Siegfried Holding AG (SFZN) Earnings Call Transcript & Summary

Very good morning and a warm welcome from the Siegfried team here from sunny Zofingen. Yesterday we announced the acquisition of an early-phase CDMO from Wisconsin [Technical Difficulty] We want to provide you with more [Technical Difficulty] why we have bought this site, how we're going to integrate it into our network and why the Siegfried team is very excited about this development. With me in the room is Reto Suter, CEO in the interim and CFO. My name is Peter Stierli, I am the Head of Communications. We will first take you through the presentation and at the end we will have enough time for a Q&A session. This webcast is planned until 10:45 CET. Please note that we will record this session. And without further ado, Reto, I would like to hand over to you.

Thank you very much, Peter. And obviously also from my end, warmly welcome you to this call. It's a great morning here in sunny Zofingen. Now the arrow has struck again and the Siegfried journey continues. We have announced earlier that we have signed binding agreements with Curia Global for the acquisition of an early-phase CDMO in Wisconsin in the United States of America and we're very happy to provide you with some additional color and also some of the information about this target in the next few minutes. So let's start to drive in the safe harbor statement on the summary of this transaction. First question is what do we buy? We will acquire a CDMO, which is specialized in early-phase development and manufacturing services. The CDMO is located in the United States in Grafton, Wisconsin and we buy it from Curia. On the slide, you now see where Grafton is located. You also see where that location is relative to the 2 sites we already own in the United States in Pennsville that's on the East Coast and in Irvine for Drug Products that's on the West Coast. So why do we buy this? Why do we make this transaction? This new site, which employs currently and will continue to employ around 80 employees, is strengthening our offering in the Drug Substances area both in the terms of capabilities, but also geographically of course. And with this acquisition, we will be able to offer early-phase development and manufacturing services. And secondly, geographically, it's clear that we also strengthen our U.S. footprint which is, obviously against the backdrop of many regulatory initiatives, a warmly welcomed effect of that acquisition. What is our plan? How do we build out this site? We will further develop it into our North American Siegfried Acceleration Hub for early-phase CDMO services including services also for highly potent API. Question of course is why do we call it the Siegfried Acceleration Hub? Because it will generate additional attractive growth opportunities. We enhance our offering now with early-stage development services and through that become even more relevant for our customers. On the deal terms, we have not disclosed a lot of deal terms in the release, but have mentioned that this acquisition will be funded from existing funds and that we do not change the outlook for 2024 and also that the midterm financial targets remain unchanged. This transaction is expected to close soon on July 1, 2024. However, let me provide you with some rough ideas around the financials. Final purchase price will be determined at closing so that's not very sure yet, but I expect it to be in the low-teens millions Swiss francs. There will be the need to spend a bit of CapEx on the site for the buildout, I expect that amount to be mid-teens million Swiss francs. On the additional sales that we will acquire through that acquisition, that is mid single-digit million Swiss francs. So due to the small quantum, there will also not be a diluting effect on the group's margin. And remember, we do this deal not for the sales and profit of the Grafton site; but we do this deal to capture attractive opportunities already at earlier clinical stages, which will then ultimately result in a further acceleration of Siegfried's growth trajectory. And then after this summary, let's dive deep into the deal rationales. When we disclosed results and earnings over the last few cycles, we have also spoken quite a bit around the composition and the approvals of small, large molecules over the cycle and we have also disclosed some data on the current pipeline obviously with the goal to make a very strong and robust case for small molecules. Today, I will add some additional details especially on the composition of the pipeline because it's important to understand because this will reveal the rationale for this transaction. Now on the right hand side, you see the new drug approvals over the last 6 years divided into small molecules, this is the dark blue bars and the biologics or the large molecules, which is the light blue bars. And you see, and this message is not new, there's a steady flow of newly approved small molecules coming into commercial production. That's very good news for our franchise especially when you consider that we at Siegfried with the current technology base are able to access at around 80% of these small molecules coming our way. We also have spoken about the new pipeline or the approval pipeline before, but today I would actually like to provide to you some additional insights. I'm now referring to the Marimekko graph on the right hand side and vertically you see the pipeline sliced into the various players of the market. So at the top you see governmental, university, nonprofit organization; which accounts for 1,181 projects and products. If you go further down, you see biotech, small pharma companies; regional midsized pharmas to the large global pharma companies below. And in the horizontal axis, that graph is sliced by critical stages so blue to the left refers to preclinical and Phase