Lonza Group AG

Ladies and gentlemen, welcome to the Half Year Results 2024 Investor and Analyst Conference Call and Light Webcast. I am Sandra, the Chorus Call Operator. I would like to remind you that all participants have been listened only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions over the conference call by pressing star and 1 on your telephone and follow the presentation over the webcast. Please limit yourself to one question and then re-enter the queue in case you have a follow-up. In the webcast, we have a chat box, which should only be used if your question cannot be heard over the phone line. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Wolfgang Wienand, Chief Executive Officer. Please go ahead, sir.

Thank you very much Sandra and good morning and good afternoon and a warm welcome actually to our H1 results presentation. It's actually great to be here with you today. As we begin, I would first like to take this opportunity to introduce myself. My name is Wolfgang Wienand and as many of you will know, I joined Lonsa as CEO at the beginning of this month. I joined Lonsa from secret. where I was CEO for the last five and a half years. Before that, at Siegfried, I held the roles of Chief Strategy Officer and Chief Scientific Officer. Prior to joining Siegfried, I spent time in a series of leadership roles at Evonik Industries, most of the time also in the CDMO space. Over the last two decades, my career has helped me to gain a deep knowledge of the CDMO space to build a broad network in our pharmaceutical industry. I'm very much looking forward to using all of this in order to, together with my team, bring Lonza to the next level on this extraordinary journey. While today is only day 19 in my life at Lonza, it is still important for me to engage with you and to at least share some first impressions and thoughts about my plans for H2 at the end of this presentation. What I will not do, though, is present the results of H1 2024 to which I didn't contribute myself, or to comment or take questions on actual financials, the financial outlook for full year 2024, or for the mid-term. For that, I will hand over to our CFO, Philip, who is with me in the room. and who will now guide you through the set of figures of the first six months in 2024. So over to you, Philipp.

