Lonza Group AG (LONN.SW) Earnings Call Transcript & Summary

Welcome to the Lonza presentation here at the JPMorgan Healthcare Conference. From Lonza, it's my great pleasure to welcome the CEO, Wolfgang Wienand, who will lead the presentation. And that will be followed by Q&A where the CFO, Philippe will join us as well. Without further ado, I'll hand over to Wolfgang. Wolfgang, welcome.

Yes. Thank you very much, Zain, and a warm welcome from my side as well. I'm happy to talk about One Lonza today and how we actually drive long-term value. But before we go into the presentation, let's have a brief look at the safe harbor statement. Please take note and feel bound to it. What are my key messages for you today? First of all, we have a clear strategy for value creation and as part of that, of course, for capital allocation. I'll talk to that during the presentation. The Lonza Engine enables us to outgrow our already attractive underlying markets. Thirdly, we operate the leading global CDMO network and are well set up to support regionalization desires of customers of their supply chains. And lastly, we continue to invest across technologies and across the globe to support our customers' growth journey. And by doing so, growing strongly ourselves. So the agenda, a quick look at Lonza, where we are today, then looking at the financial model, its key business drivers and actually going through 2 of them, which is strong top line growth, investment in growth, just to close out in the end with the financial model again and what you can expect from us in the future. And with that, let's start with a quick snapshot, and I will actually not take you through every detail here, but essentially, 3 key messages plus evidence supporting those claims. First of all, we are the leader in the CDMO space by revenue. We're actually increasing profitability, and we look at a very well-balanced business in terms of regional revenues and also a very well balanced portfolio in terms of customer types. So roughly 50% for small and midsized pharma companies and large cap pharmas. We at Lonza can essentially serve almost any key modality in any phase across the globe. 8 technologies within Lonza, which we apply across our global network of -- I mean, essentially, it's more than 30 sites. But if you look at sizable capacities, sizable sites, it's actually around about 20. We at Lonza, have a strong track record of outgrowing the market, a CAGR of 12%. We currently manage a significant portfolio of growth projects. And we have supported over the last 5 years, around about 80 pharmaceutical assets being commercialized, being brought to the market. But now to Lonza and what actually drives us and what is at the core of everything we do, in a way our North Stars, it's our vision. We are the pioneer and world leader in the CDMO industry, setting the pace with cutting-edge science, smart technology and lean manufacturing, a rich statement, which actually is very useful and educates ourselves and others about our ambition, what we want to do and what we don't want to do. By saying CDMO industry, we kind of implicitly took the decision that actually CHI is not the right business for us. While being a great business, we are not the best owner. We also make the claim to actually be world-leading across modalities, across the biopharma value chain, the product life cycle, but also world-leading in terms of value creation. What does it take to actually create superior value? First of all, you need an attractive underlying market, which provides you with opportunity because otherwise, how to create value. Then you need a business model which enables you to translate those opportunities into real value. In our case, it's a CDMO business model. But so far, no differential really, right? I mean every company operates in the same market, and there are other CDMOs out there. Obviously, in order to create superior value, you need something special. Our magic Lonza Engine, which actually is kind of a composition of what we think makes us different and as a combined offering to our clients puts us into the position to provide superior services, which then translate into very attractive business opportunities. It's actually 5 elements: high-performing teams, a leading scientific, technological and digital ecosystem, unparalleled customer partnerships, end-to-end execution excellence and lastly, plug-and-play investment and integration capabilities because we constantly need to actually add people, add technologies, add capacities in order to grow at the pace at which we can and expect to grow going forward. Just -- I mean, not in order -- in order to not just make claims, I brought some evidence for each of those elements of our One Lonza Engine. First of all, high-performance teams. We -- I mean, like every year, twice actually do a voice of employee survey to kind of test where we are, what are the teams thinking, what are they doing? And just to report a few, I think, impressive figures here among the top 200 leaders, you see 95% strongly support the One Lonza strategy, the One Lonza purpose and the One Lonza mission. Engagement index, well above 80%. And very important, we -- I mean, on the 1st of April, we introduced a completely new target operating model with a lot of change with the exception of myself, CEO, CFO and General Counsel, almost everyone of our 200 leaders actually sitting on a new chair with a new responsibility. But still, in October, role clarity was 88%. I think remarkable. Leading scientific, technological, digital ecosystem. We at Lonza brought with our GS System in Biologics, more than 100 molecules to the market and actually worked on 2,000 unparalleled customer partnerships, while being