Bachem Holding AG (BANB) Earnings Call Transcript & Summary

Welcome. Welcome in Zurich. Welcome, wherever you are in Zoom around the globe. We appreciate that you take the time to spend with us today. My name is Kuno Sommer, I'm the Chairman of the Board of Bachem since 12 years. 12 years, Bachem, 30 years in Life Science, and I have to admit I have never seen a situation like this. I've never seen that the pharmaceutical industry is facing a potential paradigm shift, potential disruptive changes driven through this diabetes, weight loss and all the indications which are on the horizon. So there's a lot going on. We have seen the market increase, capital market increase, capitalization of some of the pharma companies involved. At least the market seems to believe as well that there is something going on. What does it mean for us for Bachem? I would like to share a quote with you. It's a quote of a C-level of one of the customer AB, which you don't know, which they are, who has visited Bachem, spending a lot of time with us with the Board, including Mr. Grot with the management. And this quote at the end, and I read you the quote so I have to read it. "Congratulations to Bachem on years of investment and growth that have you led to what I see as the perfect place at the perfect time to seize a great opportunity." It's flattening, but we take it seriously. And we, as a Board, family and CC, we are fully aligned to invest heavily into capacities. We are doing it. We will continue to be doing it and it's driven by committed orders. So we don't do it in the air. We have contracts behind. We have firm orders, mostly firm orders for the next years, decades to come. So it's a great journey. And as the CMDO, we want to have a balanced portfolio. So we don't want to be too dependent on one or two. So we work broadly in peptides and oligos to keep this balance because we don't know, you don't know, we don't know, who will be the winners of this race, which we just to be sure that we are in the middle of it. So it's clearly less business as usual for us. It's large scale for us, larger scale manufacturing. So we are scaling up. We are bringing in people who did it before. We are scaling up in engineering, in IT and in [indiscernible]. So it's also not busy as usual for our customers. All of them are in a new game. And they tell us what I have never heard in 30 years, they tell us, look, its capacity and time. Money is not important. This, of course, is a good message for us, money is not important for big pharma. So you will hear today '23, an outlook on '24, first outlook. And I think the next big milestone, we won across this CHF 1 billion in 2026, which is not so far away. We -- all orders basically are here. So it's up to us to execute properly and we are extremely confident that we will cross this line. It's a journey. It's a next milestone. I would not say the sky is the limit, but the journey will go on. And with this, I would like to hand over to the team.

Thank you very much, Kuno Sommer, Chairman of the Board. So before we hand over to our management, let me also welcome everyone again here in Zurich as well as on the Zoom call around the world joining us for our full year results. A couple of notes of housekeeping. We will have some time for Q&A at the end of the presentation. Those of you who are joining us via Zoom, please use the Q&A function in the Zoom to type in questions. It's open. You can type in anything already that might strike you we will -- and we've been in -- while we have the Q&A here in the room after the presentations. Also, this call is being recorded. So anything that is said here will eventually be available on our website, which we are very much aware of, of course, and I think you all are as well. With that, just a quick introduction to the next speakers, Thomas Meier, our CEO, is with us; as is Alain Schaffter; Daniel Grotzky, Head of Corporate Communications and IR. Thomas will give us an overview of the full year results, 2023, a look back. Alain will do the same from the financial perspective and dive a little bit deeper into the numbers, and then Thomas will speak a little bit about the market environment and the outlook for 2024 and beyond. And then we'll have adequate time for Q&A. We estimate about 12, 12, 15-ish for the entire event. We have, for all of those of you who are here with us today in person and [indiscernible], after that in room a little bit to the back, those of you who are joining us online, maybe it's an incentive for you to come and visit us in person next time. And without further ado, I'm happy to hand over to our CEO, Thomas Meier.

