Sartorius Stedim Biotech S.A. (DIM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the Sartorius and Sartorius Stedim Biotech conference call on the Polyplus acquisition. Today's conference is being recorded. At this time, I would like to turn the conference over to Dr. Joachim Kreuzburg CEO. Please go ahead, sir.

Thank you very much, and welcome also from our side to our today's conference call on the acquisition of Polyplus by Sartorius Stedim Biotech. Thank you for your interest in our acquisition and our business development overall. We are happy to host this call after we learned last week that there is quite a significant need for further explanation and wishes from quite numerous investors to have the opportunity to go into some more detail, so we are happy that so many of you have found the time to dial into our call today. Let me briefly introduce Polyplus on the first chart before I then later hand over to Rene Faber, my colleague on the Sartorius AG Board responsible for the Bioprocess Solutions division and most recently, also being appointed CEO of Sartorius Stedim Biotech. And then Rainer Lehmann is available as well, particularly, to talk to you about the financing structure that we are considering and of course, also discuss any upcoming questions. So Polyplus is a company and a business that has been very much recognized by a lot of players in the industry for, I would say, 2 reasons. One is because it's a very strongly positioned and highly recognized company for the supply of transfection reagents to a lot of companies in the gene therapy market. It has a strong position in this market. And therefore, I think everyone knows Polyplus very well from that end. Secondly, it was clear that this company would be for sale at some stage as it was owned by 2 private equity firms. For quite a while, it was owned by ARCHIMED and then most recently since 2020, also by Warburg Pincus. So by ARCHIMED and Warburg Pincus together. So I think it's fair to say that therefore, it has been quite a competitive process now when the 2 owners were looking for selling the business. So Polyplus is headquartered close to Strasbourg. It also has locations in Belgium, the U.S. and China. The majority of the 270 employees, though, are employed in France. The majority of those, again, are close to Strasbourg. It runs GMP manufacturing activities and is expanding those -- has expanded those significantly over the last couple of years. And as I already said, and Rene will go into more detail in a minute, it's particularly known for transfection reagents but has expanded the portfolio significantly for, let's say, further upstream applications, particularly in the field of viral vectors that are used in cell and gene therapies, but again, more details to come later. And you will also see later or get some more information about how strongly this business is positioned within this crucial application and that this, together with Sartorius really will lead to a complete or at least very broad portfolio, along with the different workflows of those customers. The financial profile of this business is also very strong. It will achieve or that is expected to achieve upper double-digit million euro sales revenues in 2023 based on strong growth rates -- top line growth rate but also EBITDA growth rates, very substantial gross margins that are driving also the bottom line profitability, therefore, also very significant EBITDA margins today. And as you would imagine, when talking about reagents, we are talking about a high share of recurring revenue that this company is achieving. And again, as I already said, I will now hand over to Rene, who will walk you through the details of this business. Rene, please?

