Lonza Group AG (LONN) Earnings Call Transcript & Summary

So hello, everyone, and thank you for joining this session of Morgan Stanley Global Healthcare Conference. I am Tibu Bhutra, I'm part of the European pharma equity research team based in London. Before we start the session, I just need to refer to important disclosures -- please is the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales pie. So for this session, I'm delighted to have with me Philippe Dec, CFO at Lonza. Thank you very much for being with us today. We will obviously go on the Q&A. But before we do that, Philippine to start with some inflatory comments on the current situation and the outlook for Lonza.

Yes. Thank you very much, Thibault. Thanks, everyone, for joining. So after a very strong first half 2026, I think we've now had another couple of months in 2026. And Overall, I think we must say the industry for the CDMO is still a very attractive one. I think we still see -- or we see a very strong interest from both large pharma as well as biotech companies who, by the way, make up 50% almost of our revenue. So we are a big pharma company, but also a large company for biotechs. So I think we see a good environment. We continue to see good request for our capacities and our capabilities both in Europe but also obviously in the U.S. So overall, a good environment. So that's -- I think that's an important point to make. I'm sure we'll have questions about the environment. The second thing we've progressed this year into becoming a pure-play CDMO. So remember, in March, we announced the divestment of 60% of our Capsules division, which we will complete by the end of this year. And so this will make Lonza now really a pure-play CDM or really focused on the services, both in development and manufacturing. So that's, I think, another important step that will happen this year. Also in the plants, of course, since our investor update back in 2024, I think a much more impartial view at buying or building ourselves. We were historically a company that used to build everything we needed. We are now much more in part in choosing what we build versus what we buy. Obviously, buying is always a matter of opportunities and it's more difficult to plan ahead, but that's certainly part of our plans as well. So I think for us, a very exciting year. We also have a Capital Markets Day upcoming in October, where we're inviting investors to join us in Vail I think a very important side that we purchased almost 2 years ago now. And so we're very pleased to actually be able to show that side to people and also to update investors on our plans, our strategies and answer more questions. So that's a little bit of kind of a roundup of where we are, but happy to take your questions.

Before we go straight on the business, maybe a couple of questions on sort of policy tariff these kind of things. So if we start with just the sort of biosecure topic, there were some progress on the legislation in the U.S. It's likely that something will materialize in some shape or form in the future. There was a recent legal win by Wuxi that may be sort of saw this 1 a little bit. But I guess the question is, is secure already today a key focus for your customers and showing up in your customer conversations? Or is it still sort of wait and see for the industry and for your customers?

Yes. Biosecur is kind of this never-ending story. I think it started several years ago now. And I think we -- from the beginning, we didn't really put a lot of emphasis on it. And I'll explain you why. And we see this over the years actually location manufacturing in China has always been the discussion we have with customers and what it means. And I wouldn't say that biosecure has made -- has made a big, big difference. Certainly not a difference that you could quantify in our numbers. And let me maybe explain why because people think or may think this is counterintuitive. A lot of the work that's happening in China, a lot of the development work that's happening in China is for companies that are tendously smaller and do their early stage work in China. Why do they choose China? There's certainly a cost aspect to this, but it's also a timing aspect to this that actually, there's still many, many opportunities to move away to another CDMOs if your product end up being successful. And so if you put yourself in an early-stage company, you have 1 compound Phase I you may choose to finish your Phase I in China. If it's successful, you may even decide to do your Phase II in China. And once you finish your Phase II, this is when you have to -- and you're successful. This is when you really have to decide -- where do you want to have your launch site and how do you want to secure your commercial volumes. And so this is where we see a lot of company actually coming to Lonza or coming to a Western CDMO to do their work. And so Therefore, you don't have kind of a mass exodus of companies now moving to exit China because they have a lot of time to do so. I think even at the beginning of biosecurity, we had a very long grace period. I think at the time of 8 years or so. So in 8 years, you still have multiple opportunities to move away. So I think it's continuation of people being worried about having exposure to China for their IP for some of their development. And some companies decide to be radical about it and move away. Others are just waiting and see. And I think most of the companies actually are in the wait-and-see mode. But we have companies that are coming to us at the end of the Phase II with a successful compound saying I want to be with Lonza for my Phase III launch side, my commercial volumes.

Okay. That's very clear. And these are topics I wanted to sort of touch on before we move on to the business is tariff, U.S. type in particular. So how much of tariffs and all the discussions around onshoring or conversations with customers. So at some point, this year, you mentioned that -- some of the major U.S. manufacturing investments by the industry could Lenten some outsourcing decisions. So if you could comment a little bit on this and we Wison.

Yes. So tariff is also a complicated topic because it keeps on changing and evolving. I think very early, we communicated to the market that tariff would not have a direct impact on Lonza. Now why is that the case? First of all, because everything that we sell, we sell at the door of our warehouse. And our customers are picking it up, and they are taking it wherever they need to take it. We actually often don't know if our volumes are being used for U.S., if they use for Europe, if they use it somewhere else in the world. So our production, actually, we don't import into the U.S., and therefore, we're not directly exposed to tariffs, so they will not end up on our P&L. The second area where there could be an exposure is when we are importing raw materials into the U.S. So imagine we need a raw material in Vacaville. We would -- could potentially import this out of Europe into the U.S. We have a policy that all the raw materials are passed through to our customers. And so if the price was before 100, we would basically 100 plus tariff and then pass that on to customers. And the third area where this could impact us on tariffs is around CapEx. So we are building -- or we are renovating something in the U.S., and we are importing material. We're importing steel or whatever else equipment we need to buy in Europe. This could impact us if that good is subject to tariff, but this would be capitalized over many years, and therefore, also not really have a direct P&L impact for us. So the direct impact of tariffs is actually very small on loan itself. However, we, of course, we have customers that could be exposed to tariffs. Right now, pharmaceuticals are mostly excluded from tariffs. If there were some, of course, we... [Audio Gap]

Sometime.