Thank you, Daniel. Thank you, Kuno. Welcome, everyone. Great to be back here in Zurich in the reader. We have been here before, and it's always nice to see everyone in person. Back to the world, back to the ground, what happened in 2023? We are excited about the results we have. It's top line, it's sales. We have seen CHF 577.3 million revenue, an increase of 8.6%. I'm sure you all have seen that. In local currencies, it would have been even better, but the Swiss franc is very strong. So it would have been at 12.8% and it's all based on a very strong second half of 2023, where we brought in CHF 337.5 million. The key drivers, and that's important, it's our pipeline. The pipeline delivered in terms of revenue, profit and the pipeline delivered for peptides and oligonucleotides. So that's very rewarding for everybody working at Bachem. And this pipeline also generates later commercial products and especially in the peptide field, we were strong in 2023. It's not only top line, of course, we are also looking at profitability. And EBITDA is at 166.7%. That's a margin of 28.9% and of course, hampered by very high and strong Swiss franc. If you look at the local currency, it would have an EBITDA margin of 30.5%. Based on that strong financial performance, the Board of Directors recommends to the general assembly an increase of the dividend paid to CHF 0.80 per share. Its revenue, its profitability. But right now, in a growth market, it's, of course, also capacity. So we are clearly focused on bringing on new capacity and bringing on this capacity as fast as ever possible. And we are focused on that. That is one of the main tasks we have within our company. We foresee that we can start commissioning of the first line in Building K within 2024. That's not our only capacity play we have. We build capacity globally. So we also build capacity in existing buildings, and that's true for the Americas, in Vista, in Torrance, and it's also true for Bubendorf, where we add capacity in the existing shell. That is important to make as much product as the market is asking us to produce. We also have the Sisslerfeld, where in future, expansion is happening. We are working on the paperworks, on the planning very soon, we will get active there, too. And we are over 2,000 people, full-time equivalents. We need good people, and it's very heartening to report that we find excellent people in the Basel area and people who are very keen to join such a nice team. And I would like to take that moment to say the entire team is here. The entire CEC team is here, Gunther and Torsten are sitting in the first-line row and are available for questions later. It is the top line, it's the profitability, it's the capacity, and it's all built on solid science and innovation, and our portfolio is the proof of the innovation. We want to have the strongest portfolio. We welcome any peptide opportunity, any oligonucleotide opportunity, but we take very good care that with all the projects we have, we learn and we deepen our knowledge. And we build clusters of knowledge where we want to be extremely strong and it's very nice to look back to know that we started with the inquiry teams many years ago. And it was a big challenge, and it was challenging at times, but we said we got the one -- we want to have a lag in that business. We want to understand it and it pays dividend every day. Looking at the numbers, Research & Specialties, 40.8, we see a decrease there by 10% in local currency. We see the CMC development, very strong showing with CHF 227.4 million, an increase in local currencies of 27.7%, remarkable. Commercial API, CHF 309 million, a plus of 3.4%. And this all adds up to the CHF 577.3 million, the highest revenue Bachem ever achieved. To achieve such results, of course, you need strong tailwinds. We have them in the market, no question. And we also have experienced some headwinds. You always have a mixture. So the tailwinds, there are originator peptides, first deliveries with long-time customers for long-time contracts. And also, and that's remarkable, our generic offering, generic peptides, very strong showing in 2023. CMC development, I think it comes without saying, 27.7% more. So the peptide landscape. And it's, of course, metabolic diseases, but it's much more, very strong. And most rewarding, I would almost say is strong showing in oligonucleotide development. We have seen very nice projects there. We see our equipment working, good collaboration with customers, very nice picture for the CMC for peptides and oligonucleotides. Then the headwinds, lower commercial demand for oligo products. We communicated that and a reduced demand also for small molecules generics. Tight capacity, it's a topic within the industry with Bachem, and we have seen some headwinds from tight capacity in the Research and Specialties field, that's why those 10% less sales were achieved there. Depicting here, we see first half year, second half year, the very strong showing of those CHF 337.7 million in the second half of 2023. And if you look at 2019 and you add those two numbers, you will figure out that in 2023, we achieved more revenue in the second half than in the full year of 2019. That gives you an idea how this company is growing, how the team is growing and how they actually deliver and we're going to continue on that path forward. Now comes to question now, you're going to have just one customer. Well, it is true that the red part at the very top on the right side, the others is shrinking relatively to the total revenue we have. But it's also true that the top 5 are 40%, around 40-ish. And I can tell you that none of them is in the double digit. So it's still a very broad portfolio, and it will continue this way. But make no mistake, it's also clear that if you want to go to the CHF 1 billion, there's going to be a certain concentration in the top 5 for sure. And that's good for the business, and that's why we need to reach our goals and targets. Coming back to the pipeline. That's the future. And as I said, it's really where we invest heavily with our own R&D money with a good investments in modalities, in trends, in clusters where we believe the future lies, and we are happy with our pipeline. It's now at 162 new chemical entities in there and it's a pipeline that delivers and we want to continue it that way. And we welcome opportunities in the peptide and oligonucleotide field, and we will grow this pipeline as we go along. And most importantly, we will bring them to the next phase, the 14 Phase III projects. They are important that we get commercial products coming out. Another pillar in our strategic priorities is sustainability. And as you can see, those values since 2020 for waste, for energy, and water consumption per employee is improving. We're going to continue to work on that and keep it as a priority. We get rated externally. We've got a gold medal, not just for one side for the entire group. And we are excited in the opportunities to improve how we do chemistry to bring peptides to the market. Capacity Building K, top priority for everyone. And what happened in Building K is quite remarkable. And in many ways, an example of what's happening to the industry overall. We started with the idea of a multi -- medium-sized multifunctional tights, building and equipment structure. In the course of that process where we were already constructing this building, we realized that the market is growing at a much faster pace than everybody expected. And we adjusted, we were agile enough to now have large-scale equipment being built in there. And I can tell you that everybody at Bachem is happy about that equipment that's in there. So we made that turn. It costed us a little time and a lot of work. And we are there to have the large-scale equipment ready to serve the new market that market within this paradigm shift Kuno just mentioned, and we are clear that we're going to commission and hopefully manufacture in the second half of 2024 on the first line in that building. And as I said, this is not the only capacity play, we add additional capacity in the Bubendorf site, in Vista, and we also increased the working hours of that equipment and the people in the site. Not the end of the expansion story, Sisslerfeld, the Swiss people probably have seen in the news. It's now all settled where The Street goes and so on. So a lot of work there into planning and how to build that up. And it's, of course, very exciting work and some folks behind us, say, faster, faster, faster. We're going to go fast, but we also are going to make sure that we do it the right way as we always state. We had an incident, a fire incident in Vienna in November, and I'm happy to report that the Vienna site is working again and the restructuring of the affected area is on its way. And with that, I pass it on to Alain.