Yes, Joachim, thank you very much. And hello, everybody, from my side. Good morning. Good afternoon. I'm going to walk you through a bit more in detail through the portfolio, the main applications, market and synergies with the Polyplus moving forward. On the chart here, you see the -- like 3 main product groups Polyplus is offering. In the middle, Joachim already mentioned, what Polyplus has been known for mostly is transfection reagents. Those are reagents used in virus or viral vector production, both the reagents for adherent cell cultures and also more modern suspension cell culture. The management of Polyplus has been developing the company very nicely operationally, but also in the last couple of years, added to the portfolio interesting, highly relevant plasmid capabilities. You see that on the left side, it's both plasmid designed through the acquisition of e-Zyvec and plasmid production through the acquisition of Xpress Biologics, a company based in Belgium. Plasmid, as most of you probably know, are also critical input materials, critical additives to make viral vectors, but also inputs for DNA or RNA-based therapeutics. On the right side, you see some products which have been developed organically, if you like, by Polyplus in the last few years. Launched recently also novel reagents for the direct type of delivery, In-vivo delivery of RNA and DNA. So also a nice complementarity to transfection reagent and plasmids. Moving to the next chart. I will explain you briefly what is the main application of transfection reagents plasmid, viral vector and manufacturing. On the left side on the chart, you see a scheme of upstream process and the critical materials, which are needed to make a viral vector, plasmid and transfection reagents as the most critical materials here in terms of impact on overall process economy and process performance, product, profile, quality of the product. Transfection reagents is needed to bring a plasmid into a cell which is then growing in cell culture media and typically in a single-use bioreactor and the product out of it is our viral vector. On the right side, you see the description of the impact or criticality of those input materials in the process with plasmids and transfection reagents, both being the most critical inputs here. Moving to the next slide. What is the key and this is what we are very excited about in such application is to make the combination of those critical materials like plasmids, transfection reagents, cell culture media and cells, work properly together, make it as an integrated system, which delivers to the client the most efficient process. And here, we see the combination with the Sartorius products and technologies like cell culture media we have in the portfolio, but also later in the process downstream technologies, monolithical columns, which we acquired by -- through the acquisition of BIA Separations, you will remember in 2020. This combination provides a really industry unique, highly differentiated, fully integrated workflow offering, which addresses the main pain points of customers. On the next chart, let me talk briefly about the market, which we are addressing with these products or Polyplus been addressing quite successfully with the transfection reagents and plasmids, particularly cell and gene therapies. You see on the left side this type of therapeutics represent today already quite a significant portion of the R&D pipelines of our customers. We see those pipelines being, meanwhile, well distributed across the clinical phases from preclinical to late Phase III clinical up to commercial approvals. Of course, this is not yet a mature market. This is like 20, 30 years ago, monoclonal antibodies market, also did not -- or it took some time until the molecules made it to commercial and you have at the base commercial business consumption of materials in such applications. Here, however, we see the market maturing, molecules moving towards later clinical phases, which will and is driving the demand to -- for such input materials and of course, with the upcoming approvals that will drive the growth of that business. Last but not least, also new indications with larger patient populations is another growth driver. And the expanded use of DNA or RNA now beyond the vaccines is also an application where we see growth coming for that business. On the next chart, let me talk briefly about the synergies, the potential we see. Again, very excited about the unique combination we are creating here, solving unmet urgent market needs, both on the portfolio side, the cross-selling capabilities we will be able to average across the portfolio in upstream, downstream technologies, our use of our global platforms, not only in R&D where we see a very interesting complementary capabilities, which will bring new innovations to the market, but also our global reach to the customers through the sales organization and manufacturing network. If we look at Polyplus as a -- like a fifth acquisition in a row in our journey to build highly relevant, attractive financially and the growth profile portfolio we have been putting together since last few years. You will remember 2019, we started with Biological Industries; cell culture media for cell therapies added in 2021; the CellGenix growth factors used in cell cell therapies manufacturing; Xell company specializing on cell culture media use in viral vector manufacturing, so highly complementary, very close to plasmid transfection reagents used or provided by Polyplus; then Albumedix and other critical material for cell therapies, formulations and cell culture media. And now with Polyplus, this portfolio would -- we will, moving forward, bring together build a kind of specialized cell and gene therapy business unit within the division. And Polyplus, both products and the management team will play a key role in building that attractive business units in the Bioprocess division. With that, I hand over to Rainer, who will walk you through the financials. Rainer?

