PolyPeptide Group AG (PPGN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the PolyPeptide's Half Year 2024 Results Presentation and Business Update Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Michael Staheli, Head of Investor Relations and Corporate Communication at PolyPeptide Group. Please go ahead, sir.

Thank you, Sandra, and good morning, everybody. Thank you for joining our call. I'm here joined in the room by Juan Jose Gonzalez, our CEO; and Marc Augustin, our CFO. They will run you through the presentation and then they are open to take your questions at the end. As usual, I draw your attention to the disclaimer on Slide #2. As Sandra already told you about the usual procedure regarding the Q&A, you can ask it over the phone or in the chat function. And with that, over to you, Juan Jose.

Thank you, Michael, and good morning, everyone. Thank you for joining us today. The objective of this session is to give you an update in terms of our operation and organizational progress. Then Marc will walk you through our H1 financial results, including the upgrade for our 2024 guidance. And then we'll step back and share with you how we see the peptide market evolving, what is our strategy and what is our midterm outlook. So let's start. There are 4 key messages for today. Message #1, we have solid progress in H1 with marked improvement in profitability and operating cash flow. We also indicated at the last earnings call that we're planning to start production of our large-scale capacity in H2 2024, and I'm pleased to confirm that we are on track to start production then. Message #2 is that, we are upgrading our guidance for 2024. This, not only reflect the results in H1, but also the strong momentum as we move into H2. Now, we are expecting high single-digit revenue growth for 2024 with a positive mid-single-digit EBITDA margin. Message #3 is that, we see the peptide market continue to accelerate and becoming one of the most attractive CDMO market. And on the back of that, and given how well positioned we are in this market, we are sharpening our growth strategy. The objective is to transform PolyPeptide into the most innovative peptide CDMO by focusing on 3 competitive advantages: innovation, superior development capabilities, and capacity expansion based on modularity. And it is on the back of this strategy and commercial contracts we have already announced that we are also issuing a midterm outlook, and that's our message #4. We are targeting to double our revenues by 2028 vis-a-vis 2023, and an EBITDA margin that is going to expand from minus 2% in 2023 to approaching 25% by 2028. So these are the 4 key messages for today. And with that, let's start talking about our operational progress. So when we started [ the turnaround of ] PolyPeptide, we launched an operational excellence program. And we are pleased to see in H1 that we are starting to drive improvements in manufacturing planning and execution. These improvements are resulting in higher capacity utilization. Marc will talk in more detail regarding this, but we are also seeing that a disciplined net working capital management have also allowed us to move from, I would say, very negative position last year to breakeven this year, and this breakeven includes a significant investment in inventory ahead of the planned growth in H2 2024. And finally, in terms of operational progress, we continued the execution of our capacity expansion program. We have a CapEx expenditure of 15% of revenues in H1 2024. We are advancing multiple projects across the network. We have projects in Belgium, Sweden, France and the United States. And finally, as I mentioned before, the commissioning of the large-scale SPPS capacity in Belgium is on track with production ramp-up to start in the second half of this year. So this is in terms of operational progress, and we expect to continue to see operational improvements in the second half of this year. Now, in terms of the change in the market. In the last earnings call, we talked about how our customer base was shifting towards large pharmaceutical customers. And how these large pharmaceutical customers have a different level of requirements in terms of how to negotiate commercially, in terms of how to interface in terms of execution? We also talked about how the market was changing rapidly in terms of the growth of the GLP-1 market, how we're going from smaller volumes to larger volumes? And how this require a significant transformation in terms of the way the companies run? So it's very important for us to strengthen the organization. And over the last 12 months, what we have done is upgrade key senior-level positions. This includes, for example, the appointment of new site directors with industrial capabilities in all of our key sites. That includes Braine in Belgium, that includes Malmo, Sweden and that includes our sites in the U.S. We are also strengthening our group functions, including a new head in terms of global quality management. The promotion of one of our top talents to lead development globally, and also the setup of a global program management function. And the idea is to make sure that we leverage more the benefit of the network, and at the same time, that we provide more consistency of experience for our customers, disregarding with what site they are interfacing. Now, as part of strengthening the organization, I am also happy to share the appointment of our new Chief Commercial Officer, Stephane Varray. Stephane have over 2 decades of experience in CDMO. A long experience in Lonza where he started in R&D. Then he went into program management and commercial roles within peptides and then moved into biologics. And, of course, Stephane in his last position as the leader of the peptide platform in Corden Pharma. He played a very important role driving the whole commercial strategy and partnership with some of the key large GLP-1 players. So we are very glad to see Stephane deciding to leave Corden Pharma and join PolyPeptide. I think we both share the same expectations in terms of the potential for the company to grow and the ability for him to lead what is a high-performing and motivated commercial organization. So that's the update in terms of our operational progress and organization. Let me pass it to Marc to talk about our H1 financial results.