market-leading in terms of Net Promoter Score already last year based on the new target operating model with the strategic enterprise account management and many other changes, we have been able to even increase this a good figure, times 2 for big pharma clients and by 50% for small and midsized pharma companies. End-to-end execution excellence. So our view on what can be an attractive offering besides the individual nodes of drug substance, drug product, which is integration. Drug substance and aseptic drug product manufacturing, significant increase of activities of such integrated offerings in the Biologics space. Integration capabilities, 2 obvious examples, Synaffix acquired in 2023 with integration and this business running at full steam already in Q1 2024. And of course, Vacaville, 1.5 hours away from here, and I'll speak to that later with the integration successfully accomplished mid of 2025. So also for those of you who followed Lonza a little bit more than 1 year ago, I, together with Philippe, we shared at our investor update mid of December, the areas where we actually want to work on and make promises in terms of pushing our company further, reshape, elevate, focus, expand at the time. Reshape target operating model, done. Elevated quality to the Executive Committee, new business platforms and all that worked very well. Elevate in terms of asset construction because that's actually key for us to continue to grow. And also there, we are making strides and good progress in terms of being faster and getting more efficient in terms of how we spend our funds. Focus, exit of CHI, which is well prepared now. The legal entities are separated, all systems, IT processes are separated as well, and the exit process is underway. And with that, I actually want to turn to our financial model, the flywheel, which is one of a compounding defensive growth company. That's how we see ourselves from a financial perspective. First of all, strong top line growth, which then we need to translate into margin, expanding margins, which then lead to cash generation. That cash we can then use to either, I mean, kind of incentivize and share with our shareholders or to continue to invest into the next capacity, next technology to then actually continue to grow and on it goes. So what are the drivers behind that? Obviously, revenue drivers, margin drivers, cash drivers, growth drivers. I will speak today about the upper 2. First of all, revenue drivers, innovative pharma pipeline, which is a source of growth opportunities, manufacturing outsourcing trend, which, in our view, will continue to prevail and will continue to be happening. Active market selection, regionalization. Growth drivers is organic growth, CapEx and M&A. What I don't speak about today, but you can rely on this being a super focus of myself is, of course, to kind of expand margin over time and make sure that we actually are very, very mindful about, I mean, how much cash we actually earn and how we spend it. I'm very serious about that myself, but not the topic for us and here today. So strong top line growth. how do we define our growth potential? And here, we see it on the left-hand side. First of all, the underlying pharma market itself is an attractive one, not very cyclical, growing at 6% to 7% a year in terms of value. Then there is this additional growth increment available to companies like Lonza, which is the increase of outsourcing of captive manufacturing of pharmaceutical companies to partners like Lonza, 1% to 2%. Active market selection. So that's our choice, our decision where to invest into which technology and which subsegments of this underlying pharma market we want to address. And by carefully choosing the most attractive spaces, we actually add another 1% to 2% growth increment, which leads to a growth of 8% to 10% on average over time of the CDMO market addressable by Lonza. And then there's the Lonza Engine, which kind of makes us special and adds to our capability that actually enables us to outgrow by another 2% to 3% so that our view based on the conditions that we see today to Lonza on average over time, there is a growth potential of 10% to 13% available. That's actually what you have seen at the very first slide being kind of our historic performance as well and is the centerpiece of our so-called Lonza CDMO organic growth model. So I've spoken about choices that we made at Lonza. And on the top, we actually see that, I mean, the pharma market itself, USD 1.2 trillion and the clinical pipeline of more than 7,000 molecules growing at 9%, while the underlying market growth at 7%. And Lonza did make choices over the last years in terms of which technologies to serve aid in our case and actually where to play in the life cycle of a pharmaceutical product where we actually cover and offer services from early phase discovery through clinical phases to, of course, then in the end, commercial large-scale manufacturing. If we apply those filters, those conscious decisions, then we are looking at an addressable market for Lonza of around about USD 100 billion, growing at the previously mentioned 8% to 10% and us being able to actually address above 90% of the innovative pharma pipeline, so we can actually make offers and look at what's happening in pharmaceutical innovation for a very, very large portion of the pipeline. So that's one view. Then I said continued outsourcing and 2025, as we all know, being a very exciting extraordinary year when it comes to pharmaceutical supply chains and actually who does what and who does what, where. And we decided for ourselves, of course, listening to everything that has been published and talking to our clients about the future and how they want to work together