So let's have a deeper dive into the numbers of '23, and starting from the key figures, Thomas already mentioned some, the EBIT of CHF 129.4 million in '23, where we have not talked about is the net income, which increased by 11%. There, we benefit now from a better financial result. On one hand, our securities performed better than we had in the last year in '22. On the other hand, we had more than CHF 6 million impact from the loss in U.S. dollars that low spot rate at the end of the year was a hit on our exchange rate and on the financial results. The earnings per share, CHF 1.50 and slightly diluted by the capital increase we did in March '23, 8-year open of that will be the announcement of the dividend we asked for the AGM as Thomas already mentioned. On the cash flow, CHF 250 million operating cash flow, which looks quite impressive. At the moment, it's almost 3x, but I will go into that deeper what's the main impact there. And -- but starting with the EBITDA margin, we had in '23 compared to '22, to a drop of 130 basis points. One was clearly the strong Swiss franc. So at local constant currency, the margin would have been 30.5%, slightly above the 30.2% that have reported and the starting point in '22. What was the impact for the decline, it's in COGS. So we also suffered there from higher input costs. So labor costs went up. We have higher supply costs. We have higher costs from starting materials and also a less favorable product mix, you have seen API was not that strong as CMC. So that was the impact there. On the marketing and sales, and G&A, the two green bars, we kept those costs on the proportional. So we invested also there, but under proportion to the top line, and that's why we have a positive contribution to our margin in '23. And very important for us in Bachem and Thomas mentioned that with the pipeline, we spent more money on R&D. We don't capitalize them. We leave it in the P&L. It's now 1.9% of total sales. Last year, '22, was 1.4%. So it's a clear investment in the future with the dilution on the margin, but we take that, it's taken decision that we need to invest there for the future. On the cash flow, as I mentioned, a very high operating cash flow before change in working capital, CHF 313 million. And maybe you remember, we always talked about how to refinance. We ask customers to prepay and to contribute to our CapEx. We have CHF 145.6 million as noncurrent. So that's the longer-term money received from customers, which we spend on the CapEx side, but that also clears the trust from our customers into Bachem that they are ready to provide money for the CapEx expansion. The change in receivables and accruals is, on one hand, based on higher sales as account receivables went up. And we also have due to the incident in Vienna that Thomas mentioned, receivable against the insurance companies that this incident is covered by an insurance and we already received money, but by the end of the year, it's a receivable about CHF 11 million in that number. The change in inventory, it's -- we need to provide, we need to make sure that we have the right material on time, but that's the increase we invest there for the future for the growth on the top line, which ends up in a CHF 249.9 million operating cash flow. What have we done with that money? We, on one hand, have spent cash on CapEx of CHF 268.4 million. And also for covering that, we sold securities in the amount of almost CHF 95 million to cover that cash need. On the financing, we did the capital increase with close to CHF 106 million net proceeds in March. And in April, we paid the dividend of CHF 56.2 million. That was the cash out there. So at the end, we had a positive change in cash of CHF 126.3 million in 2023. On the balance sheet, we see an increase in the working capital. So on one hand, we have increased our cash securities, which is cash-like block with CHF 30 million plus, and we also have a higher net working capital of CHF 51 million, which mainly comes from the inventory that we have increased there, but also the receivable part I mentioned before. The debt side, so we still have no external loans. We kept our financial independence and also from the capital increase, we are now with an equity ratio of 78%, which is CHF 1.3 billion by the end of last year. Talking about CapEx capacity. We had CHF 269 million CapEx last year in '23, which is 46.6% of our total sales. And this is needed. We need to spend that money. We need to increase our capacity, as Kuno, Thomas mentioned, it's always something we need to do. You see the secret over the last 5 years. That's a very important step to have the capacity to deliver on the demand of the market. So '23 past, looking forward, Thomas?