Thank you, Juan Jose, and good morning, everyone. I'm happy to be here today to share PolyPeptide financial results for the first half of 2024. Over the last 6 months, we have made important strides in our journey towards operational and commercial excellence, as highlighted by Juan Jose. Before diving into the details of our sales, profitability and cash flow, please let me first spotlight the 3 key themes that drove our financial performance in the first half of 2024. First, growth drivers. We have seen positive momentum in our commercial business, surging by 8.6%. Even more impressive is the underlying commercial revenue growth of approximately 45% over the last 2 years comparing H1 '22 with H1 '24. This clearly demonstrates the success of our commercial initiatives. Second, operational improvements. In '23, we identified lower asset utilization as a key area for improvement and I'm excited to share that we are making significant progress in addressing this challenge. Third, financial stability. We have stable sales and improved profitability and together with our net working capital management, it has resulted in a turnaround of our operational cash flow, bringing it to breakeven in H1 '24. And with that said, let's dive into the details of our sales, EBITDA and cash flow performance. Let's begin with the sales bridge. As you can see on the left side, the chart, our H1 '23 performance was EUR 132 million. This figure grew by 2.9%, reaching EUR 136 million at constant exchange rate by the end of H1 '24. The robust performance of our commercial business, which grew by 8.6% compared to H1 '23, was the main driver behind this growth. You will notice that we have now merged Contract Manufacturing and generic business into the commercial business category, offering a more meaningful perspective on our business performance. However, our development business saw a decrease of EUR 3 million compared to '23. This decline is attributed to several smaller factors, including product mix and phasing. In summary, we see a sales performance of EUR 135 million in line with our expectation and guidance for H1 provided back in March. The EBITDA bridge clearly illustrates that our efforts to enhance utilization are starting to bear fruit. On the left side of the chart, we have reported H1 '23 EBITDA of EUR 19.4 million. After excluding the extraordinary write-offs of EUR 9.5 million, we have an adjusted starting point of minus EUR 9.9 million. From there, we observe higher people cost of EUR 5.7 million, primarily driven by an increase of 8.1% in headcount, mainly supporting ramp-up activities across the network. These higher people costs, however, were more than offset by our operational efficiency projects, which led to higher asset utilization and enabled a more favorable product mix. The result a remarkable turnaround with an EBITDA of EUR 2.9 million for the first half of 2024. In summary, our focus on improving operational efficiency has a positive impact on our EBITDA, proving that we are on the right path towards achieving our midterm guidance profitability targets. Juan Jose will show later. Now, let's move to the cash flow bridge. Here, the significant improvement compared to H1 '23 are clearly visible. Our operating cash flow improved from minus EUR 48.3 million in H1 '23 to breakeven in H1 '24, driven by both improved profitability and net working capital reduction. Over the last 12 months, we have made sustainable progress in managing the net working capital, especially in areas related to inventory and payables. These improvements illustrate our disciplined net working capital management. In the first half of '24, these activities combined with improved commercial terms and conditions resulted in a favorable net working capital change. This achievement showcases the effectiveness of our initiatives and the ongoing focus on maintaining financial health and operational efficiency. Our CapEx of EUR 20 million was in line with our plan. The investment amount in the cash flow bid added up to EUR 32.2 million due to invoicing phasing. We repaid EUR 10 million of our RCF, which is leading us to a cash position of EUR 48.5 million at the end of H1 '24. In summary, with the operational improvements, prudent cash management, close collaboration with customers and the current financing instruments, we are well funded. And at this point of time, we don't plan to raise equity. We will continue to review our financing as needed for our growth path, which Juan Jose will present in a few minutes. Before I hand back to Juan Jose, I'd like to provide an update on our '24 guidance after a solid H1 result. Initially, we projected mid- to high single-digit sales growth, and based on our H1 performance, we are now upgrading this guidance to high single-digit growth. This improved sales outlook also allowed us to fine tune our EBITDA guidance from positive EBITDA to mid-single-digit EBITDA as our target for the full year. There are no changes to our CapEx or net result guidance. With that, I hand it back to Juan Jose. Thank you very much.

