Lonza Group AG (LONN) Earnings Call Transcript & Summary

Hi. Welcome to the Lonza presentation at the JPMorgan Healthcare Conference. I'm Richard Vosser, European pharma analyst with JPMorgan, and it's my great pleasure to introduce the CEO of Lonza, Pierre-Alain Ruffieux. Before I hand over to Pierre-Alain, I would just remind everyone that we will stay in here for the Q&A of the presentation. And so if you'd like to ask a question, then please put your hand up, and there will be mics. And just wait, and we'll come to you. Pierre-Alain, great to see you.

Thank you. Good morning, everybody. A warm welcome to all of you. It's really good to see you after 2 year, back face to face. I think we have already -- we have almost 40 minutes together. In the first part, I'm going to share a brief update on our business. Then I'm looking forward to hear your questions. The agenda today is the following: I will start with the short company background, highlighting some aspects of the CDMO business. I will go a little deeper on our offering and like some of your setup for success before going to some conclusion. As we dive into Lonza, let's first take a look at our numbers. Many of you already know our number for 2021. But -- and we are going to report our full results in a couple of weeks later this month. And I hope that you would be able to join our call on 25th of January. Within the number of this slide, I want to highlight some of our long-term performance indicator. On the left, you can see our strong momentum on sales growth with a compound annual growth rate of 13% between 2018 and 2021. Our strong financial performance and the divestment of LSI has allowed us to invest on long-term growth and success. This is reflected in a cumulative total of CHF 2.9 billion CapEx between 2019 and 2021. We will see later on what we are investing in 2022. I know many of you are not familiar with the CDMO business. So would like shortly to highlight some of the aspect. Our growth and success are supported by our position as an established and prominent contract development manufacturing organization, or CDMO. In this role, we serve the complex need of large pharma and small biotech customer on their path to commercialization. So we develop the processes, make clinical batches and produce for the market. We have a range of services, of course, preclinical, clinical, launch and commercial phases to ensure that we can deliver value at every stage of treatment of the life cycle. This broad portfolio of our offering provides multiple strategic benefit to our customer. It helps them to plan capacity, manage risk, navigate complex regulatory requirement and speed up the journey to market. Let's note down some time on offering and explore some of the details. On this slide, you can see a snapshot of all our services offering are spread across our 4 divisions: Biologics, the largest one; Small Molecule; Cell & Gene as well; as Capsule & Health Ingredients. The rest services allow us to serve customer needs in preclinical, clinical and commercial phase across a number of complex modalities. We are also leveraged multiple synergies across the division. We will go in more detail later on, on that. Moving forward, we will look at our 4 key attributes, which help us to maintain a distinct value proposition. The first one, we serve our customer regional and global needs across our seamless network. We also work as a trusted partner to maintain top quality and quality for our customers. We provide the unmatched breadth of services across to support treatment across life cycle. And finally, we deliver innovation to support our customer unmet medical need. Let's take a moment to go through each of them. On this slide, you can see our network for Mammalian. This map set up a small, mid and large Mammalian assets are distributed around our network. You can see that this red show that we have a very strong regional ops of capacity to serve our customers in the location that benefit their own business. Capacity indicated in light blue show our current area of growth investment. And finally, the yellow point are showing where we have technical development capability and clinical capacity. We have significant Mammalian capacity center in each region with this in Europe, Switzerland; Portsmouth in the U.S.; and Tuas in Singapore. This regional capacity hub are supported by a network of small facility based largely in Europe and in the U.S. Finally, the map also show our drug product offering located mainly in Switzerland where we have announced last year a major investment of CHF 500 million. We have also some clinical capacity, both in China and in Switzerland. Our drug product network does not only support Mammalian offering, but we can do fill and finish for all modality like microbial, mRNA as well as bioconjugate. There is one aspect, which is really key, is a seamless approach for quality and regulatory for our customers, which means it's a priority for us. On the left, you will see the number of customers IND and BLA that we support it between 2019 and 2022. Any filing is a very important milestone for our customers and therefore for us. But some recent BLA have been very particularly significant. You can see that we have some expedited program supporting acceleration for our customer as well as 3 cell and gene therapy approval brought to commercial lately. We see the [business] forward in this emerging technology, and we are very proud of this achievement. It's also a landmark for Lonza, where we have the only CDMO with 3 successful commercial BLA filing in this space. As we turn to our integrated offering, I would like to focus a little on bioconjugates, as an example, how we deliver for our customers. Antibody drug conjugate better known with as ADC are key. The highly targeted therapy that can target cancers with an antibody and the toxic part. And we have a complete offering on this dimension. In this example, you can see that we are able to manufacture the antibody. We can produce the linker in our Small Molecule division. We have the capability to produce a cytotoxic drug to put it all together and also to provide [indiscernible] services. So we generate value at each stage of the value chain. Finally, I want to share a few examples where our approach to innovation, support our customers and drive value for our shareholders. Moving from left to right, a unique innovation in Biologics has been our Ibex offering, which provide [indiscernible] capacity to serve specific customer needs in short time frame. This flexible model helps customers to manage risk and increase speed to market for the complex therapy. We will look at that in a couple of minutes. In Cell & Gene, our Cocoon platform has the potential to make personalized medicine commercially viable. We are also working to support the commercialization of multiple Cell & Gene products. And