Yes. Thanks, Rene, and also hello, everyone. Welcome to today's call. So let's look -- have a look at the key figures and especially the financing. Purchase price, as we disclosed, is around EUR 2.4 billion. How are we going to finance this? JPMorgan provided us with a bridge loan facility on Sartorius AG level for up to 2 years. And this then the plan after closing to refinance this mainly and potentially only by long-term debt. Of course, here, we used to tap into the promissory note market through [indiscernible] for this level. This won't be enough. So we're here thinking, of course, tapping into the bond market. As we always said that in case of large acquisitions, we will be open to use equity. Hence, we also put that out there at the end of last week and said we'd be open to raise a smaller portion, if any, in order to finance this. But this is really highly dependent on the market conditions. I really want to explicitly say it's not mandatory. We have the financial strength and capacity to fully finance this through debt. Of course, the transaction is subject to customary conditions in this case, particularly by the regulatory authorities. This is really the only thing that will go -- will happen in the next few months and we, therefore, expect the closing during Q3 of this year. And with that, I think I'm handing back to Joachim for Q&A, right?

Yes, exactly. Basically, Q&A. So thanks, Rainer. Thanks, Rene. And yes, I would say stage is open for Q&A then.

[Operator Instructions] The first question comes from Michael Leuchten from UBS.

Two questions, please. Just going back to the equity part that Rainer just commented. I mean it's pretty clear that the parameters you've given in the past means you don't have to dip into equity. But I think the market is concerned that you are going after more sizable assets now and you -- with this when you've basically used the debt capacity or whatever else you need to do, then will require some equities. So I was just wondering if bigger picture you could comment on why this one, in particular, was the one to do right now and sort of what the opportunity costs are of maybe having to look at equity? Should there be something else out there? Basically, do you need to chase higher growth assets because some of your portfolio is slowing down and that's the only way to stay dynamic? And then the second question. Polyplus seems to be specked in for Zolgensma and Luxturna. I suspect it might also be spec-ed in for the Sarepta DMD drug. What percentage of the revenues roughly are dependent on in-market sales? And is that a drag on the top line momentum for the next few years?

Yes. So thank you for these 2 questions. Maybe I take them at least to start off with an answer. Maybe one thing we ask you for understanding and acceptance is we have announced the signing of an agreement and now we are on the path towards closing. As Rainer just said, we expect that during Q3, so we think another whatever, let's say, roughly 4 months, maybe that this will take. So -- and therefore, we are really limited in regards to giving certain details on the business of Polyplus. And further, we also would hesitate to give any details on specific drugs that products, be it Polyplus or other Sartorius products are specked in. So therefore, I would say, let's postpone a more granular answer on your second question. And again, I would like to ask you for your understanding. In general, I think what one can say we consider the, as Rene, I think, said, we consider the pipeline for gene therapies to be healthy with a healthy distribution over the different stages of clinical trials, and we think that Polyplus is very well represented across this pipeline. On your first question or this rather spectrum that you opened there and that we're asking for. So first of all, I really would like to underline again that we consider Polyplus to be an extraordinarily attractive business. It really has been on the top of our strategic agenda for a while. And as I said, it was clear for everyone in the industry that this would become a sale at some stage. So it's not that this is by any, whatever, chance only that we were really so highly interested in this business. So in other words, it's hard to take this case as a proxy for numerous others. But as we always said, indeed, Rainer referred to that, during all the recent Capital Market Days, there was a section where we were showing how our financing capacity was structured and the components, this would be composed of. And we always said that equity would be a certain portion of that. And I think what is also clear is that at times with high interest rates, there is a certain shift at what level a certain equity portion might become attractive and meaningful also in regards to EPS. So also that comes at a price now again differently to quite a couple of years before. So I guess what we are very carefully looking at in how -- what would be the best balance also in regards to earnings per shares on the, let's say, shorter time horizon, whereas on the mid-term time horizon, such businesses, such assets would be accretive in any scenario with or without a certain equity portion. So therefore, I would say I understand these concerns by the market to some degree, even though, as I said at the beginning, we have been a little bit surprised because we always have been very, very transparent about the fact how our financing capacity would be structured and how we would look at that. And then finally, also, thank you for your -- for how clearly, you address other potential strategic motivations to acquire such businesses and whether that would be to compensate for lower growth rates in other businesses or so. So I think maybe before I try to answer that, I would like to say, well, we are actually at very special times because we are going through this normalization. And therefore, I think maybe it's also important to adjust what's the underlying growth rate in such more established businesses like whatever filtration, for example, or fluid management technologies or also some of the cell culture technologies. So -- and we have seen extraordinary growth rates for at least 2 years during half of 2020, the full year of 2021, et cetera. So maybe that's just as a disclaimer upfront. But that's really not the motivation for us. Our viewpoint here is, as always, we are looking for complementary additions to our portfolio to make the entire portfolio then even more relevant to our customers. And since a couple of years, Rene was relating to that, we have a specific focus on new modalities because these new modalities really gain traction, become increasingly important. And to complement and building -- or adding complementary technologies means also generating synergies. And yes, of course, that means that we believe that the addition of this business is accretive to the growth of other of our businesses, existing businesses as Rene walked you through mostly in the area of other critical raw materials but also in regards to some downstream technologies. So I wouldn't qualify this transaction as a defensive move at all. We believe it's really a straightforward move really at the center of our strategy, fully in line with what we have done over the last few years and also always communicated what we intended to do going forward.