Thank you, Marc. So let's talk about the future and what we will do is share with you our perspective in terms of how we see the market evolving, what we see as the current position of PolyPeptide and how do we want to compete in the marketplace. And as part of that, what do we see the potential of the company. So I think at this point we all agree that peptide has become one of our most attractive CDMO markets. This market is expected to grow double digits for the next decade, driven primarily by GLP-1. Now, having said that, there is actually a robust pipeline across multiple therapeutic areas. And some of the things we've seen oncology, in metabolic disease, in cardiovascular, are also exciting and is showing the potential that peptides have to advance different therapeutic areas. In the case of GLP-1, today, we have nearly 70 clinical developments ongoing, all driven, not just by the existing dominant players, but by multiple players also trying to enter into the market. And that's very important because all these clinical development efforts, all these investments in terms of commercial infrastructure, in terms of operations, will ensure the development of this market. We also expect that this market is going to go from few blockbuster drugs to multiple broad offering targeting different patient profiles and metabolic disease areas. And we consider this to be very positive also in terms of the risk profile of the GLP-1 market. Now, we expect a continued trend towards synthetic peptides with complex molecular structure. And we also expect robust outsourcing, especially towards western-based CDMOs. Over the last 6 months, the concerns around biosecurity have intensified, and we also see this as a positive midterm trend for companies like PolyPeptide. And finally, as this market is becoming more attractive, we expect to see more competition from both existing players, but potentially new entrants. So the key question is, how do we compete in this more attractive market? And let's start by how we are positioned today. We have a track record of over 1,000 therapeutic peptides manufactured over the last 70 years. PolyPeptide has one of the strongest reputations in the market. Our multisite development and manufacturing network provide customer proximity and flexibility, which is becoming very important, also giving all this geopolitical concern. And finally, our superior development capabilities is driving a rich pipeline. I mean, we believe we actually have the richest pipeline in the sector, also taking into account the relative size of the company. We have 29 Phase III projects and commercial contract with broad diversification and a strong exposure to GLP-1. We actually work with all major GLP-1 players today. So given the market and how it is growing, given how positioned we are, we spend time discussing how do we want to compete in the marketplace and how do we want to differentiate. So let me share with you a strategy for PolyPeptide going forward. And basically, our strategy is to transform PolyPeptide into the most innovative peptide CDMO. From a foundation point of view, we want 3 things across our multisite network: Operational and quality excellence; industrial scale capabilities; and then talent, culture and ESG credential, which are in line with what is needed to execute on our strategy. With that in place, we are targeting to build 3 key competitive advantages. Number 1 is innovation. If you look at the manufacturing process of peptides today, it's far from efficient. It was not designed to produce industrial scale volumes. And that's why we have been investing over the last couple of years in proprietary technology. I'll just give you an example. We have a proprietary resin technology that for certain peptide molecules we can double to triple [ the ARPU ] during the upstream process. We have already implemented some proprietary technology on the green chemistry side where we're able to reduce our solvent consumption by 40%. We are already doing recycling in some of our sites, and more importantly, we are launching pilots to be able to recirculate our solvents. Now, the impact of all these innovation combined is going to significantly improve the effectiveness and efficiency of peptide manufacturing. And that we consider is going to be a very important source of differentiation going forward. Our second competitive advantage is in terms of development. Now, we said that we already have superior development capabilities and that we already have one of the richest pipelines in the market. But actually, we want to make sure that we further strengthen our superiority. We want to make sure that for any biotech or large pharmaceutical player with an exciting peptide development project, that they look at PolyPeptide as a #1 destination place. And there is a whole agenda around best practices, investing into advanced technologies. We're actually using India as a service center to better provide support to this development infrastructure, just to make sure that again, the experience that customers