another important aspect of the plan includes implementation of the privileged access management system to protect against the accidental or deliberate misuse of privileged access by streamlining the authorization and monitoring of privileged users. Privileged access management system will improve incident response time through automation and prove beneficial in demonstrating regulatory compliance. We are also developing a cyber threat intelligence enhancement program under which appropriate cyber resilience plans are being put in place for new cyber incident scenarios that have the potential to escalate into a crisis.

Achieving the Great Place to Work® Certification

Among the highlights for the year was being recognized as a Great Place to Work. We are proud to have consistently improved our employee feedback and the suite of HR policies that form part of the assessment process. Over the past seven years, our Trust Index score has steadily increased, driven by focused efforts to strengthen people practices and engage employees. At Syngene, trust is founded on five focus areas: credibility, respect, fairness, pride, and camaraderie. The 2014 assessment served as the baseline, and the 2020 assessment showed double-digit percentage improvements in each area.

Board of Directors

Jonathan Hunt Managing Director and Chief Executive Officer

Mr Hunt has done his BA in Business Studies & Economics from the University of Sheffield and MBA from Durham University, United Kingdom. He has over 30 years of experience in the global biopharmaceuticals industry. At Syngene, he is responsible for leading the Company’s business operations and steering its investments in developing and strengthening its capabilities and capacity. Prior to joining Syngene, he held leadership positions at AstraZeneca for over a decade, including President and Director of AstraZeneca, Austria, and President and Chief Operating Officer, AstraZeneca, India. He is also a member of the Stakeholders Relationship Committee at Syngene.

Executive Committee

Sibaji Biswas Chief Financial Officer

Mr Biswas is a certified Chartered Financial Analyst from ICFAI and holds a B.Tech from IIT-Kharagpur. With an MBA from University of Calcutta he has also completed Management Development Programs at the Indian Institute of Management (IIM), Ahmedabad and London Business School. He has over 20 years of extensive experience in finance and related functions. His prior experience includes working with Vodafone (Romania), Vodafone (India), Hutchison Essar Limited, Fascel Limited, and the ABP Group. Prior to joining Syngene, he was the CFO and a member of the Board at Vodafone (Romania). At Syngene, he oversees the finance, supply chain, legal, secretarial and IT functions and as a member of the Executive Committee, he plays an important role in driving strategy, improving profitability, identifying new opportunities, improving cash generation and enabling organizational growth.

Financial Review

Tax expenses

Tax expenses for the year stood at Rs 643 Mn in FY 2020-21 in comparison to Rs 1,048 Mn in FY 2019-20. The decrease in effective tax rate in FY 2020-21 is predominantly due to the incremental depreciation impact in the tax books coming from the new units that have gone live, operating losses in the newly set up commercial API plant at Mangalore and decline in the interest income.

Employee benefits expense

The employee costs for the year increased by 14% to Rs 6,602 Mn. The increase in headcount in our existing and new facilities that went live in the last twelve months has driven 10% increase and the rest of the increase came from amortisation impact from the rollout of the new Restricted Stock Option plan. The total employees in the company increased from over 4,900 as of 31st March, 2020 to over 5,400 as of 31st March, 2021.

Exceptional gain

Pursuant to a fire incident on 12 December 2016, certain fixed assets, inventory and other contents in one of the buildings were damaged. The Company lodged an estimate of loss with the insurance company and the survey is currently ongoing. The Company has recorded a loss of Rs 1,057 Mn arising from such incident and received disbursement approval of Rs 2,120 Mn from the insurance company till 31st March, 2021. The Company has recorded a gain of Rs 350 Mn and Rs 713 Mn on the basis of disbursement approvals in the consolidated financial statements for the year ended 31st March, 2021 and 31st March, 2020 respectively post the recovery on loss of Rs 1,057 Mn. Consequential tax on the exceptional gain is Rs 122 Mn and Rs 254 Mn is included within tax expense in consolidated financial statements for the year ended 31st March, 2021 and 31st March, 2020 respectively.

All figures are in Indian Rupee Million

(a) The Company has entered into external commercial borrowing agreement dated 21 September 2020 to borrow USD 50 million (Rs 3,660) term loan facility. The facility is borrowed to incur capital expenditure at Bengaluru, Hyderabad and Mangaluru premises of the Company.

(b) The facility carries an interest rate of Libor + 1.30% and are to be paid in three instalments of USD 7.5 million in September 2023, USD 12.5 million in September 2024 and USD 30 million in September 2025. The facility is secured by first priority pari passu charge on fixed assets (movable plant and machinery) and second charge on current assets of the Company.

(ii) (a) The Company has entered into foreign currency term loan agreement dated 30 March 2021 to borrow USD 50 million (Rs 3,660) comprising (a) USD 20 million (Rs 1,464) term loan facility (‘Facility A’) drawn on 31 March 2021; and

(b) USD 30 million (Rs 2,196) term loan facility (‘Facility B’) to be drawn by 30 June 2021. The facilities are borrowed to incur capital expenditure at Bengaluru, Hyderabad and Mangaluru premises of the Company. (b) The facility carries an interest rate of Libor + 0.87% and are to be paid in three instalments of 15%, 25% and 60% from end of 3 years, 4 years and 5 years respectively from the date of origination. The facility is secured by first priority pari passu charge on fixed assets (movable plant and machinery) and second charge on current assets of the Company.

(iii) (a) The Company had entered into external commercial borrowing agreement dated 30 March 2016 to borrow USD 100 million comprising (a) USD 50 million term loan facility (‘Facility A’); and (b) USD 50 million term loan facility (‘Facility B’). The facilities were borrowed to incur capital expenditure at Bengaluru and Mangaluru premises of the Company.

(b) ‘Facility A’ of USD 50 million carried an interest rate of Libor + 1.04% and was repaid in two instalments of USD 12.5 million in March 2019 and USD 37.5 million in March 2020 in line with the agreement ; and ‘Facility B’ of USD 50 million carried an interest rate of Libor + 1.30% and was repaid in March 2021 and the facilities provided were secured by first priority pari passu charge on fixed assets (movable plant and machinery) and second charge on current assets of the Company.

(iv) The Company has obtained foreign currency denominated short term unsecured pre-shipment credit loans of Rs 2,599 (USD 35.5 million) [31 March 2020 : Rs 3,089 (USD 41 million)] that carries interest rate of Libor + 0.20% to + 0.30% [31 March 2020 : Libor + 0.35% to + 0.60%]. The loans are repayable after the end of 6 months from the date of its origination.

**Others include income from support services, rentals by the SEZ Developer and release from deferred revenue for assets funded by customers over the useful life.