our work in exosomes is enabling us to deliver targeted value treatment. Finally, our new Enteric capsule enable acid sensitive therapy to be delivered safely into the intestine. Across all divisions, we are investing around CHF 180 million a year in R&D in 2021. Looking more closely to Ibex, its potential to deliver for all customers who was definitively highlighted by the rapid scale-up of our mRNA drug substance production during the pandemic. This work marks the beginning of a 10-year agreement with Moderna on the mRNA platform with new product on the way beyond the COVID vaccine. On that, we have probably reached peak sales in 2022 and the manufacturing footprint as we seamlessly resized as the pandemic continued to recede. The pandemic has clearly confirmed the great therapeutic potential and commercial of mRNA platform. This is why we have also invested now in new clinical mRNA development and manufacturing capacity in the Netherlands. Adding to explore offering, I would like to spend a couple of minutes to explain clearly why we are strongly set up for success. The wider CMO industry is very attractive and continue to show double-digit growth. Within this space, we are working to deliver to our customer and investor now and in the future through very sustainable value creation. Our ambitious CapEx program has seen us investing 30% of sales revenue in 2022. That makes Lonza quite unique. Do you know many companies which are investing such a high percent of topline with 1/3 of the turnover with the profit margin more than 30%? We are also continuing to invest in new assets across the portfolio. All our growth CapEx are supported by anchor customers derisking what we are doing, our strong customer pipeline. Our diversified business underpinned by long-term commercial contract provides a strong and stable foundation for the future. We also remain very resilient to new competition entering the market due to the high entry barrier of the CDMO space. On the next slide, you can see that we benefit from high revenue visibility across the business with typical commercial contract duration average up to 10 years for Biologics and up to 7 years for Small Molecule. Currently, around 70% of our business is based on commercial product, and we have a healthy pipeline across all our divisions. The nature of the CDMO business means that we provide product and services of a social nature. It means that our business has the underlying level of resilience even during macroeconomic uncertainty. As mentioned before we have invested increasingly in organic growth while maintaining a strong balance sheet. This has been supported by our strong and sustainable business performance and the divestment of LSI. On the left, you can see our incremental CapEx trajectory over the last 4 years. We intend to maintain our current accelerated approach to investment until 2024, after which we anticipate to return to high 10s percent of sales. Our ambitious investment level has invest more than 20 large growth projects, each of which is in different phase. Multiple growth projects are progressing at the same time, and they're all set to offer attractive financial return. Approval of any new project is contingent to an IRR between 15% and 20%, ROIC of 30%. And we have a rule of stone that every dollar invest in CapEx will deliver $1.10 sales at peak sales, generally 3 years after the start of the facility. This ensures that we are set up for long-term success with attractive return in area of sustainable customer demand. On this slide, we want to show you a picture of all growth projects looked in reality with the picture of biopark in Visp, Switzerland. The 2 large building in the center of the recent image are Ibex 1 and Ibex 2. The first of these 2 large -- the Ibex 1, the first building is now largely contracted with the second on track to deliver on budget and on schedule. As well as focusing on growth, we are committed to ensure that sustainability is at the heart of what we are doing. Our 2030 environmental target, as shown here on the left, and our safety and gender equality target on the right. We are working diligently on our E&C agenda, and we know there is always more we can do. Based on the strong progress, in 2021, we updated our target to reflect our ambition. As part of this process, we have also revised our 2030 energy intensity reduction from minus 24% to minus 36%. Our business model has proven resilient despite the challenging micro [vital] environment. And it's underpinned by a strong and stable late-stage business and robust contract including pass-through clause for raw material. These always contribute to partially mitigate inflation pressure. The geographical spread of our business provides a natural level of currency hedging. Additionally, as a supplier of essential goods and services, our business is less exposed to economic fluctuation associated with consumer spend. As inflation is being widely discussed at the moment, we wanted to take a couple of minutes to explore our position in more detail. While our business has proven to be resilient, we have taken additional measure to mitigate the impact on inflation to a large extent. On the left part of this graphic, we have noted some of the main inflation headwind impacting our business in 2022. While raw material and capital investment looks set to remain stable in 2023, we anticipate impact from further wages increase in high inflation markets. We also foresee an increase in energy costs, largely in 2023 as the cost for 2022 were hedged in 2021. We have worked to alleviate the impact of this factor by leverage pass-through clauses and applying inflation clauses, we have in all our long-term contract. Internally, we have also accelerated productivity and doubled down on strategic procurement as part of our operational excellence. Before we move to the Q&A question, let me share a few concluding comments. Our business is uniquely positioned to capture value as a leading CDMO player in the health care space. Our site network and extensive western footprint can be deployed to meet our customers' needs on a global and local level. Our long-term success is supported by our growth investment in area of sustainable customer demand. Our business is also set up with the right mix of technology and capability to address our customer complex challenges. And finally, our value proposition is enhanced by our technical and regulatory and quality expertise. Before we close, I would like to confirm that we will be holding also a Capital Market Day in Q4 of this year. It will be an opportunity for us to share our divisional strategy in more depth and update also our long-term midterm guidance. We will be doing that in Visp and also organizing a visit of a biopark, and we really hope to see you there. Many thanks for your attention, and we'll be happy to take any questions.