Thank you, Wolfgang. It's my pleasure to present our business in the first half today. As usual, we provide an update on the group as a whole and a financial summary before going into the divisional deep dive. We will also make sure there is enough time for a Q&A at the end. Before we start, let me remind you, our figures are reported in Swiss francs, growth is reported actual exchange rates, except sales growth, which is reported at constant exchange rates. So let's start with the group overview. As you can see here, our sales growth in the first half was well on track to deliver our full year outlook. Our sales were 3.1 billion Swiss francs, growing 1.8% versus H1 2023. We delivered a core EBITDA of 893 million Swiss francs, representing a margin of 29.2%. We have also reported solid free cash flow at 296 million Swiss francs. We achieved this through good performance across our CDMO business, despite challenges in the hard, empty capsules business of our CHI division. With these results, we confirm our group outlook at flat sales growth in constant exchange rates and a high 20s core EBITDA margin. We also confirm our mid-term guidance 24 to 28, which we upgraded in March of this year, following the announcement of the Vacaville site acquisition. Now let's take a look at some commercial highlights in our CDMO business. We have seen a healthy number of new contract signings across the first half. We also see good momentum in early phase inquiries across biologics and cell and gene technologies. In the first half, we have signed new business in line with our expectations, but among the multiple signings, let me highlight one in our cell and gene division where we have reached an important commercial supply agreement with a key customer. This provides for manufacturing services from both our Portsmouth site in the US and our Geleen site in the Netherlands. We have also seen strong interest in signings driven by our new ADT linker technology, which was integrated into Lonza as part of the Cinefix acquisition last year. Supported by strong and sustained interest in our mammalian manufacturing offering, we have signed an agreement to acquire the Genentech site in Vacaville from Roche. Many of you joined our investor call in March, in which we shared details of the agreement. It will allow us to double our global mammalian network and significantly increase our presence in the important U.S. market. The antitrust process remains on track, and our integration plan is progressing on schedule. This is supported by our close collaboration with the Vacaville site leadership team, and we are encouraged by the site's positive response to the acquisition plan and process. We are currently looking to close the transaction in Q4 of this year, and therefore do not expect any significant impact on our full year financial results. The announcement of the acquisition has been well received and we see strong interest from new and existing customers in gaining access to this additional capacity. We have already completed a couple of site visits with customers and are pleased to report the signing of the first letter of intent with a key customer. We see this level of interest as an early confirmation of our rationale to acquire the site. Moving to ESG, we continue to take steps forward in meeting our ESG commitments with a focus on clean energy. In the first half, the science-based target initiative has validated our targets to reduce our near-term emissions. Additionally, our recently agreed renewable energy certificate will enable us to achieve 100% renewable electricity from 2026 across our current US operations. Taking our European China and America's power agreements together, around 90% of our electricity will be renewable from 2026 onwards. Finally, we have been recognized by Ethics Fair for the third time as one of the world's most ethical companies. This reflects our continued commitment to showing integrity in the way we conduct business with our partners, customers, and colleagues. Now let's take a closer look at our financials. As just mentioned, our sales growth was 1.8% with a core EBITDA margin of 29.2%. Excluding the termination of the COVID related MRNA business last year, the group grew at around 6%. Overall, we have seen a robust performance across our CDMO businesses. This is partially upset by a weaker than expected market demand for our hard empty pharma capsules. and to a lesser extent softness in our buying science business unit. Sales and profits were negatively impacted by currency exchange rates due to the Swiss brand depreciating versus the same period last year. Our margins remain well protected from currency movements mainly due to our good natural hedge. Assuming today's rates remain stable, we expect a lower impact on sales of minus one to minus 1.5 for the full year, as the US dollar and the Euro have returned to rates similar to the prior year period against the Swiss franc. Turning to our margin evolution, we reported the decrease of 0.8 percentage points in H124 versus H123. This is mainly due to a higher base in H123 from the COVID-related mRNA sales and the Kodiak termination as well as the impact from significantly lower margins in CHI in the first six months of this year, which impacted the group margin by 1 to 1.5 percentage points. Excluding these effects, Lonza improved its margin mainly through a favorable product mix and higher productivity, which included network optimization activities initiated in 2023. As part of our continuing commitment to growth, we invested more than 600 million Swiss francs of capex in H124, mainly in the biologic division. Of the total capex, around 65% was gross capex and used primarily for large growth projects. The remainder was deployed in maintenance, infrastructure, and systems. H1 capex in percent of sales is at 20% due to the timing of capex spending, which is expected to accelerate in the second half. Overall, while we may end slightly lower than the guided 25% of sales for the full year, our growth project delivery remains in line with that. Finally, let's take a look at cash generation. We achieved a strong free cash flow of 296 million Swiss francs for the first half. This is due to a combination of factors, including the phasing of capex, favorable customer funding, and normalized inventory levels compared to H1 2023. We expect a lower free cash flow in the second half as our capex investments accelerate. Now let's take a look at each of our divisions. Here, we see a snapshot of divisional results and key performance drivers. As we already noted, we have seen positive performance in biologics in both sales and margin, and positive sales growth in small molecules. More generally, we have seen solid performance across our CDMO businesses, while the CHI division was impacted by market weakness in heart and T-pharma capsules. Now let's take a more close look at each division in turn. Starting with the biologics division, We have seen 7.3% sales growth versus H1 2023, corresponding to mid-teens sales growth when excluding mRNA sales in the prior year period. We have also seen a healthy level of contract signings over the first half, largely in commercial, with signs of recovery in clinical. Divisional growth was supported by mammalian and strong sales in bioconjugates, both driven by commercial demand. The positive margin evolution was supported by favorable product mix in the first half, strong operational performance, and cost focus. Looking at two of our biologics business units, in the median, we continue to see strong commercial interest as well as initial signs of early-stage recovery. While our early-stage work is a smaller part of our business, it establishes relationships that provide a pipeline of future large-scale opportunities. The current sign of early state recovery comes from the more positive funding environment, which has evolved since the beginning of the year. As we noted before, we are taking steps to optimize our extensive global Nameli network. Our acquisition of the Roche site in Vacaville, California, is designed to expand our large-scale offering in a location that is attractive to our customers. It will allow us to ensure that our customer needs can be matched with our site offerings and locations. We are also nearing the completion of the site closures in Hayward and Guangzhou, China, which were announced in January with our full year 2023 results. Turning to our bioconjugates offering, we have seen good levels of clinical and commercial demand. Thanks to our integrated offering, more than 50% of ADC projects involve now multiple modalities. We're extending our work with existing customers as well as gaining new customers in the space. As I mentioned, there's also strong interest in our extended ADC offering since we completed the acquisition of Synafix in 2023. To maintain momentum, we are focused on expanding our large scale capacity to accommodate increasing customer demand. Turning to our small molecules division, we continue to see sustained demand for highly potent and complex offerings. Our H1 sales growth is lower than fully expectations due to the timing of customer campaigns. We expect higher sales in the second half, which will also include sales from our new HP API facility in VIST due to commence operations in the second half. In H1, the solid core EBITDA margin of 33.6% was supported by a combination of favorable product mix, good operational performance, and high asset utilization. We remain pleased with the strong margin progression in recent years in this division. IntelliGene. The division declined 6.6% versus the prior year period, but showed robust underlying growth at 10% if we exclude the Kodiak termination in H1 2023. The CellEngine Technologies business delivered solid sales and positive core EBITDA margins. Performance was supported by a focus on operation improvement and strong commercial manufacturing. The strong underlying performance was partially balanced by headwinds in bioscience. In this business unit, we provide researchers with tools and materials to support treatment discovery, quality and testing. Here, sales of media and self-discovery products were impacted by lower customer demand, resulting from the recent early stage funding constraints. Despite these challenges, BioScience delivers solid margins due to a combination of product mix and strict cost control methods. Finally, let's take a look at our capsules and health ingredients division. After an extended period of post-pandemic destocking, we see demand recovery in our nutraceutical hard anti-capsules business. The same applies to dosage form solutions and health ingredients. However, industry capacity for nutraceutical hard anti-capsules increased over the past years to meet demand, and this has led to increased competition for volumes today. With pharmaceutical hard anti-capsules, We have seen the impact of destocking only since the second half of 2023. I will get to this in more detail in a minute. The 24.8% core EBITDA margin is the result of the continued destocking in pharma and recovery in a more competitive nutraceutical business. These temporary market headwinds were only partially offset by cost containment and network optimization measures. In H1, we have successfully installed and started the first of our new generation of hard-empty capsules production lines, confirming strong improvements in productivity and quality. We will continue to progress with the rollout of this new technology over the coming quarters. Let's now take a moment to review the historic and future demand evolution of hard-empty capsules in more details. We see the temporary headwinds experienced over the past two years in both the nutraceutical and the pharma segments, which were triggered by the COVID pandemic. Looking at the hard-empty capsules market, it generally remains attractive with a history of stable growth. In the two graphs on the left, we have taken pre-COVID demand as a benchmark and charted the demand lines through the pandemic and post-pandemic phases. We see that for nutraceutical hard empty capsules in the upper graph, the pandemic rapidly led to higher demand levels. Nutraceutical customers were also quick to reduce orders and destock around mid 2022. Six to eight quarters later, we are now seeing demand back in line with historic trends. We expect the market in this segment to return to its previous growth trajectory of around 3% per annum. Now looking at pharma hard empty capsules in the lower chart, We see that pharma customers also increased demand during the pandemic, but at a slower pace. They also started destocking only in mid to late 2023, and it remains ongoing. At this time, we expected destocking for pharma hard anti-capsules to be completed by the end of 2024 or early 2025. From this point onward, we anticipate year-on-year market growth of around 2%. While the past two years have been volatile, we are confident that the market will return to its historical growth pattern in 2025. With long-term strong reposition in this industry and with the continued investment in both product and production technology, we are confident we will return to attractive growth and margins. As we conclude the tour of our divisions, let me take a look at our full year outlook before handing back to Wolfgang for an update on our board governance and priorities for the second half. Please note, this slide was updated at 9 a.m. CET this morning from our first release, so please refer to this version. Based on our first half results, we are well on track to deliver on our full year outlook for 2024, which includes flat constant exchange rate sales growth and a core EBITDA margin in the high 20s, so between 27 and 29%. We anticipate higher CDMO sales in the second half, which will allow us to maintain group sales at around the same level as H2 2023. You will recall that the second half of the prior year included large COVID-related MRNA revenues following the Moderna contract termination. Margin in the second half are expected to be lower than H1, mainly due to less favorable product mix across businesses. Looking quickly at each division, Biologics will mainly benefit from the ramp-up of growth assets and to a lower extent from capturing opportunities from the early-stage funding recovery. In small molecules, the phasing is favorable to the second half, and we will also see first contribution from our new HP API asset coming online. In cell and gene, we are expecting our bioscience business to stabilize after a softer start in the first half. We just spoke about capsular and health ingredients where the recovery is anticipated in 2025. And now, before we move to the Q&A, I hand over back to Wolfgang.