have is very different when they are working with PolyPeptide. And the third competitive advantage is a capacity expansion program based on the modularity concept. Rather than centralizing our capacity expansion into large infrastructure projects, we are going for mid-scale projects using the modularity concept that give us an easier deployment, that give us speed to market and that provide customers with flexibility. This is very important also in the GLP-1 market, as customers don't really know what will be the demand of our product as this market continues to be created. The idea is to have these models, where appropriate, will have this advanced innovation and to roll out these models across our multisite network. That's also very important. We are committed to make sure that we maintain customer proximity as a key differentiator for us. And we believe that this foundation, with this competitive advantage will deliver on our strategy to make PolyPeptide the most innovative CDMO player. Now, with that as our growth strategy, let's talk about what does it mean in terms of financial outlook. So from a revenue point of view, we are targeting to double our 2023 revenue by 2028. This growth is supported by commitments and supply forecasts of existing customers. It does not assume or take into account securing new customers. The main contribution is going to be driven by commercial contracts that we already announced before. And the base business is expected to grow with increasing asset utilization and improved efficiency. This is very important. For example, the upgrade of our guidance in 2024 assume a very small contribution from our large capacity coming online. That basically means that this large capacity is going to have a more positive effect in 2025 and 2026. And that's where you see this growth of the base also coming to play a role. Now, in terms of profitability, we expect our EBITDA margin to go from minus 1.8% in 2023 to approaching 25% in 2028. And there are 3 main levels. First of all, contribution from base business with increasing asset utilization and improving efficiency. A contribution from growth initiative with implementation of commercial contracts communicated earlier. And finally, the operating leverage mainly from economies of scale with better absorption of global overhead. Now, our path towards this EBITDA target in 2028 is not going to be a straight line. You should expect temporary margin impacts from growth investments with an even phasing depending on when capacity is coming online and when you are building you're going to see some variability from now until then. And we will use our annual guidance to give you some clarity in terms of how to -- in terms of what to expect every year. Now, this revenue and EBITDA guidance is supported by a capital expenditures strategy. First of all, from 2021 to 2024, we launched a CapEx cycle of around EUR 280 million that we are going to complete at the end of this year. This CapEx cycle has positioned PolyPeptide for a strong growth going forward as we have -- as I mentioned before, our large scale capacity coming online and we also have capacity available in some of our other key sites. And this is very important for us, that every time we finish a CapEx cycle, that CapEx cycle is, not only supporting the growth within that period, but also position the company to continue to grow. So now we are launching a new CapEx cycle from 2025 to 2028 and we are targeting a CapEx investment of 15% to 20% of revenues. This capacity expansion is focused on high return of capital and basically there are 3 key things. We are continuing our expansion across our multisite network. We are leveraging proprietary technology and the potential of modularity to maximize manufacturing throughput and flexibility. And these programs are being in line as part of customer projects with customer investment. This is very important for us. We are not building capacity ahead of demand, but we are actually doing it on the back of a specific contracts agreed. And finally, this CapEx cycle is also going to ensure, similar to the previous one, that we have capacity available to continue to grow beyond 2028. Now, with that, in terms of our capital expense strategy, let me just summarize our midterm outlook. So, first of all, it's a strategy to transform the company into the most innovative peptide CDMO, anchored on 3 competitive advantages: Innovation focused on green chemistry and industrial manufacturing; superior pipeline development capabilities; and a capacity expansion leveraging the potential for modularity. And again, our midterm outlook is to double 2023 revenues by 2028, an EBITDA margin to go from minus 1.8% last year to approaching 25% by 2028. And this is supported by a capital expenditure programs of 15% to 20% of revenues. We believe that the execution of this strategy will create significant value for stakeholders and we are all committed to deliver against this midterm outlook. And with that, let me hand it over to Sandra, our operator for the Q&A.