Coming back to the pipeline, looking at two main products, we have the oligonucleotides and the peptides. We are very happy where we are with the oligonucleotides. We are in the small interfering RNAs. We produce antisense oligonucleotides, and we have some oligomorpholinos in our portfolio. It's well positioned. That's always a great starting point. And then we built that business, as we always did, by innovation, by new ideas how to do the synthesis and by the close collaboration with our customers. The market might be a little softer than it was before, but we are sure we can capitalize on the investments we made and especially on the knowledge we build within our company. And it's going in the right direction and we are certain that this will bear fruits in the future. With the peptides, there are many positive trends, but one, of course, is right now so big that it is hard to see where this all is going. And I think it's important to mention it is not just weight loss. Weight loss is very important for your body. It starts with your chins, with your knees, but it goes in your physiological processes. We have seen the SELECT study of Novo Nordisk showing the cardiovascular incidents are massively reduced if people take GLPs, and that's not the end of the story. They also see the biomarkers for inflammation dropping by significant numbers. So you see ultimately that this will help people to live longer and I think this is a very nice situation to be in. The flip side is that the patients are waiting. There's not enough material in the market. There's a rush to achieve more and we are all in the pharma industry are new to this game. So we adapt and we move. And we move like we always do with the focus on quality, time and cost. And you see all those things happening around us, and they are vast. How much is getting invested? I think those are the numbers in the last quarter, CHF 6 billion announced by Novo Nordisk, CHF 2.5 billion announced by Eli Lilly, Novo Nordisk buying Catalent. So there's a lot going on. We're going to remain independent. We want to bring the quality to the market. I'm sure everybody appreciates our independence in delivering what they need. So our positioning is clear, deliver, have the quality, be fast. That's what's going to happen in the peptide market for the foreseeable future, I believe. And here are some more. And I think the second bullet point on the left gives you a real flavor that it is really not only those incretins. There's a PCSK9 inhibitor out there, an oral one based on peptides. There, the interleukin-23 get in development, Phase III, there's an interleukin-16 antagonist coming out in the labs of protagonists in California. And we see peptides in cancer. They have always been there. Now very strong again with Taraja Therapeutics. So it's broad, and I think it's going to be -- it's going to stay because they're very specific. Oligonucleotides, still waiting for the real takeoff of the larger indications. Like Vivo, a little bit slower than expected probably. But we see especially the lipoprotein A drugs coming up next. There is nothing in the market. I think they will pick up a little faster. And overall, there's a huge need for chemical synthesis, chemical synthesis of peptides on solid phase, in solution phase, in hybrid approach, and also for oligonucleotide. And that's where the knowledge of Bachem is. That's where the investment of Bachem and the team, the team that ultimately delivers that success. And then we have to trend to nearshore. I mean it's real. People want to move out of China. I think this is going to remain for a little while. And we have long-term partnerships. It's very rewarding how people are interacting with us, how they signal and also put their money [ where their mouth is ] that there is a long-term partnership for Bachem. What we need to do? I can repeat it, expand, expand, expand, keep the quality. And all this is, of course, a transformation. If you have seen that we made the full year 2019 revenue in the half year, you can imagine this team feels and act a little different. And we're going to continue on that way and take everybody who's interested along and add some external talent to achieve what we see coming. We have concepts. We have frameworks. Here, you see the trailblazing CDMO and CDMO on your right side, that's where we are coming from. That's where our heart is in. Everybody is always excited. And now we're building a CMO, a franchise, a franchise that cranks out the material that looks at operational excellence. And those are people that are coming in and they bring some new ideas, and it's very fruitful to have those discussions and move on and get successful in all aspects of that business. Kuno mentioned it, we have the contracts, and this is another depiction of how we see that. We have the business on the left that's there, the dark blue. We're going to keep this business plus/minus. We add some additional business, the light blue on it. And then we have the long-term contracts that's orange that are already in our hands. And if we execute according to our plans, we are north of that CHF 1 billion in 2026. I have all conviction that we can do it. But of course, it's not a given there are many days and steps that need to fall into the right spot, but we have the right team and we're going to amend it to make this happen. Comes the most interesting part. The outlook, sure everybody has already read it, mid-high single digits next year in local currencies, that's for revenue. Profitability. We see stable EBIT margin compared to prior year in local currencies. That means we based it on our current result, that's the 28.9%, and we say it's around there going forward in local currencies because the currencies we can't influence, we influence our operating performance. Outlook 2026, this CHF 1 billion, I explained how we're going to make this happen. And I also believe that we're going to be north of 30% EBITDA in 2026. Yes, that was it. Thanks for listening, and we're going to do the Q&A.