with Lonza, we decided to take actually a cold eyes view and ask ourselves, what does it really mean. And in order to do that, we -- I mean, got back to official figures, I mean, official public figures, Bloomberg consensus estimates for forward-looking activities of the top 20 pharmaceutical companies and of course, actual historic figures. When I said top 20, we decided to actually exclude Eli Lilly and Novo Nordisk, not because these wouldn't be great companies, but because we wanted to normalize for the special effect of the catch-up investments for GLP-1 API, which actually kind of distorts the whole picture slightly though, but still distorts the picture. So if we look at 2 KPIs here for large pharma, top 20, first of all, for the time horizon from 2015 to 2025, I kind of assumed actual and then further out to 2030, just the absolute CapEx amounts spent by those pharmaceutical companies, we actually see a historic CAGR of around about 3%. And also based on consensus forecast of Bloomberg, this is going to be 3% over the next 5 years as well. So no big change in expectation. Second KPI or second figure we looked at is the ratio of that CapEx divided by sales. And here, we see the range being between 4.5% and also going forward, 5%. So also no visible significant change. So that's big pharma. And there's the other portion, very important of the pharmaceutical universe, which is small biotechs and midsized pharma. And here, we kind of got back to the pharmaceutical pipeline and ask ourselves who is contributing what. And here, we see that actually the number of molecules, innovative molecules being contributed by small biotechs, midsized companies is actually growing over time to -- and is expected and actually is in 2025 at 75%. Why is that relevant? Because just by the model, by the setup, biotechs actually don't invest in own manufacturing capacities and capabilities, and they shouldn't because every dollar probably is best spent in terms of innovation and creating value there. So our conclusion from all that is, first of all, it's not a surprise if you really think it through, that the strong economic rationale to outsource to capable CDMOs actually is unchanged, will continue to prevail. And we actually don't see a relevant trend change in terms of pharmaceutical companies outsourcing manufacturing to capable CDMOs like Lonza. What is, of course, or most likely happening is that the kind of capital allocation takes place at different places, and there will likely be a preference of the pharmaceutical companies to actually create additional capacities in the U.S. That speaks to regionalization. And here, as Lonza operating a very well-diversified global manufacturing network, we actually see ourselves in a good position to serve and help our customers in their desire to regionalize their supply chains if they will. I spoke about our global network here. I won't go through all those sides, but you essentially see that there is a significant presence. And it's actually true since 25 and 30 years already in the U.S., East Coast, West Coast. There is obviously also a strong presence and quite an amount of capacities within Lonza in Europe, but also in Asia. And that is the outcome, of course, of many, many years of investments. But considering the last 5 years, Lonza has spent roughly CHF 10 billion overall across the world, across technologies to further strengthen our network and build that network that we are looking at out of which CHF 3 billion over the last years already went into the U.S. This slide, I leave for you to read, which is kind of commenting and putting into perspective our activities across different technologies. and different stages in the life cycle of a pharmaceutical product. All that leads to a current business portfolio within Lonza, which comprises of more than 1,000 different molecules across the different stages throughout the product life cycle. And we actually start in many, many cases, early on with early phase of Phase I development and then assuming clinical success, of course, bringing those molecules to market together with our clients with a retention rate throughout the phases if clinical success is there of 99% and above, which essentially means once with Lonza, people stay with Lonza because we can provide great services. Of course, there are drop-ins coming from left and right, either from captive manufacturing internally as pharma companies or from other CDMOs. That leads to an attractive mix in terms of customer types, which is more tilted towards small biotechs in the early phases, not a surprise because there are more opportunities out there. And later on, large pharma companies comprise or providing the highest portion of revenues. So that's actually what we see in terms of our business. Now how to make sure that we continue to lead the market, that we continue to be able to offer our clients what they need, and that is about investing into growth. At Lonza, we are currently managing a portfolio of 23 growth projects across the world, across different technologies. And Lonza is a company based on the high-performing teams I've been speaking about at the very beginning, which actually is able to efficiently build, to efficiently construct and to efficiently operate assets all around the world, in Europe, in the U.S. and also in Asia. A few highlights, a few projects from that portfolio 23 growth projects. For one, a Commercial high potent API manufacture drug substances facility in Visp, actually medium-sized CapEx project being started up in 2025 and already contributing in a very nice way to our 2025 performance. Peak sales are expected prior to 2030. And also in Visp, a large-scale mammalian drug substances manufacturing