I and gray refers to Phase II through to filing stage. Now 2 areas in this graph are marked in a darker blue and you see that the vast majority, so this is well above 80% of the total, of these projects and products in preclinical and early phases are driven by small and medium-sized companies and it's exactly these clients, which we are now addressing with the Siegfried Acceleration Hub. We want to tap into this large pool of future projects and products. Now going still a bit into more detail. This is the development phases and as you know so far, Siegfried has typically entered a customer relationship somewhere at the end of Phase II. So this is marked in gray at the bottom. And our focus was to provide high quality, very robust GMP manufacturing at really industrial scale. And after the launch of course, we have then provided commercial manufacturing in our large scale API manufacturing plants in our leading API Drug Substances network. Now with the recent acquisition and the buildout to the Siegfried Acceleration Hub, we enhance our offering with early stage development services for Drug Substances. So through that, we will become even more relevant and attractive to our customers as we are now able to offer a really integrated range of services from early stage development to commercial production of the APIs and then not included on this slide of course also through to the manufacturing of the fully formulated Drug Products ultimately. We think that this integrated offering will be specifically appealing to the small and midsized pharma companies so to the dark blue area on the last slide, who typically lack the resources to change their suppliers after preclinical stage of Phase I. And as a result, this transaction; and that's the main rationale for this transaction; will enable us to capture attractive opportunities already earlier than today at earlier clinical stages, which of course will then also generate attractive opportunities, which over time will accelerate our growth trajectory. So more molecules will make it into commercial stage through this transaction. In addition, and that is also very important, against the regulatory backdrop that we see today; this transaction will also strengthen our position in the United States, the world's largest pharmaceutical market, and it just enhances our degree of freedom to operate with this additional footprint in the U.S. Earlier today I have received quite a few times the question why we are making that pivot now into earlier phases and I'm also happy to share a few thoughts on the strategic thinking behind it. It would be wrong to think that this is just a decision which we took a few weeks ago. So the strategic debate whether to enter earlier stages has been going on for quite some time and it was from the very beginning clear to us that we would not be able to access that stage in an organic format as everything we do is GMP and obviously earlier stages are non-GMP, so different mindset. So it was clear to us that we would access it through an acquisition. We also on the business development and sales side have received for quite some time inquiries from small to midsize pharma companies who didn't want to change providers during clinical trials. And obviously now in the current environment against the backdrop of an improving biotech funding, this has normalized quite a bit, and also regulatory developments such as the U.S. BIOSECURE Act, all the stars have lined up and we are now very happy that we have been able to transact or able to get exposure to this attractive space and we're looking forward to this further acceleration of our sales momentum. From a structural point of view with the acquisition of the Siegfried Acceleration Hub in Grafton, we further enhance our world class network. So we enhance the offering particularly for small and midsized companies so that fits in well into the current field, which is known to you. And you see on this chart that this is complementary to our current R&D development centers in Zofingen and Evionnaz long term quite perfectly actually. So this will be just an additional feeder into our network, additional complementary capabilities in early-stage development services and also manufacturing based in the U.S., which again is a strong market in the world. While this transaction of course in the first step strengthens the Drug Substances offering, it's clear and I mentioned it the offering goes beyond that as it includes also the development and the manufacturing of fully formulated Drug Products in a next step. And this brings me actually already to almost the end of the short presentation. We are really excited about this acquisition. It significantly enhances our offering by adding this early-stage component, which we did not have so far. It's specifically attractive for small and midsize pharma companies which, as presented in February, make up 2/3 of our revenues in 2023. So that enables us to just capture attractive opportunities at earlier clinical stages and this leads to further acceleration of our growth trajectory. And we of course, all of us while we are very happy now, we know that it will require very hard work to develop this network into the Siegfried Acceleration Hub. But we are very keen to start this process after closing, which is expected to be on July 1. So the Siegfried journey will continue. So today the arrow has struck in grow existing core, but we will of course just continue to deliver on our strategy evolve and we will continue to access attractive growth opportunities as they become available through M&A as we did today, but of course also organically. And this will result in, as you would expect it from Siegfried just in further profitable growth. These were my comments and I think we are now available and look forward to your questions. Thank you very much.