Okay. So thank you very much, Thomas. Thank you very much, Alain. We're happy to open now to questions, questions from either the audience here. [Operator Instructions]

[indiscernible] from [indiscernible] About the outlook 2024. If currencies would remain as they are at the moment, how much currency influence would it be on the top line and on the margin?

Currency question, Alain?

If we stay at the same currency level, then we have what we present as a guidance, mid- to high single digit. Did I get the question?

Well, because currencies developed strongly also in January and February, that's my question.

I mean, the January, February, now the dollar is the main part, it's 88 roughly, and we closed with 89 last year. So if it stays like this, I would say the local currency will then also be reported currency more or less.

And the other -- the next question is about oligos. You wanted to reach the CHF 100 million. Do you expect it to be in 2024?

Yes. We put that out ones to explain to you what kind of size we see in the market. We don't want to put out different numbers for oligonucleotides and peptides. So it's going to be included in the overall number. But we work as fast as possible in oligonucleotides. That's all we can say, and it's a healthy business.

Laura Pfeifer of Octavian. Two questions, maybe first on the EBITDA margin guidance. What gives you the confidence to reach this target? I think it's not unambitious to keep it stable, given that you are still in an investment phase, you have to hire personnel and you will also have the ramp-up, I guess, of the new site. So I think more color here would be appreciated. And the second one is on the CapEx. We have seen you spend a lot, 47% of sales in '23. I think here, we would appreciate if you could give some more insights, maybe where this will go this year and also the next 2 to 3 years, will it stay above 40%? Or what is here the trajectory?

Laura, I appreciate your comment about the profitability. It's an ambitious goal and we take our confidence from the past that we could deliver and very good cost control. That's how we want to achieve that in combination with a good operative business model that we have. On the CapEx, Alain?

We expect that '24 will be higher than this year. I would say, about 15% maybe even more than this year, so in '23. On the long term, I don't like to give a certain guidance because it's changing a lot right now. But what we want to say is that we have -- as we have proven now our customers who also support us financially in that case, and it depends also a little bit like that. But it will be more expected in '24 than '23.

Okay. We have plenty of time for questions. I'll take one from the online audience, Vineet Agrawal, Citi. I have a couple of questions here, but I think I'll take the -- 2 here that, I think probably maybe a couple of other people's mind, can you comment on exactly when do you expect Building K to come online? That's the first question. And then your 2026 guidance implies close to 30% revenue CAGR between; '24 and '26. What sort of growth have you assumed from Building K and what's the ramp up -- what is the ramp-up going to look like?

All right. I'll take the first one. We exactly believe that in the second half of 2024, we will start the commissioning work in Building K for the first line, and we hope that we're going to produce in that line in 2024, that's all we can say. There's nothing else I can add to that. Everybody is focused on achieving that goal, and we are optimistic that we will hit that exact time line.

Second question is what sort of growth are we assuming from Building K in the longer term with the context of the 2026 CHF 1 billion guidance?

I think we were outspoken on this that we expect the revenue coming out of Building K to be in the range of the revenue we're achieving in the large manufacturing building in Bubendorf.

Questions from the room. I think over here, Barbora Blaha.

Barbora Blaha, UBS. How much ramp-up cost to you capitalize? And what would the EBITDA margin look like this included?

I'll tell you the number and you calculate. It's about 10% from our CapEx is own work capitalized.

Okay. And then second question, you wrote in the press release that a part of the large volume contracts announced in '22 will be reduced. Is there any risk of cuts in '25 and '26 of these volumes to be cut as well? Or is this...

Yes, I understand. I guess I understand. The question is, are we going to be able to deliver on our targets going forward? And I think we strongly believe that we can do it. And as I told to you, is not a walk in the park. It's challenging to get it done as quickly as possible and we are in a situation where the patients are waiting. So when it's ready, we're going to produce. And we try to plan as diligently as ever possible. And I'm optimistic that's all -- and I'll tell you more in August.

But from the customer point of view, you don't see the risk that you will -- because you have not delivered the required amount.

That question is I'm not the right person to answer that, but I see the market the way that right now, everybody is happy if we can help the patients to get their medication.

Anja Pomrehn.

Anja Pomrehn, Mirabaud Securities. Two questions, if I may. Coming back to Building K since we don't want to give us a little bit more of a precise date sort of when it comes online, can you then provide us, do you -- can we expect that the building will be at "full capacity" in '25? First question.