facility, 120,000 liters, obviously, a large CapEx project, started GMP production in 2025. And here, we will actually step-by-step ramp up and expect peak sales around 2030. Another example, kind of closing a gap that we had before in the area of aseptic fill and finish services. Here, we are investing in a medium-sized CapEx of project in Stein into highly flexible filling lines, different technologies. And this capacity is expected to start in 2027 with peak sales in the early 2030s. And then a pleasure to talk about Vacaville. Obviously, a great fit to Lonza acquired at a great point in time. And by the acquisition, we actually created the largest U.S. CDMO mammalian network in one go in 2024. Acquisition price, CHF 1.1 billion at the time, and fermentation capacity of 330,000 liters. So it's really one of the world scale, the very few world-scale sites existing on this globe and closing was on the 1st of October. Peak sales expected in the first half of the 2030. Let's quickly go through some highlights of that acquisition. We -- and that we kind of knew, acquired a very capable and strong team, super low attrition. People there embrace the opportunity to work within a company where actually manufacturing is at the core of what we are doing, very low attrition, and they like to work together with leaders and subject matter experts from our global Lonza network, and they're actually ramping up and creating CDMO capabilities in a great way. Integration worked very, very well across processes, standards, IT systems. We are fully on track. No relevant issues there. Also end of last year with our first and actually very successful U.S. FDA audit under new ownership, which is an important step, of course. But here, we could actually build on the strong quality track record that Vacaville under the Roche ownership already had, but of course, relying on the strong quality mindset of Lonza as a whole. High customer interest, 4 contracts signed, more in the making. I myself will actually go with 2 potential clients or 2 clients to Vacaville tomorrow and on Thursday and look forward to actually present this great site, the 2 potential new products, potential new customers. High-quality assets. So what we bought from Roche was a high-quality asset already. We don't need to do anything about that. The investment of roughly CHF 500 million is about increasing flexibility and turn it into a CDMO, into a highly flexible CDMO operation when it comes to automation and also spaces so that we, in a better way, can parallelize our manufacturing and become more efficient. But all that, I mean, aside, I just want to cite a great quote, which kind of reflects what the team is doing in Vacaville, "A truly seamless tech transfer into Vacaville — execution at a level I've rarely experienced in my whole career." Spoken by a senior external Head of External Manufacturing of a large pharmaceutical company. I think it speaks for itself. And lastly, kind of concluding in terms of capital allocation, how we look at that and the financial model and the CDMO organic growth model. First of all, we, of course, need to generate cash and then need to invest into maintenance, repair systems, then we actually distribute to shareholders, of course, dividend. Then there will potentially be proceeds from the exit of CHI that leads to discretionary cash available for us to make choices and to invest into Lonza's future through organic growth, growth CapEx or M&A. And we actually apply this framework in a very rigid way with clear expectations in terms of returns. We don't like fluffy synergies. We want to be very clear in terms of creating value, and this is what we actually do. What does it mean in terms of investments to be expected going forward? Based on our CDMO organic growth model, you can actually expect us to invest well above CHF 7 billion until 2030. And the majority of this amount of money will actually go into future growth. And with that, I actually want to close with the CDMO organic growth model. On the left-hand side, you see our magic, the Lonza Engine, which actually leads eventually to an underlying market addressable by us of 8% to 10% plus the growth -- plus the Lonza Engine increment of 2% to 3%. In order to actually turn those opportunities into value, we need to continuously invest into our systems, maintenance, mid- to high single-digit percentage of sales and into growth, low teens of sales. And if we do that and as long as the conditions are as we see them today, our CDM organic growth model kind of expects constant exchange rate sales growth of low teens on average over time and an expanding core EBITDA margin, so margin growth ahead of sales. For 2025, we actually upgraded our annual guidance together with the half year results in July to a constant exchange rate sales growth of 20% to 21%, including around about CHF 0.5 billion revenues from Vacaville and a CORE EBITDA margin of 30% to 31%. And I would be happy to actually see or meet as many of you as possible on the 28th of January when actually Philippe and myself will actually reveal and report our full year 2025 performance. And with that, actually close the presentation. No, I don't close. I share my key messages once more, which is we have a clear strategy. I hope that became clear for value creation. We continue to outgrow our attractive underlying markets. We have a strong global network and will further strengthen it. And we, as One Lonza have made progress as promised a year ago. Lonza is set up for success. We are One Lonza, the pioneer and the CDMO market leader, manufacturing the medicines of tomorrow for our customers and their patients worldwide. And now I close and hand over to Zain. Thank you very much.