And I won't do a prediction now as to how many products will have. I think we -- back in '23, we forecast, I think, 6 by 2026. So we are there -- we have a we're quite pleased with that, not all our large products, but all are hitting live. And all of them are actually important therapies for patients. So I think we are intelligent to stay in Celgene. We believe in the modality, we believe in the use of Celgene. And you have to be willing and capable of riding the wave of cell and gene because this is certainly something that this is the only thing you do, it's actually very difficult to actually manage these ways. If this is part of our portfolio, we can actually manage that. And we are, therefore, so much more attractive to companies because they know we'll be here in 2 years, we'll be here in 5 years, we'll be here in 10 years to manufacturing their product, which is more difficult if you're a stand-alone smallest cell and gene manufacturer.

I think that makes sense -- and moving on to the other part of your business, which is integrated biologics I think when you look at the performance of Lonza in first half, I think it's been obviously very strong. What has been surprising from investors is the mix of this growth where advanced intel was really, really strong, as we mentioned, specialist modalities was very strong. And integrated biologics, I think you're guiding for around 10% growth this year, which is maybe on the lower end of where investors were expecting biologics to grow based on the industry trends. So just if you could sort of coming back on this, is it sort of a business that's getting a bit in a more mature phase. It this year is seeing a bit of a sort of phasing in terms of the ramp-up project -- like what -- how to help investors sort of understand the 10% growth we're seeing this year integrated biologics.

Thanks for the question. I think -- probably 2 fundamental things to explain. First of all, we are very pleased with the performance of Integrated Biologics. We said this in July. They are absolutely delivering on what we expected from the platform. So -- there's no kind of dark cloud or anything that didn't work the way we wanted. Fundamentally, when do you grow as a CDMO or how do you go at the CDMO, you need to be adding capacity, right? So if you see the significant growth we discussed before on ADS in the platform, this is because you have new capacity coming online. Now if you think about I&D, there is no large capacity coming online now. What we are doing is we are finishing some of the ramp-ups we had on smaller assets. We are basically growing the base by squeezing out a little bit more here and there. but there's no large capacity coming online right now. And therefore, you need to wait for capacity to come online to create that growth. Once the assets are full, you basically back at 0 growth. And so this is the way a CDMO growth. And when we are promising the market that we will grow 10% to 13% on average over the years. This means that we have capacities coming up in the different modalities at a different point in time to generate 10% to 13% growth every year. They may not all come equally every year, right? And so for biologics, if you think about what we're doing today, we are basically changing Vacaville, making Vacaville CDMO ready or entirely CDM already, which basically means that Vacaville for now is flat. It's going to be flat until 2024, and then we'll start 2028, then we'll start growing. So until then, it's actually even yes, a headwind to growth for the platform because in the year-over-year, you basically have EUR 0.5 billion of revenue that is not moving. So the next wave of capacity will come from our 620k in Switzerland in Visp that is actually starting this year. And over the next 2 to 3 years, they will provide growth then Bakari Group provide growth starting 2029. And in the meantime, we also have some of the field finish assets, which are also in IND that will provide growth over the next few years starting in 28, -- so you only grow with new capacity. And therefore, 10% for INB fully in line with plan, and I feel quite satisfied. That's very clear. And maybe taking a step back when we think about the industry and the key trends One of the things that's been emerging is biotech funding sort of come in but more strongly. So is it something that you've seen -- are you seeing sort of an impact on your business already? And to what extent is this important for Fernanda. So if you can come back a bit on the Vertex funding piece. Yes. So biotech coming, obviously, we're pleased to see that the funding is coming back. I think we see also some venture capital having made money and reinvesting it into early-stage compounds. This is not a KPI that we follow too attentively because in the end, early-stage work is a very small part of Lonza. It's roughly 10% of our revenue. So it's not financially not the most important piece of our business. However, it is strategically very important. And so we are very interested to see healthy early-stage companies, stage compounds because we -- first of all, we want to capture them early. The compound that we capture early in Phase I usually will not leave Lonza. We have a retention rate of 99%. So people that joined us early have successful molecules, which stay with us until they are commercial. And so the earlier we can grab these customers the better. Second, you learned a lot about molecule. You learn about a company, you know how to deal with the molecule and you have to scale it, you know how to make it successful commercially. And so it's very difficult actually for another CDMO to be more attractive than we are because we know the molecule so well that we can price it correctly. If you take a compound in the later stage, you don't know exactly how the molecule will scale. -- you're basically making buffers in your calculations, so you're usually less attractive. So strategically, it's very important to get access to early-stage compounds. It's very interesting to be in touch with biotech companies. But financially, it's not a big driver. And therefore, no, we don't see it in our numbers today. But I think we see the interest increasing, and we see that actually the demand is quite healthy.