Thank you, Reto. So now we can start the Q&A session. So please raise your hand and I will call you up and you can unmute yourself to ask a question. First question I see is from Gary.

So Reto, just to pick up on that comment you made about already having some incoming from some smaller customers who were looking for early-stage activity, which you just weren't able to do before. Could you just add some more color here in terms of the visibility that you have in terms of demand for these services and perhaps how you see the productivity of the site and its contribution ramping up from the mid single-digit revenue amount you gave or have given in those prior conversations? And then I'll have a second question that I can come back to.

Very sensible question, Gary. I think it's important to see that we did not do this transaction for the stand-alone P&L of the Grafton side. That will remain small. And overall if you look at the revenue mix of the Siegfried Group also going forward, the vast majority of our revenues will come from commercial manufacturing activities. So the Siegfried Acceleration Hub will develop of course, but this will never be a main contributor into the revenue mix within the Siegfried Group. So the deal rationale is really around having the access to earlier phases to get in touch and to secure 1 or the other molecule making it into commercial manufacturing stage and then benefiting from the revenues that we generate there. So you will see the effects of the transaction actually in the revenues of the Drug Substances cluster over time. So this is how we look at it. Of course we have received inquiries from smaller and midsize pharma companies also in the past. We have even executed some earlier stage development projects, but we restricted that actually to strategic customers for whom we do just a lot of work. It's clear so far we have not been in a competitive position to play there because everything that we do is GMP governed and obviously in the early clinical phases, you are not so we were not cost competitive. Now with the addition of the Grafton site, we're able to do that and we are very happy about this addition to our offering.

Okay. And then the second one was just really on how this fits into the rest of the network. I mean you've got the Pennsville site in the U.S., but I think that's kind of more commercial. So just thinking about how projects might transfer as they progress. You've got the North American presence in early stage with this deal and commercial with Pennsville, but maybe not a North American presence within the later stages of development. So do you see that as a gap that might now need to be filled or are you confident that you've got sufficient capabilities in the network to kind of cater through with the value chain now?

I mean you saw it on the slide where I presented how it feeds into the network. Of course project can be commercialized within Grafton. They that can be complemented and passed on into the existing R&D facilities that we have in Zofingen maybe not in Nantong this time or they, based on the maturity of the project, could be introduced directly into commercial manufacturing and then into the existing large scale API manufacturing network that we already have and this is the beauty of it. So it's really a perfect fit of the current setup that we have.

Next question is from Charles.

Congrats on the deal. Three questions, please. First of all in terms of the existing customers of the new sites, do you have sort of rights to compete for that work to take it through to clinical and commercial or does Curia, with arguably some existing relationships, have some sort of rights or ability to compete for that work?

Very good question and I'll just answer the first one, if I may, Charles. Obviously we take over business that is currently in that site and that business will remain of course in that site. However, it is clear that we will also need to build it out. So business development and sales activities will play an important role there and we have prepared for this for quite some time and it will kick off on July 1 because it's clear we also need to bring in quite a number of new projects on to that site in order to make it into a well-diversified projects portfolio also in the earlier stages as we already have it now in the later stages.

Okay. So just to clarify. So can Curia sort of go back to the existing clients you have in this site and try to attract those projects through to the rest of their platform?

Yes. I mean that's existing in that site and we will continue to do that business in that site, but obviously we will add new business to that independent from Curia.