[Operator Instructions] Our first question comes from Laura Pfeifer from Octavian.

I have 3 questions, please. Maybe first on the midterm target, on the sales target. I understand that you want to double your sales, which implies roughly 15% average growth per year. I'm just wondering if you could indicate a little bit how the progression curve. Will it be -- could it be -- I mean, will it be rather linear? Or will it be a big boost in the first 2 years and then maybe a boost later? So I'm just wondering if you could some more insights on that. And then secondly, on your margin target for '24, this mid-single-digit EBITDA margin target, I think you had around 2% in H1 here. I'm just wondering why you only expect a moderate improvement in H2 despite much higher sales. What are a little bit the drivers or the headwinds here? And also, how dependent is this on the success of your ramping up of Braine in the second half? And then maybe the last one quickly on the Braine timeline, I think you said you will ramp-up production in second half. This is still a quite vague timeline, and I would be happy if you could maybe a little bit more specific. When do you expect also to book the first revenues from batches produced here?

Thank you, Laura. So let me start with the question around the midterm target and the details on the Braine ramp-up. And then Marc will comment on the mid-single-digit EBITDA guidance for 2024. So, first of all, in terms of our midterm target, it's a CAGR of around 15%. The only thing we can tell you is that, it will not be linear, mainly because a lot of the growth will accelerate when new capacity comes online, and then it could go back to a more slower level and then new capacity comes online. So I think that is -- that's a dynamic that you will be seeing with our competitors and that you will certainly see with PolyPeptide. In terms of providing additional color for 2025 and 2026, let me just say this, one is, we expect to have a healthy growth on the back of our new capacity, new large SPPS capacity coming online, but we will provide more feedback when we issue our 2025 guidance at the end of this year. And then in terms of details on our large SPPS capacity. First of all, we are basically finishing the commissioning and validation. We had a successful quality audit with our customer. And we are basically moving into the PPQ batches. So, I mean, we are in August and we are saying that we are actually going to be in production in the second half of the year. So we are basically -- the target for us is to make sure that by the end of the year, this capacity is producing in a way that will ensure the growth we are expecting for 2025. But, I mean, all the construction risk is behind us and a lot of executional risk is already behind us. So now we are just in the final stages of the project. Marc, do you want to comment on the mid-single-digit EBITDA?

Yes, sure. Laura, thank you for the question. You can expect that the margin in the H2 '24 is also impacted by the ramp-up of the large-scale asset in Braine, especially compared to the second half of '23. So we bear now the high end of the ramp-up cost before we run into the production. As Juan Jose says that, the production is expected to ramp-up in the second half. So as you can imagine, we are fully staffed, we are running all the tests, which have an additional impact on profitability, which is hitting us in H2 '24. So that's explaining why we have the forecast guidance for mid-single-digit EBITDA.

The next question comes from Konstantin Wiechert from Baader-Helvea.