Yeah, thank you, Philipp. Indeed, I would like to share a short update on board governance as well as some of my own questions and thoughts for the second half and beyond. First, let me share an update on our governance at the board level. Jean-Marc Huet was elected as Chairman of the Board at our Annual General Meeting in May and he has since then announced a series of updates to improve the robustness of our Board governance in June. The Board has committed to focus on key areas of talent, leadership and organizational health. In this context, it will establish two new Board Committees, the new Nomination and Governance Committee will oversee talent development and succession planning, while the new Remuneration Committee will oversee executive performance and evaluation. To support succession planning, roles have been divided among different board members. Jürgen Steinemann has been appointed as vice-chairman, while Christoph Meder continues to hold the role of our lead independent director. The Board will also review membership after nine years, with a maximum tenure of 12 years. This will ensure the Board remains agile to the changing needs of the business. Together, these structural changes will enable us to achieve industry-leading governance standards. Additionally, we have also announced today that the Lonza Board will propose two new directors for election at the AGM in May 2025. First, Juan Andres, who most recently served as President of Strategic Partnerships and Enterprise Expansion at Moderna. Second, Eric Drapid, who most recently held the role of Executive Vice President, Head of Global Operations and member of the Executive Committee at Tava Pharmaceuticals. If elected, Both will bring a wealth of experience from their former roles in managing complex global technical operations in pharma. From our customers of Lonza, both will also bring the customer voice to board discussions. Finally, as Spanish and French nationals, Juan and Eric will bring valuable fresh international perspectives. Just before I close, I would like to share some impressions from my first days at Lonsa and also provide a snapshot of my immediate priorities in my new role, as well as some of the topics that I will address together with my leadership team to ensure that we are set up for success in 2024 as well as for the long term. Firstly, I'm actually impressed by the people that I have met at Lonsa so far, impressed deep scientific and technological know-how, by their sharp business sense, by their passion to serve our purpose as a company, and by their competitive spirit to win on the CDMO playing field. And I've taken note of their openness to self-reflect, which in my experience is a key feature of winning organizations. Furthermore, it was amazing for me to see how openly and friendly I've been welcomed and supported by people of any level and function in onboarding me at high speed. So far, I perceive the Lonza team as one which is ready to tackle its challenges and translate them into future success. I want to share my priorities a bit more specifically. I myself and we as a team will have a laser focus on our short-term priorities to deliver full year 2024 in line with our ambitions. This will be actually very much about operational delivery and getting things done as promised. Top of my mind will also be the closing of the transaction and the fast integration of the Wakerville site and its team into Lonsa, as will be the execution of our ongoing large capex growth projects as planned. which are the foundation for the significant growth that we will deliver over the next years. At the same time, and strategic in nature, we will work on laying the foundations for long-term success. This will be about creating clarity about fundamentals like our vision. So where do we want to take our company? What's our ultimate goal? Our mission? Why do we exist? What's the purpose? as well as our core values which provide for the guardrails of our daily actions. Based on this, we will step by step answer a number of strategic questions for our businesses and translate them into strategic imperatives as part of a unified Lonza strategy. The focus of my first days was on communication. which will remain a key theme for the year and for my whole tenure as CEO of Lonza. On day one, I reached out personally to our top 50 partners in the pharma industry in order to share my views and, actually more importantly, learn about their views on Lonza and their needs and how they believe Lonza can help them to be even more successful. With talent development being a key topic for a strongly growing organization like ours, I already started to walk and talk with senior talents, an effort that will continue and will be widened to any level within the organization over time. This will help me to quickly develop an intuition and a feeling for how the Lonza organism functions and to make sure that my decisions are aligned with what the teams are ready for. Furthermore, I will talk to as many colleagues throughout the organization as possible. My ambition is to visit 10 sites in my first 100 days, so 10 in 100, with most of the other sites to follow later in 24 and 25. An equally important part for me, and something that I actually enjoyed in my previous role as well, is to engage with our investors and with you, the financial market community. While I will of course focus on business and internal topics over the next month, we will invite you to an investor update in December, during which I myself and Philipp will share our views on Lonza's ambitions, strategy, business models, as well as the organization itself. And with that, I thank you for your attention and hand over to Sandra to host the Q&A session.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. Kindly limit yourself to one question only. You can get back in the queue again for any follow-up question. If you wish to remove yourself from the question queue, you may press star and 2. Questions on the phone are requested to use only handsets. In case of difficulties with understanding your question on the phone line, we will ask you to submit your questions via the chat box in the webcast. Anyone with a question may press star and one at this time. Our first question comes from Richard Boster from J.P. Morgan. Please go ahead.