Okay. And then secondly, obviously some early-stage CDMOs have been under pressure because of biotech funding and even more cautious pharma spending in the past, which strikes me that this is perhaps opportunistic at this stage of the cycle. But have you actually started to see a recovery? You talked more positively about biotech funding and about BIOSECURE. Has that actually translated to more inquiries or better business development pipeline?

Yes. I mean 2 answers to that. I mean first of all, we will follow what we also have successfully implemented on later stage and also commercial manufacturing, which is the diversification across a large portfolio. So no significant key project or product risk. So this is one of the reasons why we want to bring in many new projects on to that capacity in this concept. So that's number one. This is by far the best available risk management method to deal with the risk that you describe. Secondly, on biotech funding; if you look at the environment, if you also look at funding levels, if you look at dry powder; this has not come back. I mean it has come back. But if you look at it over a mid to long term, it has just normalized. There was too much money in that space and it seems to have normalized now. So also from that perspective the stars have lined up and it was a good point in time to transact on that. Obviously the BIOSECURE Act was more referring to the geographical component so from that perspective, it makes a lot of sense to also have a very close relation from a geographical point of view to the United States of America.

Understood. Is there any change in the numbers of discussions that you're having on the basis of I guess from the end of last year when it was perhaps quieter to now?

Yes, I mean we are entering early stage now as we have not had it before and we will immediately start with business development and sales activities.

Okay. And my third one is perhaps a bit cheeky one because it doesn't relate to this at all. How is the new CEO search going?

I think it's going well. That's obviously in the hands of the Board of Directors and I think they're going through rounds and rounds of interviews. So they're optimistic that in the second half they will be able to announce new leadership of the Siegfried Group.

The next question in the queue is from Fynn.

So 2 from my side. First, on the CapEx investments that you plan there so what's actually behind that? Are you further expanding the capacities at the site or is it more modernization that's may be necessary? And then can you maybe help us on the phasing of the CapEx so do you expect all of this still in 2024 or will this also be phased over the coming years maybe? And then you said that it won't be dilutive to your margin so it's below group, but is it actually a loss-making entity? And if so, when would you expect it to turn breakeven for you?

Thank you very much for these questions, Fynn. Let me go through them one by one. I mean first on the CapEx level, this is midteens million Swiss francs. Obviously from a CapEx point of view, 2024 is already over almost until you have planned and procured, et cetera, it's almost '25. So this will spread over '25 and maybe '26 and it will not be a lot. I mean what we do there is partially also expand the capacity. This is an early stage hub so what you should expect is a bit of lag, a bit of piloting capacity. This is what it is not much, but just the things which we think are important for us to be successful in the market with new clients and that's what we do there. On the dilution of the group margin, obviously as this Grafton site will not be significant in terms of revenue contribution, it also cannot have a significant impact on the group margin. The operations is not loss making, but we also have not purchased that facility for the EBITDA or net profit contribution because it's simply too small. The deal rationale is really to get access to that marginal additional molecule making it into commercial manufacturing, which will then of course benefit through scale effects and attractive pricing, which will be beneficial to the group margin from that perspective.

We have 1 more question from Anja.

I have 2 questions as well. One might be just very quick. Could you kindly share with us what the capacity of the pilot plant in Grafton is? That would be question #1. Question 2, I mean in terms of molecules, could you share how many molecules you currently have in your preclinical pipeline and what you expect in the best case scenario? I mean you never know for sure. But best case scenario following the acquisition or the closure of the acquisition, how many more molecules you think you will be able to work on going forward?

I mean in terms of capacity in the pilot plant, this is a few cubic meter of reactor capacity. I don't know whether this information is helpful for you, but it's of course...

What do you call few, Reto?