Thanks, Pierre-Alain. We've already got the first question at the front here. We'll just pause for the mic.

It was a great presentation. We are hearing some of the Asian CDMO companies adding some kind of a discovery CRO functions to secure their future customers. So I'm curious if you also agree or have a plan to introduce a CRO in the discovery CRO functions onto the -- your CDMO business.

Thank you for your question. We don't see a strong overlap in acquiring customers with CRO and CDMO activity. So for us really, to secure customer, it's really providing strong services focusing on Phase II and Phase III to secure our long-term commercial capability. So it's really where we put more focus and adding capability in technical development. I show on the slide our difference center everywhere, the yellow dot, where we can clearly capture the customer at early stage.

Further questions? Maybe I'll build on that one and just thinking about fill/finish capabilities, particularly on the Biologics side of things. I think you're investing in those, but sort of maybe you could go into how you see the growth opportunities there for Lonza and what that can deliver -- the value it can deliver?

So historically, Lonza has been very, very strong in drug substance. And some years ago, we have decided to make a significant step in drug product. So we have now, as we speak, since multiple years, 200 scientists in Basel, developing formulation, probably one of the largest group. We have also acquired 4 years ago a facility for clinical manufacturing. Many of our competitors will consider that it's almost commercial. And we make a huge investment, CHF 500 million, for commercial manufacturing. We see a lot of synergy being able to provide services in the drug substance, and our customers are looking forward to have exactly product servicing in drug product too. So big advantage we have the value. You have seen also in the market, a lot of demand for high-quality capacity in drug product is clinical, and it's what we are building currently in Switzerland. And you mentioned in Biologics. Clearly, our capability in drug subs product is not serving only Mammalian but Microbial -- mRNA, sorry, as well as EDC.