Konstantin here today. Maybe starting first here on, I think your strategic positioning compared to the past, it seems that you have increased the importance of GLP-1 products for your midterm guidance, which is, I think, also underpinned by the appointment of Stephane. So I think, firstly, I would appreciate if you could give sort of a rough split between how much of the growth until '28 should come from those large-scale products and how much from the remaining pipeline? And maybe also, I would like to hear whether you expect delays in some of the smaller products, maybe due to tighter biotech funding or a certain market demand, or whether that's all at the same? Then second question, maybe on your R&D expenses, I've seen that those reduced notably in the first half, while at the same time, you also point out that innovations are important driver of your efficiency improvements. So is this a temporary decline in the first half? And maybe what's your plan here in the midterm, also in terms of importance for you and in terms of spending? And lastly, maybe also coming a bit back to the previous question, twofolded. One is, again, your headcount increased here. So is the 1,280 now sort of a number that is enough for the next 1, 2 years of growth? Or should we expect some further hiring here? And then this also refers to the second half year guidance where you just said you imply the high end of the ramp-up cost. If I understand that correctly, you should have a positive gap of about EUR 10 million from nonrecurring inventory write-downs anyways. So nonetheless, it looks a lot like, even if we adjust for this, your ramp-up costs would potentially be even more than that. So maybe you can give a bit of a view how much this higher end of the ramp-up cost would essentially be? And what that would potentially then mean into '25 if those ramp-up costs normalize?

Thank you very much, Konstantin. So, let me answer the question regarding the strategic positioning and revenue contribution of GLP-1 versus other therapeutic areas and R&D investments. And then Marc will talk about expectations in terms of headcount and this ramp-up cost. So in terms of the strategic positioning, we see GLP-1 as the main growth driver for the company from now to 2028. Now, unlike some other companies, we actually have a very rich pipeline, and that basically gives us exposure to GLP-1 across multiple players. We do not want the company to grow on the back of a single customer with 1 product. But we also have exposure to all the other therapeutic areas, and that's very important for us. We want to make sure that by 2028, we are a company that was able to maximize the GLP-1 opportunity, while at the same time, continue to participate in the most exciting innovation in the other fields. Now, again, it's difficult to give you a precise split, but you can assume that the GLP-1 is going to be the #1 growth engine from now until 2028. In terms of R&D investment, R&D happens within our R&D center in Strasbourg. It happens with partners, and it happens within our development infrastructure. And that's why it's very difficult to see how much investment we are putting within R&D. Now, the development of this proprietary technology is not something which is very expensive. So you are able to advance innovation, both for green chemistry and manufacturing, without having to do significant investments. This more reflects around your external focus, your expertise, which in the case of PolyPeptide is significant, and your ability to focus on the areas that will have the most disproportionate impact in terms of manufacturing effectiveness and efficiency. Marc, do you want to comment on headcount and the ramp-up costs?

Of course. So, yes, of course. What I said at the beginning, we are at the final end of ramping up the large-scale asset in Braine, and that also represented in the number of FTEs we currently have. Regarding your question, if we expect further FTE increases? Yes, the growth path Juan Jose was describing is not only based on this expansion we are doing in Braine. So further expansion will come with the further expansion, of course, we will increase mindful the number of FTEs required for these investments and we will have also here for the ramp-up effect at a lower level compared to Braine because Braine is quite a large asset. But we will see similar situations going forward. Regarding your ramp-up -- your question regarding the ramp-up cost, so the ramp-up cost for the second half we consider significant and has an impact on the margin, as I said. You were referring to the write-offs and I was showing that in the EBITDA bridge that we recognize or consider EUR 10 million of the write-offs H1 versus H1 '24 in our EBITDA bridge.

The next question comes from Jack Reynolds-Clark from RBC Capital Markets.

2 for me, please. First, on the midterm guide, could you talk about how much of the 2028 revenues are secured or derisked versus how much is yet to be won? And then could you talk about -- a bit more about the operational efficiencies, how much opportunity is there to realize kind of increased efficiencies at the existing -- in the existing footprint?

Thank you, Jack. Thank you for your question. So, in terms of the midterm guidance, pretty much all the growth from now to 2028 is already secure. And that's why we said this guidance is anchored on commercial contracts that we have already announced, that we have already announced. And that's why we are very confident in terms of this number. And this is very important for PolyPeptide because it's not a matter of just issuing a guidance, but making sure that this guidance is supported by very concrete plans where we are confident in also being able to deliver it. Now, in terms of operational improvements, there is still operational improvements to begin, and this comes from 2 sources. Number one, our operational excellence program. And number 2, we still have -- as we have more capacity coming online, opportunities to drive capacity utilization. And the combination of the 2 is what is going to drive what we call the base profitability to a much higher level than what we have today. That's actually one of the elements that move us from the minus 1.8% to approaching 25% by 2028.