Thanks, Wolfgang, for a great presentation. And I'd like to welcome Philippe Deecke, the CFO of Lonza as well to the stage to join us for the Q&A. [Operator Instructions] I've already had a couple of questions that have come through. One question is on Vacaville. And I think you've said in the presentation, 4 contracts signed, more in the making. We had 4 contracts in Q3. So what's the latest there in terms of contracting momentum? It sounds like customer interest is still high.

Yes. Customer interest is high. And that probably is due to, of course, Vacaville being as such a very attractive capacity run by a very capable team, but it kind of makes sense as well, right, with the desire to regionalize supply chains and limited capacities in the U.S., this capacity obviously is highly valuable. And so we are in very constructive discussions with customers, but can't share anything else at least today. But again, we are very confident that this will actually -- is a great solution to our clients and will contribute to our future business success.

And I think it's clear from the presentation, but just to make sure it's clarified for everyone, you've had a successful FDA audit. So I think it was a 483. So it sounds like that's all resolved now in terms of operations as usual.

Yes. I mean, to put that in perspective, 483 as such is a rather common thing. I mean sometimes at Lonza, we are able to actually get away with a totally clean sheet, so no observation. But I mean, as a matter of fact, it's typical that there are some observations. In this case, in Vacaville, they have been minor, classified as minor observations leading to voluntary actions indicated. Very few, most of them closed, maybe even all, I don't know. But I mean, the takeaway is this was a very welcome -- not surprising, I have to say, but a great confirmation of the high-quality level at which the Vacaville team operates and obviously, a very, very good outcome for ourselves, for Vacaville and also for our clients. So great news.

And last question for me on Vacaville would be you've had 4 contracts so far, more to come hopefully soon. So could you put into perspective how many more contracts you need to achieve your midterm outlook for Vacaville to maintain sales stable over the midterm?

I actually would refrain from giving a figure because it will just naturally be wrong. I mean this can be very large contracts over many years. There can also be smaller ones still of high value. So I actually wouldn't share a specific figure. But maybe share how we see sales to evolve over the next years. First of all, until roughly 2028, we expect the Vacaville site to operate at around CHF 0.5 billion, plus/minus revenues. Why is that so? Because we actually decided and made it a conscious decision to take the time to do the upgrades needed to make it a fully highly flexible CMO manufacturing site. And for that, you need downtime, which means you can't manufacture during that time. But we will benefit later on by having a stronger asset, a more flexible asset and more efficient asset. And this site in terms of revenues will then take off probably starting around 2028 and fully flourish beyond 2030.

And you talked about the One Lonza strategy and the Lonza Engine being able to deliver growth above market. We've seen a lot of changes in the market over the last 15 months, and you alluded to some of it in the presentation, particularly on the policy side, on the tariff side. But as you look back over the last 15 months, how do you feel now about the 10% to 13% CDMO growth? And what are the key drivers to be able to achieve the upper end of that range versus the lower end?

Yes. Actually, while a lot of things are happening, and they are relevant. So I'm not saying that they wouldn't be relevant. But in the end, we decided to really step back and ask ourselves, what does it mean for us? And how are we positioned towards those changes, which is probably at the heart of things, the desire to create more regionalized supply chains. And here, the outcome is while our, let's say, regional supply -- I mean, our own supply and regional demand in the market is not always everywhere a perfect match. We actually are everywhere where it's important and have the starting position to actually build out accordingly. So in this regard, we actually didn't see a change or the need to change our organic growth model and still believe that we actually will be able to deliver going forward on average over time towards that ambition. It can be sometimes even above maybe, sometimes at the lower end, hard to tell, but that's our view I mean, even considering the changes that we all experienced over the last year.

And looking into '26, I appreciate we'll hear more in a few weeks from now, but what are the key drivers that we should bear in mind in terms of '26 CDMO growth for the top line and also margin?

Yes. It's actually an easy answer because we can't talk about it until the 28th. But I think we see the dynamics continuing in all the modalities we are. I think especially in mammalian biologics, the dynamics are very strong. We've seen again for 2025, a very strong signing year. We'll share the numbers at the end of January, which, of course, contributes to the future growth in '26 and beyond. So I think the modalities perform well. Our assets are ramping up. So I think the only headwind that I think people know is we are sitting on CHF 0.5 billion of Vacaville sales, which are not growing. So in that case, this is some kind of a financial headwind, if you want. But we believe that the rest of the network is so strong that we can actually offset that. So we're not concerned about this. So actually, '26 so far looks good. Also the funding in biotech, which is a small part of our business, seem to regain a little bit of strength at the end of the year. So that's also a little bit of a cloud that was hanging on the CDMO industry, which is probably a little bit lighter now.