Hi. Thanks for taking my question. Question on margin phasing, please, in the two key divisions, small molecules and biologics. So just small molecules, you know, there's Given the positive impact of batch phasing on revenues in that business, how should we think of the margins there? And then in the second half, and then biologics, you know, obviously there's the Vacaville closure in Q4 that might have a small negative impact on margins, but how should we balance that with the BISP ramp and continued strong performance of the biologics top line into the second half? Thanks very much.

Yes, thank you, Richard. Thanks for your question. Obviously, as you know, we're not actually guiding on margin for the different divisions. But overall, I think just maybe repeating what I said during the presentation, we were in both of these divisions benefiting from strong product mix in the first half, which we do not see repeating, or we know will not repeat in the second half. So I think the product mix explains both as to why, you know, margin, certainly for bio, and we're, I think, guiding a little bit better on bio because of the big prior year that we have with Moderna, so I think certainly on bio we expect margins to be lower in the second half than in the first half, mainly due to product mix, and, you know, this includes sales that we do around raw materials that we always do, but there's a little bit more heavy in the second half. On the small molecules, I think we continue to see healthy margins, and We have more sales, but also more ramp-up costs for the new facility in VISP. So, you know, you can do your own math, but that's as much as I'd say on the division.

Thank you.

The next question comes from Gary Steventon from BNP Exxon. Please go ahead.

Hi there. Thanks for taking the question. Just be interested in your thoughts on longer-term mammalian capacity. Earlier this week, you had one of the big Bioprocessing players said they think capacity needs to increase, certainly for commercial and phase three projects. And they implied that longer-term capacity wasn't sufficient, particularly at CDMOs. So, you know, we've got this, we've got back-of-bill coming online, but you've also got the mid-term CapEx targets. The question is really how you view those longer-term supply-demand dynamics in large-scale mammalian. Do you need to bring any extra capacity online, like others have said? And is that possible within the current mid-term CapEx outlook? Thank you.