The next question comes from Barbora Blaha from UBS.

My first question is about the capacity expansion. Will this be more a linear expansion, like 15% to 20% of revenues each year? Or is this an average and more will be expensed, like towards '25, '26 to, yes, ensure the growth? And also, where do you want to increase the capacity at existing locations? Or will you need to buy new land? And do you want to build up by greenfield? Or do you want to acquire another company? And then another question on -- you mentioned the new players entering the peptides production field. What new players do you see or expect to enter the market? Do you have any in mind already? And also, do you see more competition coming from other CDMOs? Or more from in-house manufacturing as, for example, also Lilly is building up capacities?

Thank you very much, Barbora. So first of all, in terms of our capacity expansion program. I would say similar to our revenue and EBITDA evolution, we don't expect it to be linear. Our investment is very much in line with specific customer projects that we have. But you should expect that it's going to be around 15% to 20% from now until the end of 2028. And again, what we will do is, every year we are going to give you a guidance for revenue, EBITDA and CapEx. That basically reflects what is going to be happening in that specific year. Now, this capacity expansion does not include M&A. And in terms of whether it is within the existing site and the greenfield. A lot will depend in terms of how things evolve. But we are committed to advancing this multisite network. We are a big believers in terms of customer proximity. We can see the value of having development and manufacturing close to our customers. We see that as geopolitics become more and more of a risk, how important and attractive this is for customers. So we are basically very much focused on making sure that across our key geographies, we are strengthening our infrastructure. Now, listen, in terms of competition, we are seeing 2 things. First of all, if you look at the peptide market, you have some players accounting for a large percentage of revenues. And then you had a very fragmented number of very small peptide companies. So, first of all, we are actually seeing more of a consolidation behind the large players. Now, my comment just reflect the attractiveness of the market. We don't think that from -- we are in 2028 and we look at a competitive environment, that we will see no new player coming into peptides. Now, there are high barriers to entry. Peptides are very complex. That's actually one of the reasons why, in spite of GLP-1 already being a large opportunity, there have been very few new competitor announcements. But I'm sure there will be something -- there will be someone coming in and announcing a desire to enter and compete. The critical thing for us is, what it is with existing players or with new players, how do we differentiate in the marketplace? What is our value proposition? And again, we believe that the value proposition anchor of innovation, development and modularity provides a value proposition that is going to be very attractive in the marketplace. Sandra, next question?

The next question comes from Daniel Jelovcan for ZKB.

And just one question from my side. I haven't really completely understood your modularity approach. I mean, you elaborated on it with now more mid-scale sites, but I don't really get the advantage versus, let's say, a more centralized operation when you do large-scale GLP-1, like your big customers most likely will do. So I don't really get the advantage, although I like the approach, I have to say. But, yes.

Thank you, Daniel. And basically, there are 2 approaches when you build capacity. One approach will be, I'm going to centralize my capacity expansion. I'm going to build very large equipment, and I'm going to use that to serve my customers around the world. That's a very valid approach, and you see some competitors basically moving towards that model. In our case, we go for modularity. And basically, modularity means you build a manufacturing line using mid-scale capacity, that manufacturing line will have advanced innovation, and you build it externally. And then you place that, if you could think as if it were a container, and you place that across your multisite network. What are the advantages that we see with that model? Number one, it has a lower execution risk, because once you build one model, all your models are basically a replica of the first one. So it is much easier to be able to deploy it. The second thing is that, as you have more innovation, it's easier to integrate that innovation within the models than with -- than if you have done already a very large investment on capacity and technology that could become obsolete. Number 3, you have a much faster speed of deployment. It's much faster to be able to build models and place them than try to build a very large new plant. And number 4, it provides a lot of flexibility to customers, because if you have a GLP-1 customer, for example, we have discussions with them where they say, "Well, our product, depending on the market and depending on our performance, it could be 1 ton or 4 tons. And at this point, we don't really know how much capacity we should secure." Well, modularity gives them the ability to start securing capacity, and then as they start to see more traction in the market, then they can scale up more rapidly. And again, the ability to deploy the models across the network also give, as an offering to customers to have a supply chain that is based on multiple geographies, which is also a very important component in terms of their own supply chain strategy and risk mitigation. And that's basically the approach that we are taking. We believe that given where we are and the type of company that we are, this is a better approach to ensure that we can execute against these -- this opportunity.