The next question comes from Richard Vosser from JPMorgan.

You mentioned a growth rate of the market of around 20%, I think, in the slides. I just wanted to think about how that growth rate develops over time. As products maybe enter the commercial phases, do you see a step-up in growth, followed by a slightly lower growth. Is that linear? Or are we going to see step-ups as products are approved? And then I suppose more general question on Polyplus. How should we think about that growth over the next few years for Polyplus and how has that been historically for them? Are we expecting in, say, '24 ahead of market growth and then that coming back towards market growth in '25? How should we think about that? And then second question, just thinking about the -- maybe the exposure to individual customers. You mentioned exposure well spread across the product pipeline of gene therapies, but how should we think about exposure to individual customers in the revenues now and how that will change? Of course, we know that in -- across your total business, you have exposure. It's well diversified for -- by like 5% for each customer. How should we think about that for Polyplus? And then one final question, just thinking about the transition. You mentioned the 2 technologies adhesion and suspension technologies for making viral vectors and making gene therapies. Do you -- does Polyplus get a step up in volume as you transition from one process to the other? Or is that not relevant at all?

Maybe I'll start and then Rene will add to that. So on market growth, we wouldn't consider the growth of that market to slow down anytime soon. We are still talking about early times, Rene made the comparison to the monoclonal antibody market a couple of decades ago actually. So I think the times where commercial products, one-off patents and therefore, growth will slow down, we think is not close to us. So we are not close to those times. We also have seen recently over the last couple of years that Polyplus also because of they were expanding the portfolio, expanding the relevance of their offering to the quality and performance of their customers, they were able to rather grow a little bit ahead of market growth. And one can also say is, over the last couple of years because you are rightly addressing the, let's say, potential cluster risks. I think Polyplus managed quite successfully to reduce such yes, let's say, cluster risks within their portfolio over the last couple of years, as we said before, quite nicely present across the different stages of such products within the pipeline. Of course, when you relate that and compare that to the Sartorius business currently, it lays a little bit in the nature of such early stages -- earlier markets, less mature markets that you have less players, a smaller number of large products, blockbusters, if you wish. So therefore, yes, in relation maybe it's a little bit more clustered. But yet, I would say, it's really not a highly clustered business as one sometimes has seen that in some other areas of technologies recently also in regards to technologies, for example, that played a major role for the manufacturing of mRNA-based vaccines also. Yes. So it's not at all such a clustered business, for example. And maybe with that, I hand it over to Rene to answer -- or to add to that and answer further aspects of those questions.

Yes. Thank you, Joachim, and Richard, thanks for the question. Let me talk about the adherent and suspension, your question around that. So in -- today, most of the pipeline, the molecules in the pipeline are based on traditional adherent cell culture processes. And there is an effort in the industry to move from that to the more modern, more scalable, better-to-control processes -- suspension processes. So we would not see that like moving within a drug candidate from adherent to suspension with -- during the development, but rather a trend in the industry to put more candidates on suspension processes due to the reasons I mentioned better scalability, better control in that regard.