Any further questions? Maybe -- we saw strong reiteration of your CapEx plans. And I think there's been some discussion in the wider market with, I know, biotech funding. But just generally, the supply/demand dynamics from a CDMO space, how are you seeing those? Clearly, thinking demand is quite strong, I would imagine, with the CapEx plans. But just some thoughts on that would be helpful.

So clearly, we see the fundamental of the industry very, very strong. If you will look on the biopharma business, which is basically all customers, between the new product coming on the market and the new indication, we see a growth of high single digit. Adding to that, an increased trend of outsourcing. You can see that large company are not putting so much CapEx for manufacturing but more CDMO. You end up to a double-digit growth rate. So a very strong one. On top of that, we see for the next 5 to 7 years, the demand is clearly outpacing the new capacity online. So very strong demand, and this is really supporting our CapEx investment. We mentioned during the presentation that we have anchored customer. So when we build large-scale facilities, the vast majority is already reserved with long-term contract. So we have very long-term visibility of that.

There's a question here in the middle. While we wait for the mic, I might just ask one on. Is there any more space in this, but it looked like you were building everywhere?

We have space in this, but we are also investing in many other locations. So no worry about finding space.

Great presentation. So 2 years or 2.5 years after COVID and with potentially a recession, what is your outlook? You're showing that you're back in full investment in CapEx. So could you give us -- shed a little light on what you're seeing?

No, you mentioned recession. When you see the...

Potential, yes.

Potential recession. When you see the consumption of drug, we can go back to the last few years or 4 crisis, the impact on recession on consumption of drug and the drug -- the type of drug we are manufacturing, there is little to no relation. And again, as I mentioned before, the fundamentals, which are driving demand, the new indication, the new product, we don't see any sign of decrease of demand. So we are really insulated from that.

Are you seeing an increase, though I mean?

Actually, there is a strong -- so demand continues to increase. It's what I mentioned the high single-digit growth of market plus a significant increase of outsourcing, which is really driving high demand.

Got a question more on the short term, the headwinds to the industry and maybe your business as well from an investor here, which thinking about headwinds from biosimilars, COVID, particularly our costs, I think, maybe -- and capsules and cell and gene therapies. So they're just -- they're wondering how you'll manage those headwinds?

No. biosimilars are not a headwind for the CDMO industry. People are always concerned following pharma company, okay. Yes, we have a biosimilar where we will have sales. But if you think in terms of volume, generally biosimilar is increasing access. So the number of doses sold on the market is an increase. And we sell the same price if it's a biosimilar. Biosimilar increasing demand and a contribution to that. So it's not a headwind for us.

And maybe you talked about retasking COVID facilities. Is that into other mRNA projects? And how should we think about that?

So as we mentioned, we were very pleased to be able to contribute to the fight of the pandemic with the relationship with Moderna, which is a long-term relationship, 10 years. We were quite clear that every pandemic has a start, a peak and a stop, but we don't speculating, we hope -- I think all that the pandemic is behind us. And we are really excited with the new option and opportunities with mRNA. It's why we are investing in Netherlands capacity for developing processes as well as a clinical capacity.

Further questions in the room? You touched on another technology, ADC. And the first ADCs are probably, I don't know, 10, maybe 15 years old. And then there was a gap. And now we're seeing sort of a resurgence of new products on that. I mean how do you think of the outlook here for the ADCs and for Lonza and your capabilities and how that sets you up, particularly in this space?

For us, ADC is a clear example of how Lonza is working. 15 years ago, we were [indiscernible] this field in a collaboration with Genentech to put that in place. And in fact, if you look to the details -- this has continuously grown in the last 15 years. And the fact is, today, we are the leader in manufacturing them because as I've shown, it's quite complex. And we are very well positioned to continue to capture the value on this field. So again, we should never forget, in this industry, the cycle time to develop a new drug or 5 to 10 years. And we like, at Lonza, to jump at early stage to develop capability, technical capability, manufacturing capacity to capture the value.

We do have a question here.