The Building K will not be at full capacity in 2025. That's not our plan. We're beginning this modularly going. This is not seen in the industry, but you built a certain part of it. And then the other part is still under construction. It's a time-controlled project.

Okay. And can you then help us when would that be all terminated?

I hope that everything is in operation in the '26, '27 time frame. That's what we are seeing right now. And as I said, we're going to continue to go as fast as ever possible.

Okay. And then in terms of the long-term guidance '26, I mean you guide there an EBITDA margin above 30%. Is that also in local currency? Or is that reported? Can you clarify that, please?

It's a long time to go. If I would know what the rate is. Right now, we base on actual rates for our budget for our forecast. Whatever the dollar will do, we are confident that even with that lower compared to the past, we can achieve that margin and that top line.

Okay. Further questions may be for this side here. We'll probably down.

[indiscernible]. And again, Building K. You start the commissioning of the first line and then the first line should go into production this year. What exactly does it mean commissioning? Is it test runs and how many lines will there be ultimately Building K?

All right. The commissioning is the first step where we try that the equipment works according to specification and then we go into operation. That's the step we have to do. And look, there's a lot going on in this building. So we give the best forecast we can ever do. And as we know more, we're going to let you know. And the second question is how many lines are in there. I think it is -- I don't know what -- there are several lines in there. There are different units, and we -- and we're going to serve a bunch of products coming out of that building, oligonucleotides and peptides. We have major contracts in place, but there is still room to add other contracts and we also have to see how those contracts develop. Right now, it's really the time where we get it ready and it's getting sold as we produce.

Okay. Finance question here, again from Vineet from Citi online. How much of the ramp-up cost is capitalized and then what is the estimated FX impact to 2024 EBITDA? I think we just had that and what would EBITDA margin guidance look like, including that, I think we gave the guidance, but ramp-up cost, capitalization.

As I mentioned, about 10% of the CapEx is on work capitalized.

Good. Questions from the audience. Over here in the back last row, yes.

[indiscernible]. Three questions. I'm quoting there from the preview for the results of polypeptide that was done by Zurich Cantonal Bank, and we read there and quoting in German, [Foreign Language] Is it that dangerous with it to be in this game? I mean that so many things can go wrong that you might really lose your existence. That would be my first question. Second question, how about this [Foreign Language] I mean, obviously, this also involve peptides, I understand. I mean Galderma is now going public. I mean, have you -- are you working also on these products? Or do you have to maybe reduce that a bit because of the [indiscernible] you have now talked on. And if you allow a last question, you've mentioned like real, which is going a bit slow for Novartis. Are you working for this product as well?

All right. There's a bunch of questions. I start at the end. We will not tell which products we are working on. This is normally confidential with our customers. Some products we mentioned before because we're at liberty to mention. The second one was about...

Botox.

Botox. Yes, that's right. Those are peptides. Most of them are not produced by chemical synthesis. Some of them or similar ones are. And the third one is about the danger in Belgium. I don't know much about that. I think you need to ask the experts at such [indiscernible]. We take -- we do everything possible to have a safe operation.

And I think the question was how risky for the company survival is a ramp-up that.

Exactly. I mean, is it so demanding that you can -- that your existence can get on the brink?

I don't see that risk for Bachem. That's all I can say. But it's important that we get it right. I mean, you guys are going to ask me better Building K is running or not.

So just to those who are with us online, please feel free to keep giving us questions. Further questions here in the audience. I was just looking at anyone who has. Down here, last one, the second row, yes.

[indiscernible]. Not about the Building K, but about Building G, for a change. I was a bit surprised. A year ago, we had a discussion that Building G is 100% -- nearly 100% utilized. And now you just have new equipment. And with that, you feed some key accounts just -- which is good for you, but I just don't understand how that's possible. How big that could be?

Yes. All I can tell you is that we are still working on additional product trains in there. They are fully -- the Building G is fully utilized. The equipment that's in there is running at a high capacity utilization, I think that's the message we wanted to give you back then. We were still building new reactors.

But you have a lot of additional space in this G?

But what is a lot? So we can build in substantial reactors there, and that's happening, yes.

Okay. And last question, second. The exposure to radiopharmaceuticals, you mentioned. Can you explain that a little bit to me, as a nonscientific guy, what your role is there?

I did not mention that we have a role there. I mentioned that those products also use peptides. I wanted to give an overview of what's happening in the market. And those are peptides that then get loaded with radioactive warhead that go into the cancer cells, it's wonderful drugs. And I mean, you also see the revenue at Novartis. People were working on that for many years, and it's another example how those peptides are a real wonderful modality to make meaningful drugs.

But that's an opportunity for you.

