Lonza Group AG

Ladies and gentlemen, welcome to the Lonza Q1 2025 Qualitative Update Conference Call and Live 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 at any time by pressing star and 1 on your telephone. 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 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 Philip Dekes, CFO. Please go ahead, sir.

Good morning, good afternoon, and a warm welcome to our Q1 2025 qualitative update. And thank you, Sandra, for the introduction. With our qualitative updates, we intend to provide you with a general business overview, but we will not be sharing figures related to our financial performance. We will do so on the 23rd of July with our half-year update. Let me start with an overview of our group performance, the current macroeconomic situation, and our growth projects before we move on to the divisional performance. We experienced a strong Q1 performance across our CDMO businesses aligned with our expected full-year trajectory. Supported by this strong performance, we are confirming our 2025 outlook for the CDMO business, with sales growth approaching 20% at constant exchange rates compared to the prior year and the core EBITDA margin approaching 30%. Including Vacaville, which is expected to contribute half a billion Swiss francs in sales at a dilutive core EBITDA margin, we expect low teens organic CR sales growth and a margin improvement in our CDMO business. As a reminder, we define our CDMO business as Lonza, excluding the capsules and health ingredients business. As anticipated with our full year release in January, we confirm our expectations of higher sales in H2 2025 than in H1. However, we now anticipate the core EBITDA margin to be more equally balanced between H2 and H1, with a stronger than expected H1 leading to a correspondingly softer margin in H2. Main reason is a strong operational execution and more favorable mix in the first half. As in previous year, we continue to experience a healthy level of contract signings across all CDMO businesses, highlighting the attractiveness of our commercial offering and providing a strong basis for our future sales growth. Customer interest in Vacaville continues to be strong and a third long-term customer contract has been secured for the site. We can confirm that multiple contract negotiations are ongoing and we expect more signings in the balance of 2025. Our early stage business saw high utilization in Q1 2025, and we have good visibility for 2025 demand. At the same time, we remain attentive to the evolving funding landscape and the political uncertainties surrounding regulatory approvals in the US. We are also closely monitoring the recent volatility in the FX market, with the Swiss franc gaining significantly in value, especially to the US dollar. Based on FX rates at the end of April, we would expect a year-over-year headwind of around 2% on sales and core EBITDA for full year 2025. However, our margin is well protected due to a strong natural hedge and our hedging program in place. Before turning to our growth projects, let me say a few words on the current geopolitical and macroeconomic environment, which is characterized by an increased level of uncertainty. We believe that Lonza's global manufacturing footprint, including its significant presence in the US across modalities, provides a competitive advantage that will allow us to minimize the impact of recently announced trade policies on our business. At this time, we do not expect tariffs on our manufactured products or raw materials, including pharmaceuticals, should such tariffs be implemented, to have a material financial impact. However, we continue to monitor the situation closely. On our US capex spending, tariffs may have a modest financial impact, potentially leading to a slight increase in overall spending. But due to the capitalization and the subsequent depreciation, we do not expect any material impact on our P&L. Given its strong manufacturing presence in the U.S. and Mexico, our capsules and health ingredients business is currently well positioned to navigate tariff dynamics and may even experience a competitive advantage. Recent countervailing filings have been accepted by the U.S. International Trade Commission and U.S. Department of Commerce against unfair trade practices related to imports of hard anti-capsules sold in the US market are likely to add to these relative trends. The case continues according to schedule and affirmative preliminary determinations in the countervailing case were published on March 31st with 2 to 10% duties being implemented. Concurrent anti-dumping duty investigations are ongoing. Now turning to our growth projects, overall we are making solid progress. Our highly potent API facility in Wisp, Switzerland, reached a critical milestone and commenced ramp-up activities in Q1 2025, while we expect our large-scale mammalian facility in Wisp to launch GMP operations in Q2 2025. Construction is progressing well at our recently announced large-scale bioconjugation site in Wisp, which we expect to become operational in 2027 or 2028 at the latest. We also now expect operations to commence at our large-scale drug product facility in Stein, Switzerland in 2027. Originally anticipated for late 2026, the timeline has been slightly adjusted due to an updated delivery schedule for critical equipment. We do not expect material impact on our financials for 2026 and 2027 from this adjustment. For Vacaville, we have now entered the implementation phase for the upgrade CAPEX and expect the majority of the 500 million CHF to be spent in the next 2-3 years. As a group, we confirm our expectations to spend CAPEX in the low 20s as a percentage of sales in 2025. Consistent with our historical spending pattern, we would expect CAPEX to be higher in the second half of the year. Now let me guide you through our divisional performance, still using our former divisional setup, as it was still in place in Q1 2025, starting with the Biologics Division. There was good momentum across the Biologics Division with a strong demand for our commercial offering. Improvements in the biotech funding in 2024 have resulted in an uptick in early-stage RFPs, and we expect a high asset utilization in our small-scale assets in 2025. Looking at selected business units, bioconjugates continue to see strong growth, supported by recent asset ramp-ups. The mammalian business units saw continued momentum from growth projects, including