Thank you, Gary, for the question. So, you know, we have been fairly consistent in saying that we continue to see large-scale mammalian and mammalian capacity overall as being quite constrained over the next several years, with capacity being put on the market just holding up with the demand from the biotech and pharma industry. As you rightly say, we are in the process of acquiring a significant site in Buckerville, which will double our mammalian capacity. As we also said, I think it will take for us several years, it would be many years for us to fill Vacaville, and so we believe for now we are well positioned and well equipped to meet the increased demand in large scale. Also remember that a lot of other companies have announced large-scale facilities for the years to come. So for now, our internal CapEx plan are focused on large-scale on Vacaville, which also drives some investments on top of the acquisition, but we are not planning for additional large-scale capacity on top of that.

The next question comes from Jane Wayne Tempest from Jefferies International. Please go ahead.

Hi, thanks for taking my question. Given most divisions tend to have a second-half weighted year, I've got a group, not a segment question, depending on how you guide. You mentioned lower margins are expected in the second half. Can you help me understand why, given that these are typically higher? I guess you've got capacity ramping, there's more high-potent APIs, a stabilized impact from funding. So what is it within biologics which is offsetting this, and how much of that is from Vacaville? Thank you.

Yes, James. As I said before, I think the products that you produce in a facility are key to drive the market. We have some products that are very good and we have products that are extremely good. We just had more extremely good products in the first half than we have in the second half. You know, we truly do see margins for biologics to be lower in the second half, despite the higher sales that we expect in the division. And the similar will apply for small molecules. The difference with small molecules, again, we are ramping up the facilities, and we've explained in the past, you know, how the margins develop. They don't spike up right away. They take a while to go up to peak. So these are really the two main reasons. The lower margin has nothing to do with Vacaville. Depending on when the Vacaville close will happen, we'll inform you on the impact. We expect no significant impact from the close.

Thank you. The next question comes from Charles Pitman King from Barclays. Please go ahead.

Hi, thank you very much for taking my question. I've just got a question on your comments around new contract CDMO signings over the first half. I'm wondering if you could just give us a little bit more detail and kind of what the big drivers are for that. You know, have you seen any direct benefits from earlier stage demand as people try to offset potential risk from the biosecure, for example, or is this kind of a broad-based return in activity post-COVID? And just maybe a kind of The second part of that question is, to what degree do you think biotech funding steadily improving over this year and next is going to continue to generate an uptick in your RFPs? Thank you.

Charles, let me maybe start the question by saying that, you know, most of our contracts are trying to reach the levels that we are signing, and we communicated 10 billion that were signed last year. To reach this level, you need large, long-term commercial contracts. no matter how many small early stage contracts we sign, this will not lead you to signing billion dollar values. So even for this first half, I think we continue to see very good commercial signing. So this is really what is driving the value and the levels of contracts. Now to take your question on the early stage, we have seen increased requests and RFPs for early stage work. We attribute this much more to the more healthy biotech funding than to biosecure. I can talk to biosecure in a second, but we have seen, like all of you, much better funding situation for biotech company. I think funding is almost up 30 percent in this first half versus prior year, so a different market. It always takes a while between the funding and to see the impact on our financial numbers. Companies need to receive the funds, redo their plans, issue RFPs, companies enter the RFPs, and then we end up studying the work and doing the work. So there's always a time lag of roughly six to nine months before you would see any funding impact being reflected in our financials. So we'll have to wait a little bit for this. But I think we see mostly very healthy demand for commercial capacities and the contracts we're signing in terms of size are mainly commercial contracts.

The next question comes from Patrick from UBS. Please go ahead.

Thanks and hi everybody. I was wondering, you talked about the interest in vacaville from both existing and new customers can you provide some some more color or maybe you talk about the split here and can you also add a bit more color on the the first letter of intent that you signed for the sites

Yes, I won't go into too much detail, Patrick. Yes, and we would be more than happy to do so once we close the transaction, and we'll be happy to share a lot more detail on Vacaville as time comes. However, I think I can tell you that having functioning and proven capacity in the US is a very interesting value proposition to large pharma companies and biotech companies. Why? Because everybody wants to secure capacity in large scale, and we had the question before, But they also want to make sure that they have enough upside. If they end up needing more, that you can actually offer them more. And if you're in a small site, you very often cannot do so. And for us with Vacaville, we have now a lot of functioning capacity available, and we can offer them the flexibility. So this is highly attractive to customers. In terms of new versus existing, we work with 90% of the pharma companies in the world, and so, of course, Everybody is somehow an existing customer of ours, but I think we see interest from both sides, people that are attracted to produce in the U.S.

The next question comes from Dylan Van Haften from Stiefel. Please go ahead.