That's a peptide. And I see all peptides as potential opportunities for Bachem. It's vastly smaller than the weight loss. If you look at the demand of material you needed, it's a totally different ballgame. And maybe I would like to come back to Mr. [ Felger's ] question. I think the capital structure of those two companies, a little bit different, and that could add a bit of understanding why there's some kind of comments in set copy. But I don't know, it is just an interpretation.

Okay. A question -- two questions here from the online audience, Charles Weston with two questions. First one, did you benefit from generic GLP demand in 2023? Maybe Thomas on the generics. And then the second question is, what is your outlook for pricing and inflation in '24 and how much did pricing contribute to 2023?

We're not going to break out which products we are working on and what the performance of those products is. As I mentioned, we are in the GLP field for a long time, and we are happy that we made this early entrants into that field. Inflation. You know that.

I mean inflation was, of course, also hitting '23 for us. We see now, especially in supply, so electricity, gas prices going down. So we don't expect there a huge jump in '24 again, but it's sure something we have to keep an eye on, but we see inflation going down. So we also expect that it has not a big impact on our '24 numbers.

Good. Question from the audience. I saw some more questions here in the row to the right, I think it's left to me back there, in the window.

[ Andreas Merkle ] [indiscernible] in Basel. I have a question about the CapEx spending. Can you tell how much has been done in Bubendorf, roughly? And also maybe the new employees, how much of them are working in Bubendorf and in the rest of the world?

I don't have the number by Bubendorf, I know we have put about -- of CHF 270 million, we have about CHF 233 million spending capacity increase, which is the main part is in Bubendorf, but I don't have an exact number by now. And for the employees, we are 1,500 in Bubendorf right now.

Question on the other side?

[indiscernible]. My question is around this first GLP-1 client that is now -- will be harbored in what they call. How much -- so you initially guided for CHF 150 million or CHF 125 million incremental sales in 2024. Obviously, the building is delayed. How much of this revenue can you generate in the other buildings? And what does it mean for the other clients? Will you have to postpone other projects because of that?

Yes. We communicated that we will deliver the product out of the other building and the amount is included in the guidance we gave you. That's all we can currently let you know on this. And the second one is we are diligently working to serve as many customers and contracts as ever possible.

More questions? [ Jena ] here in the third row.

If I look at your preclinical project numbers -- sorry, UBS Asset Management. I saw a drop in the preclinical project numbers. Is this advancement to Phase I? Is this stopping from the clients? Or is this you deprioritizing preclinical work?

All right. Yes, that's right. And if you look carefully at the numbers, you see that Phase II has a drop of around 10%. As I said, we entered new entrants in there, a substantial number, and some of them were taken out, especially in Phase II. And then the gas work starts, whether the Phase I was progressing a little bit slower because of the financing environment, this is hard to say. But it's really nothing we are concerned about. We keep this as the mainstay of how we want to grow the company, it's our pipeline. We want to have it strong, and we take every peptide opportunity very -- and oligonucleotide opportunity very serious. And I would say the field of peptides and oligonucleotides as Kuno stated, is really going very strong on all angles for approved products, but also for preclinic. And it's, of course, metabolic diseases, but it's much more. That's the message I wanted to send out also with many of my statements. That's how I see the space.

A show of hands. I see Barbora Blaha there and then hopefully, Anja with another question. So follow-up questions here and there.

A bit more in the future. So because of the IRA in the U.S., the Ozempic and other diabetic peptides will most likely experience a price cut in '28, a mandatory price cut. Would this impact your sales? Or do you say the percentage of the API is so small, it does not impact you or you expect a higher demand, which would balance this off? Does this at all has any impact?

Price negotiation is an effect of life. So this will happen. We will work on our cost structure. That's what we can control and we will see what happens here.

Yes. And then over here.

And those big contracts, do they include any damage payments in case Bachem cannot deliver what was agreed upon? And if yes, is there -- could there already be, say, damage payment in this year? Or could it be next year or...

Okay. I think it's understandable that we cannot talk about contract details, but we need to put open because of regulatory we do and the rest is confidential.

There's one more question here from [indiscernible] and then I have one more from the online audience.

So I think another non-GLP-1 question. With 27% growth, which is spectacular in the CMC development, how long average big picture, does it take for molecules to move from CMC development into commercial production, 5, 7 years?

I think it depends where it is. In Phase III, it's relatively close in the earlier stage, it takes longer. Typically, you say it takes from preclinic to a product about 10 years, but this is vastly -- it can be a lot faster. And I think some people are explaining to you how long they take and that -- those are smaller numbers.

I have a question on net working capital. For Alain, net working capital is running around 65% of sales. Should we see this remain fairly constant? Or are there steps being taken to improve this?

I think we constantly try to improve our working capital. We also have our customers who contribute cash-wise, our working capital that we can buy material starting. It's a constant review. It's a high number, yes, but we have to be especially in the inventory be ready for the future, having the right material on time and have ensure a proper supply chain.