Anything between 1 and 20. So this is small. This is really small. It's pilot capacity as you would expect from an early-stage CDMO. Now in terms of molecule, less important is what is already there. More important is what is the target? What should we bring in on an annual basis also to make the point of the diversified portfolio in early-stage projects that we went after? I mean you know that in the late-stage phase, we have well over 100 projects going on; some technical transfers, new late stage molecules, et cetera, et cetera. So that's the number there. And within the Siegfried Acceleration Hub, it may be an inflow of 10, maybe 15 molecules a year. This is what we expect to create that well-diversified portfolio.

Gary, your hand is still raised. Do you have another question?

Yes, if I can. I was just thinking about the site, it's early stage focused and we've heard some commentary from one of your Swiss peers recently about them decommissioning to early-stage biologic sites due to low levels of utilization. So I appreciate the technology is different as of the sites. But perhaps you can just talk to the reasons as to why this site no longer fits within the Curia network so why didn't it work for them? I can see how it works for you, but why were keen to let it go? And then just another follow-up, which is really just about the kind of scope for further deal activity near term given the constraints that might be placed on management and the bandwidth that management might have in terms of needing to integrate this site. I mean financially, it's relatively small so the flexibility is still there, but it's more in terms of flexibility there management level?

Two very sensible questions, Gary. I mean on the Curia's rationales for selling that site, obviously that's a question for Curia. I'm concerned more by the Siegfried rationales for buying it. So I mean for us, this is a perfect match and it fits. From Curia's perspective, it's maybe a concentration to their core abilities. That's maybe what it is, but again that's a question for Curia. Now the second question is an interesting one. Will this now tie up a lot of management activity and bandwidth and will we not be able to do any further acquisition in the next years to come? And that's obviously not the case. I mean M&A, I'm repeating myself, is always on at the Siegfried Group of companies and it will continue to be on and also even in the next few months and quarters. We are quite far advanced already with the integration plan and the readiness plans for the close, which is on July 1 in 2024. And while 1 or the other function will be absorbed through that and we'll have to invest additional time on that, the absorption of the management capacity actually is not that large. So from that perspective, we're happy and able and also prepared to do additional M&A. I mean it's a small site, which also reflects in the effort that we need to make in order to integrate it properly into the Siegfried network. However, as always, the integration part is important to us and we will work hard and all the teams will work hard to make that happen.

Then we have another question from Leonildo.

Sorry, I just came in so I may have repetitive questions so apologies for that. So I have 3 questions. The first one is will the highly potent APIs be the focus of the new site? And a follow-up question on that is if yes, how could it impact client growth for the segment and group level over time? And the final question would be how long until the full integration of the new site?

I start with the last one. This will take 2 to 3 years I would expect to have it fully built out. Obviously the technical integration will take much less time so that's done within a year as we usually do it. From the commercial effects, I mean the question really is how much revenue quantum can come from single molecule? That's what the question always down to. So if I look at my Top 10 molecules, as I report quite regularly, that is more or less give or take 30% so CHF 400 million. So if that molecule makes it into the Top 10, we are speaking of a revenue contribution of CHF 40 million per year. If not, it's lower so it can be CHF 20 million a year and then obviously that's then year after year coming into effect. So over the years that will maybe become relevant for the Siegfried Group. Now your first question, I had some difficulties to properly understand it. I'd be glad if you could repeat it.

So the first question was about the focus of the new sites because in the press release, I saw that you mentioned highly potent APIs and I'm just wondering if that's going to be the focus or not.

Yes. I mean the focus is early-stage development services so preclinical and Phase I maybe early-stage too. So that is the focus. And the technical abilities of the site are broad and they also include the ability to develop highly potent APIs. So that's just 1 of the abilities that is available on that site.

Sibylle, you also have a question. Sibylle, do you have a question? You could unmute yourself and ask your question. Sibylle, we cannot hear you. You need to unmute yourself.

Maybe you write it in the chat.

Okay. Otherwise feel free to contact us after this call and then we can take this question separately. Are there any more questions? Does anybody have any additional questions? This does not seem to be the case. So I thank all of you for having joined the webcast. We are looking forward to hopefully see you again on August 22 for our half year results. With that, I wish you a wonderful day and goodbye.

Goodbye, everybody. Thank you very much.