Hi, guys. Thanks for taking my question. So just on CH&I, could you break out for us how much negative pricing was a factor and how we should think about the remainder of the year negotiating with your end market clients? Thank you.

Yes, on CH&I, I think pricing was certainly negative for the first half. I think if you look at the decline, roughly half was due to volume and half was due to price. So This is roughly what has happened. I think you see that sequentially versus the second half of last year, we have roughly the same decline and the same margin. It has shifted from being a nutraceutical headwind to a pharmaceutical headwind in capsules, but I think we see both of these markets to return. Nutraceutical has returned already. Pharma will do so. And so I think we remain confident for 2025, but certainly for 2024, you know, pricing and volumes will remain a drag. Even so, to be fair, to add to this, Dylan, but the comp versus last year is a little bit easier in the second half, given that the downturn started last year.

Excellent. Thank you.

The next question comes from Max Schmock from William Blair. Please go ahead.

Hey, good afternoon. Thanks for taking our questions. I just want to hear from you on biosecure. It's been mentioned a couple of times, but I was wondering if you could provide any context on whether or not you're already having conversations with new customers as a result of biosecure. And just more broadly, what drug developers are telling you about how biosecure is going to impact their thought process moving forward for manufacturing and how you all are thinking about the longer term impact to you all from biosecure. Thank you.

Yes, on BioSecure, our views have not changed much. I think, as you know, the bill now would contain a grace period until 2032, which has brought some relief to customers that they did not need to act immediately, but that they would have to think about their supply chain more strategically. And so I think what we're facing is we're facing a lot of discussions with customers on the options that they have and and the timing for transition or potentially or having a second parallel supply chain. So a lot of the discussions are ongoing, but this doesn't lead to new business immediately. These are things that take time. And so when I answered the question before, I think we do not see an impact of biosecure today in our financials. If this is a tailwind, this is more of a midterm tailwind than an immediate thing.

Thank you.

The next question comes from Sebastian Ray from . Please go ahead.

Hello, hello. Good afternoon, and thank you for taking my question. Could I ask about the business development on a sequential basis for Q2 versus Q1? Because the release reads in a more confident way than the company expressed itself as a Q1. And I'm wondering, relative to normal seasonal patterns of trading, Were there any divisions or pieces of business that became, let's say, stronger Q2 versus Q1 or weaker Q2 versus Q1? Thank you.

Yes, Sebastian, let me maybe answer it in a way. When we spoke in the month of May, I think we clearly highlighted the headwinds in capsules, I think on capsules. The situation has not fundamentally changed. We see nutraceutical markets coming back, and we're now back at the volumes that we know from the past. I think this business has continued as we expected. I think the other businesses we knew was phasing because we had plans in the CDMO. You plan a little bit ahead, as you can imagine, so we knew what was coming in H2. anything was stronger or less strong than what we predicted. We continue to see very good momentum in our CDMO divisions, and the headwinds in CHI have continued. So we see H1 as being very much in line with what we told you in Q1 in May. That's helpful.

Thank you.

The next question comes from Naresh Chuhan from Intron Health. Please go ahead.

Hi there. Thanks for taking my question. Just one on yields, please, in the biologics division. Could you help us to understand how yields are progressing, particularly on the commercial side? Obviously, there's been a lot of upgrades to your facilities. A lot of the processes have been upgraded from your customers. Just trying to understand how much yields are having an impact in that division. Thank you.

Yes, Naresh, you'll understand that I'm not probably the best place to answer technical questions, so I'll give you a high level answer and I hope in one of the meetings you'll have with us, we can answer and go more deeper into the technical aspects. Overall, I think yield is something that moves very slowly because a lot of the change that you need to do are already embedded in the drug master file, into the recipe of the product. Whenever you do things, they go slowly. They need to be often resubmitted to the authorities. Year over year, I wouldn't say that there's a strong effect on yield. I think in terms of investments in our facilities, we have some facilities that have the latest technology. products or molecules that need these latest technologies, call it N-1 perfusion. If that's what's needed by the customer, this is what we will offer. Other products do not need the latest technologies and are produced more in a more normal way if you want. And so I think there's nothing that changes year over year. So I would not say that yield played a role in our financials for this year, but over time, of course, we continue to invest and being able to offer customers whatever technology they need, single use, being it stainless steel, being it perfusion or no perfusion. Thank you.

The next question comes from Salco Friedrichs from Deutsche Bank. Please go ahead.

Thank you. And thank you for providing a bit of direction on the margin in the biologic and small molecules business in the second half. Could you also help us a little bit at a high level, obviously, with how we should think about the cell and gene and the CHI business, whether those margins should be up or rather down in the second half. Thank you.