Okay. Further questions here yes.

Have an additional question relating to the one just asked before, does AI and the capability from a hardware perspective, the speed, will that fasten the process to get from preclinical to Phase III? Or i.e., the designs and the search for better molecule, better structure, will that be influenced positively by AI?

I think we all hope that it has a big impact on a paradigm shift on the industry. I'm not the right person to answer that question. I think it holds promises. I don't see much. How the clinic is set up, to me, is still the most important part and how AI is helping there, I'm not quite sure. But maybe one of my colleagues would like to comment on this and there's nobody. Okay. What do you think?

Another question here from [ Dan Jelovcan ] and then again, [indiscernible]

Just one. Can you be a bit more specific about what you mean with large-scale equipment in Building K? Do we talk about 2,500 liters reactor or was the biggest -- and do we talk about continuous manufacturing or just a bit more technical, if you are willing to share?

That's okay. I think we mentioned that we have a 3,500 liter reactor getting installed there. No, it's installed and so it's in there. We go bigger. How big is the right big that will be seen. It's not only the upstream. It's -- we are also working very diligently on the downstream processing. I think we are many times on record that we believe in continuous manufacturing, especially for chromatography. So a lot of this is happening. And as you can imagine, this industry is looking how we're going to do that for the next couple of years. We need to get greener. We need new technologies. And it's a very fascinating time. I think we are not only scaling out and scaling bigger. I think we are going to see substantial improvements our peptides are manufactured and we also put effort in finding better and new ways to do it. At the same time, we scale bigger, of course, for the immediate future.

And then you need more a couple more reactors or [indiscernible] that?

Well, right now, you can use all kind of reactors. Of course, yes, we will not stop GLP-1. The context -- we just discussed it, we prefer incretins right now. It's the entire group. And yes, everybody is investing. What we are doing is small compared to what other people are doing, but you need to do it. You need hands, you need brains, you need capital. So you need to put everything together. But that's our expectation. It will not stop at CHF 1 billion. I think this is clear.

There is a follow-up question [indiscernible]

Maybe just quickly coming back to AI, how about Bachem then? I mean, how much are you currently investing in this field? I mean, we hear that there's a lot of talk about companies that are actually not doing much.

No, of course, we are working very hard at least in the companies I visit. We're into automation. Automation is important. And it's not a small thing to automate a couple of equipment sensors and getting the feedback loops, right? And I think there's a lot of efficiency you can read, but it's a nice task. It's a nice task. And all I can really ensure you is that we are working very hard to get that right. At the same time, we need to be fast, but for automation, I'm sure this will influence how we produce over the next 10, 15, 20 years and in the immediate future, that that's happening. And it's fascinating. I mean how you manage data, what kind of information you get out of those systems. This is great. This is great. That's true for the science in universities, and that's true for the manufacturing science we are doing in Switzerland. And it's clear, it's better for the planet. It's better for the people. So this is a positive, but we should not underestimate the challenge ahead of us to achieve this.

So one question from the online audience. This one goes to Alain. Once Building K comes online, the capital cost will be reflected in costs. So will this put pressure on EBITDA 2025? I know we're not giving you guidance, but maybe the capitalization costs.

And the capitalization cost for that year, of course, will go down, but there are other projects we can use the people in the future.

Any other questions? Okay. See less hands now, but one from [indiscernible].

I have a question about CDMO peptide markets. Do you have a feeling about how much the -- about the size of the market? And secondly, did you gain market share? And what is your expectation for the market growth of the CDMO peptides?

Yes. Okay. I don't have much data on top of my head. The question is what's the market size for the CDMOs. It's growing double digit, for sure. That is where I would put it. I don't know if one of the colleagues want to give something more precise, doesn't seem to be the case. There's also a lot of investment going on in the larger pharmaceutical companies. So some will be absorbed by in-house manufacturing. And I think all CDMOs are challenged to grow as fast as possible as long as they bring the quality the customers need.

And do you see more competitors entering the market like [indiscernible], who announced they want to be more active in peptides in the next years?

Yes, you see a lot of investments going on. I think I read yesterday, Almac is investing and EcoVadis investing in R&D. The -- they also want to be a little bit earlier. The excitement is broad. And of course, it attracts capital and colleagues.

Okay. It looks like we have exhausted the questions that are urgent in the room. So thank you very much, also online. And think -- thank you very much to Thomas and Alain, for the input. We have a little [indiscernible], which is scheduled, I think, for 12:15-ish is when food should start being available. So until then, feel free to mingle, have a chat, grab another coffee and drink. Thank you very much all for attending today, and we look forward to seeing you again for our half year results.