Okay. And maybe a follow-up. I mean, it's exactly this predictability, the visibility of your, let's say, GLP-1 customers or in general peptide customers. I mean, how can you be so sure about '28 that it will turn out like that? I mean, I have seen forecast of pharma companies 5 years ago they said we need 1 ton and in the end they needed 200 kilograms, and also the other way around. So, I mean, how confident are you with these midterm targets on the top line?

Yes, Daniel, thank you for the question. And, of course, it's a forecast and it's based on a series of assumptions. Now, what we are saying is 2 things. One is that, this midterm outlook is based on contracts we have already signed. And then the second thing is that, I haven't mentioned anything regarding new customers or regarding our pipeline. We have said that we have 29 projects in Phase III moving into commercialization. So basically, the rest of the pipeline and any new contract we'll be able to sign and execute within that period is actually going to help us to derisk our midterm outlook and ensure our ability to deliver against it. We want to make sure that as a company we build a reputation where whatever we say we're going to do, we are able to deliver.

So that was the last question. I would now like to hand over to Michael Staheli for the written questions over the webcast.

There are a few questions on the webcast. Some of them have been answered, but one remaining is from [indiscernible]. How do you expect to fund the additional CapEx investment '25, '28?

As said earlier, a key point for financing is, of course, improvement of profitability and increasing our own operational cash flow. In addition to that, we have a straight net working capital management and we have strong collaboration with our customers on new investments. So these points are mainly financing the growth path to '28.

And there is another question from Hamish Edsell from Otus Capital Management. Please, could you comment on your pricing assumptions in the new 2028 guidance? Are prices agreed at the beginning or multiyear contracts with customers? Or are they renegotiated every year?

I can start. So we have multiyear contracts as part of these contracts. Of course, you agree on the pricing and the prices have inflation clauses. So, in case of any unforeseen developments, you can adjust. But in general, these prices are pre-agreed.

So just to add to Marc's comment, I mean, we are in an environment where there is an imbalance between supply and demand. There are also new customers coming into the market, especially in GLP-1 trying to secure capacity. That basically means that you have a healthy pricing environment. We don't expect to face pricing pressure, but we're able to negotiate terms which are favorable for PolyPeptide. Next question, Sandra?

We have a follow up question from Konstantin Wiechert from Baader-Helvea.

Just maybe quickly again on the personnel expenses. I think in the first half we had a bit of a provisions for your long-term incentives. Also, if I've seen that correctly, for about 30 employees right now. Is that something that should be lower in the second half? Is that usually higher than in the first half? Or is that equally spread over the year?

Thanks, Konstantin, for the question. This is something you should expect going forward and that will stay.

Gentlemen, so far there are no further questions. Back over to you for any closing remarks.

Thank you. And again, thank you, everyone, for joining us this morning. The results in the first half of 2024 highlight again the progress in terms of the operational performance of the company, and also, the progress transforming the organization to make sure that we have all the capabilities and experience to be able to execute on this strategy. And, of course, we are pleased to upgrading our guidance for 2024. It's also important that we get a chance to share with you how we plan to compete in the marketplace and the potential as we transform the company into the most innovative peptide CDMO player. We believe that competitive advantages around innovation and development and capacity expansion through modularity combined are very compelling and will create again a very attractive customer value proposition. And finally, this midterm outlook around targeting to double the company revenues by 2028 with much healthier levels of profitability is going to create significant value for all the stakeholders. So thank you very much, and I look forward to see you in our next earnings call.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.