Yes, Falco, that's always the risk. Now, when I give one finger, you guys want the entire hand. So, look, I prefer not to do so. I think we've provided a lot of transparency on our CHI business, which, you know, will not change dramatically, the comp being easier. And on cell and gene, I think, you know, we had a good start. We need to see how bioscience will develop. So I prefer not to guide you. Bear in mind, cell and gene is the most volatile division, given that it's usually a lot of small numbers and a lot of clinical work. So, you know, it's also not that significant for the group in the end. If we're a little bit up or down, I prefer to not start guiding you on the divisions.

Understood. Thank you.

The next question comes from Daniel. Yellow comes from ZKB. Please go ahead.

Good afternoon. Just a clarification question. In the cell and gene, you mentioned 10% growth, including Kodiak. I guess that's for the whole segment, including by signs, right?

This is correct, Daniel.

So, in other words, cell and gene itself was probably up quite more, excluding the negative times. And is that correct? I mean, can we talk about 20% growth or so?

Yeah, look, you're not going into the BU level, Daniel. But, you know, we're very pleased with the Celengene technology, BU within Celengene. I think we had very good commercial production out of our Houston site. And as we've always said, you know, this division needs to move into a more commercially driven BU from the clinical bias that it has today. So, you know, again, keeping volatility in mind, of course, we're happy to see more commercial production. And if you have more stable commercial production, then yes, the division or the BU performs better. But, you know, we won't go into that level of detail, but you're correct. This was a good half year for Cyanogen Technologies.

Yeah. And a follow-up, if I may, on the microbial biome. write down about bacteria joint venture i mean that was before all of you guys time of course but i thought it's quite an interesting approach this whole microbiome stuff so um is there no future at all now for that or uh yeah that's the question

Yeah, look, I think it's a very narrow business still. There is one product that is approved and on the market, which is the product from Seris Therapeutics. You know, Bacteria looked at the business as well and decided to wind down several of their development sites. So I think the industry is just developing. When we looked at it, the industry is developing much slower. than was expected at the time. This is where we want to be prudent and don't see the high cash flow that would be needed to repay that loan. Therefore, we decided to write off the loan. It doesn't mean that the industry will not pick up. It's just taking a lot longer.

Okay. Thanks. The next question comes from from Morgan Stanley. Please go ahead.

Thank you. My question is on the outlook for the antibody drug conjugate offering and bioconjugation offering in general, you highlight a high demand for bioconjugation technologies from Synasix. Could you just remind us how meaningful the ADC offering is today as a share of your biologic business? And also in relation to that, what is your view on the CDMO industry's capacity to address the upcoming demand for ADCs? Because we saw a major player moving towards internalizing ADC manufacturing. So if you could kind of give us some general comments on the outlook for supply demand for ADC in the industry, that would be helpful.

Yeah, thank you, Thibault. Probably two sides of your question. I think first, Synafix, in terms of size, it's not meaningful to the group. However, it's a very important and interesting entry point for a lot of ADC customers because we are, you know, with Synafix, we are really at the beginning of of research and development for ADC drugs as offering linked technology. So I think this is a way for us to get access to early stage ADC. As you know, we are the leader in commercial ADC already, but I think having Cinefix now allows us to get access to much earlier companies and be able to take them from the very early stage all the way through commercial. So similar like in mammalian, for ADC we are out of one hand able to offer all the stages of development from early stage all the way to commercial for all these ADC players. So that I think is what makes our offering attractive. You get everything out of one hand. Many and most of our requests are now including multi-modality as I said. which can be, you know, linker, toxin, mammalian, or drug products. So I think this is something that customers are looking for. Today we see the ADC capacity as constraints. I think we could sell more than we have today. And so this is also a place where we are looking at our investment strategy. And therefore, I think some customer may decide to build in-house. Now, remember that all the large trucks will always have multiple supply points. So somebody building in-house doesn't mean that they will not rely on a CDMO for part of their supply. So this is something that's completely normal. We see this in MAP production, and this is also coming into conjugation. So this is not something that is surprising, but a normal course of evolution when products get larger. Thank you.

The next question comes from Yufeng from HSBC. Please go ahead.

Hello. Thank you for taking my question. I just wanted to follow up on the cell and gene therapy. I just wonder, this half the growth, how much of it is attributed to your pipeline progress? As you mentioned, I think there will be three to four pipeline projects that are coming online this year and next year. And I just wondered any color on that and how we should should probably see that the second half this year, whether there'll be more coming or sort of facing between the 2024 and 25, thanks.

Yes, Yifeng, so I think the new commercial therapies, if you want, were not a big driver in our H1 numbers. I think, again, these are products that will come only online, and I'm sure you'll hear about it if we have more commercial products This is usually something that, you know, we would communicate at some point in time. So I think knowing H1, this was not the driver. I think the key driver were just better production of molecules that we have today already or therapies that we have today already.

Thank you.

The next question comes from Lucas Baranovsky from KBank Capital. Please, go ahead.