The next question comes from Hugo Solvet from BNP.

First, on the potential size, timing of equity component. Can you maybe -- should market be in a better shape by the time of the closing, give us a bit more indication on what size of equity components you could be doing? Are we talking about a minority, majority of the EUR 2.4 billion? Second, when you updated the 2025 target for Sartorius Stedim, does Polyplus fits into the bolt-on type of deals that were included in the guide? And lastly, can you give us some indications on the size and growth profile of how we say, the more legacy portfolio of transfection reagents is from Polyplus and the new offer from custom vector designs and the growth rate or does that compare to the 20% growth of the broader market?

Rainer?

Yes. So, Hugo, regarding the equity side. Of course, as I mentioned, it really depends on the market environment after closing when we're looking into refinancing. . And I really want to point out that we're talking here really about a smaller portion, by really keep it in a lower, let's say, double-digit percentages around there, but it would be only a minority part, if any, that we would do on the equity side. But again, highly dependent on the market environment at the time of the refinancing. Focus here will be rather the debt side and tapping into the bond market.

Maybe if I may add, Rainer, the lower double-digit percentage of the transaction volume. That is what is [ mentioned ].

Yes. Yes. Yes. Thanks for the [indiscernible].

The next question comes from...

No, sorry, sorry, sorry. Hugo had 3 questions. Sorry. So yes, and maybe in addition to -- or not in addition, but answering the other 2 questions. So 2025 ambition, Hugo, just briefly, it is such a bolt-on or whatever, really following the center of our strategy kind of acquisition that we had in mind when describing our 2025 ambition that always included a certain portion of inorganic growth. So no idea at this point to adjust our 2025 ambition indeed. And growth profile, maybe I'm not 100% sure whether I got that right? Because you said in how far that would relate to the legacy portfolio? What exactly was your point?

Sorry, you presented the chart on the 3 businesses that's [indiscernible] for Polyplus. Can you share maybe the split of the total revenues and the growth rate for all of them, so we have more indications on where growth come from.

Yes. I, of course, also understand that question, but I have to really ask for your understanding, right? We cannot disclose more details at this point in time. It's a transaction that is not yet closed. We agreed upon the -- all terms. It's now waiting for regulatory approval, and we cannot answer for more details at this point. Sorry for that.

The next question is from Odysseas Manesiotis from Berenberg.

So firstly, considering this one and your other recent acquisitions in the viral vector and advanced therapy space, which I'm assuming you're outgrowing your monoclonal antibodies business, would around 20% advanced therapy plus viral vector sales exposure for your bioprocessing business by 2024 be a reasonable estimate? And secondly, I understand your ability to disclose might be limited, but perhaps, try? So on the EBITDA margin, the group would take in publicly listed nucleic acid product [ peers ] of Polyplus who are at around 40% to 50% as a comparison or at least basically above the group EBITDA margin?

Rene, do you want to take that?

Yes, I can take it. So when I referred to the combined businesses, which we have been acquiring in the space of cell and gene therapies or particularly adding critical raw materials, cell culture media, to our portfolio for these type of modalities. Your question was if it's fair to say that the portion of revenue within the Bioprocess solution for this type of products would be around -- I think your question was around 50%. I would say heading towards that longer term, short term, it's going to be somewhere around 10% rather.

Great. And EBITDA margins?

I can take that, Odysseas. Basically, you're thinking in the right direction in the ranges that you provided there. They are accretive to the Sartorius Group and also the BPS side. Hello?

Hello. Sorry. Could you repeat the last point? I broke for a second.

Okay. Odysseas. So basically, you're absolutely right in your assumption that you put out there with the comparables and they are accretive to the Bioprocess as well as to the Sartorius group level EBITDA margins.

The next question is from Ed Ridley-Day from Redburn.