Hi, this is Lucas on for Paul Knight at KeyBank. You know, it sounds like you're seeing some signs of a recovery in early stage business, you know, given the higher funding that we've seen recently. Would you say a lot of that is still kind of early conversations with customers or is it already starting to translate into actual orders? Thank you.

Yeah, so look, I think what I said on a lot of early conversation would be more on the biosecure on customers trying to understand their choices for supply chain. For early stage, I think we see more RFPs. Assuming that our win rate remains the same, this will ultimately lead also into more business. But yes, it all starts with RFPs. Multiple companies are being asked to pitch for that business. Then companies after a couple of weeks or so come back to us and say you can start working, and then we need to slot them into our development resources. And so it takes roughly two to three quarters for us to go from seeing funding and receiving maybe a request all the way for you to see the impact on our financials. And remember, this early stage work is 10% to 15% of our business. So even a moderate increase, you wouldn't notice immediately. I think Lonsa is 70% commercial business. This is what drives really our growth. Now we're very happy to see this because this is funding or this is preparing us for the future where we will move these early stage products into later development stage and commercial ultimately. But we are pleased with the recovery so far. It's a lot of discussions and RFPs which we hope will lead to business much later this year or early next year.

We have a follow-up question from Gary Stevenson from BNP Paribas. Please go ahead.

Hi, thanks for taking the follow-up. Just on pricing in the CDMA business, given that some of the input cost increases from last year have eased or reversed, just keen to get your thoughts on how you think about the contribution of price to growth outside of CHI that you've already spoken to, and just whether there are any particular segments or divisions in the CDMA portfolio where you're seeing price evolution being dramatically different. Thank you.

Yes, Gary, I think on pricing, as you know, a lot of what we buy, we pass through to our customers. So we're not really impacted by that pricing. Prices don't go down. They just don't go up as much as they've done in 22 and 23. So from that point of view, it's not something that helps us. It's something that maybe is not as extreme as it was in the last two years. Thank you.

We have a follow-up question from Charles Bittman from Barclays. Please go ahead.

Charles?

Sorry, apologies. Thank you very much for taking my follow-up. Just a quick question on CapEx outlook and just whether or not any decisions have been made around what areas you think are most worthy of investment. You kind of touched on ADCs earlier. But we've also seen kind of market developments in terms of potentially, you know, Phil Finish being taken out of the market if Catalan is approved. I'm just wondering how you're thinking about long-term CapEx investments, where you think will be the best return on investment.

Yes, Charles, I think I'd probably refer you back to our CMD. I think we haven't changed our priorities for capital investments since last October. So I think we said that the next phase or the current phase of investment would be more focused on commercial capacities, and we included in there, of course, there was a conjugation fill and finish with the topic. So I think this has not changed. You've seen us invest in both. We announced an additional fill and finish line for ADCs last year, and obviously we did the deal with Roche on Vacaville. So this is absolutely in line with the priorities that we have set, and they haven't changed.

Okay. That's it. Thank you.

The follow-up question from James from Jefferies International. Please go ahead.

Hi. Thanks for taking my follow-up question. Just on bioscience, just wondering what you're seeing in terms of order behavior and feedback from your customers. when they will reach their own target inventory levels? And does this conversation differ by product across the business? Thank you.

Yes, James. I think on bioscience, we don't see this too much as being a stocking or destocking discussion. I think it's just a demand of when these early programs start. And so we see this more as an impact of the biotech funding that happened over the last year and a half or two years. And so this just takes longer to restart and therefore demand was a little bit soft. I don't think it's an inventory discussion.

Thank you.

The last question for today's call is a follow-up from Max Schmock from William Blair, please. Go ahead.

Hi, thanks for squeezing me in here at the end. I just wanted to ask a follow-up on Synapse. I know at the time of that acquisition, it looked like Synapse had a number of agreements that included milestone and royalty payments. I just wanted to get an update around whether or not you all are expecting any contribution just beyond the initial ABC or the ABC manufacturing revenue and whether we can be expecting any sort of meaningful milestones or potential royalty streams as a result of some of these Synafix agreements that you've signed here in the first half of the year. Thank you.

Yes, Max. The Synafix business model works as many of these platform technology companies. you basically have a few milestones at the beginning and then you have royalties at the end once the product becomes commercial. So given that Cinefix works at the very early stage of companies, this will take time until you see royalty streams coming in. So that, I think, needs to wait. Now in terms of royalties, yes, this is what is generating revenues today for Cinefix. And we are quite happy to see more and more customers being interested in the platforms that Cinefix has to offer. But in the term, in the level or in the size of Lonza, the Synapseq contribution is welcome but not significant.

Thank you.

So thank you all and I guess the closing remark is that it was actually great to re-engage and thank you very much for your interest and for your time. And we are actually looking forward to re-engage later in the year. on how the business of Lonsa progresses throughout the year. Thank you very much and have a good day.

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