the ramp-up of our small-scale mammalian facility in Portsmouth. The Vacaville integration is progressing as planned, and the site has successfully maintained a strong quality and execution track record since joining the Lonza network. Turning to our small molecules division, We continue to see strong commercial demand and good operational performance. The division is supported by our continuing portfolio shift to higher value and complex small molecules. With high asset utilization and the ramp up of our new highly potent API facility, we anticipate sales and constant exchange grade growth in the second half to exceed H1. The ramp up of this new asset is proceeding as planned with additional key milestones expected to be reached in the remainder of 2025. Looking at our cell and gene division, there has been continued customer interest in our late-stage and commercial offering. We see good progress in our collaboration with Vertex for Casgavy, and we are ramping up production in our site in Geleen, the Netherlands, and expect our site in Portsmouth, US, to follow later this year. Including the approval of Mesoblast Rioncil, we now have a portfolio of five commercial cell and gene therapies, and we expect to add further commercial molecules in the midterm. Supported by the improved biotech funding environment and the increased number of RFPs in 2024, we observe sustained demand for our clinical cell and gene technology offering. We are thus pleased with the current performance, but remain attentive to the broader market environment and the low maturity of the industry, which is inherently volatile. Finally, and before moving to CHI, we are pleased to confirm that our bioscience business unit has returned to growth in Q1, with good demand for our media and buffer bioprocessing solutions. For 2025, we expect a solid performance and the business to show healthy growth again. In our CHI business, we have observed a steady recovery in demand, with Q3 2024 representing the trough. For the pharma heart empty capsules market, We expect a return to pre-pandemic levels in the second half of 2025, while demand for nutraceutical capsules is back to positive volume growth versus the same period in the prior year after a long period of post-pandemic destocking. The recent geopolitical developments illustrate the benefits of having a strong manufacturing presence in North America. We have the largest US manufacturing site for capsules in Greenwood, South Carolina, and our site in Puebla, Mexico, allows us to produce for the U.S. market at high quality and is currently tariff exempt under the U.S.-Mexico-Canada Agreement . Progressing successfully on its recovery path, we confirm our 2025 outlook for CHI to return to positive low- to mid-single-digit CER sales growth and an improving core EBITDA margin in the mid-20s, a small improvement versus our initial guidance for the CHI margin. Before I close, let me say a few words on the progress to parts way with the CHI business. We see a high level of continued commitment from the affected colleagues and a strong focus on operational execution during the transition period. We remain strongly committed to the CHI business and continue bringing new product innovations to market as well as the rollout of our next generation D90 capsules manufacturing lines across our network. In addition, We just recently announced to expand our capsules manufacturing capacities in India and China for the fast-growing APAC region. In Q1, we mandated our external advisors and we are currently in the preparation phase of the carve-out. Considering the positive business development in recent months, in line with expectations, we are confident of the successful completion of a transaction at the appropriate time, point in time and in the best interest of customers, employees and our shareholders. To close, let me provide some final remarks. We are seeing good momentum and are confident of delivering our full year outlook 2025. We see strong contracting levels and good interest in our early stage offering. As said, we are well positioned in the current geopolitical environment and do not expect any material impact from tariffs on our business. So we continue to monitor developments closely as the situation is constantly evolving. On April 1st, we have implemented our simplified and streamlined operating model to support our new one-launcher strategy. This setup will provide us with a more scalable organization, improve the customer experience across business platforms and technologies, and provide us with elevated execution capabilities in the construction and operation of our assets. This Q1 update will therefore be the last time we comment on our former biologics, small molecules, and cell and gene divisions. For our half-year results, we will comment on our new business platforms, integrated biologics, advanced synthesis, and specialized modalities. We will continue to report on capsules and health ingredients in its existing structure as it will continue to operate as a separate business within Lonza. To provide comparability with historic financials, we will publish restated 2024 financial figures ahead of our half-year reporting in late May. And with that, I would like to thank you for your time. Over to you, Sandra, for the Q&A.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the 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 if you have a follow-up. If you wish to remove yourself from the question queue, you may press star and 2. Questions on the phone are requested to disable the loudspeaker mode. In case of difficulties with understanding your question on the phone, we will ask you to submit your questions via the chat box in the webcast. Anyone with a question may press star and 1 at this time. Our first question comes from Ibrahim Zain from JP Morgan. Please go ahead.

Hello. This is Zain Ibrahim from JP Morgan. Hopefully you can hear me OK.

Well, good Zain. You go ahead.

Okay, great. So thank you for the phasing comments. Maybe just to ask further, how are you thinking about the phasing of sales growth between H1-25 and H2 in the context of the strong Q1 that you've just reported? And maybe tied to that, how should we think about the phasing of the half a billion of Vacaville revenues in 25? That would be the first question. And then my second question is just on the early stage. Any any changes that you've seen in RFP momentum in Q2 or in Q1 as a result of some of the volatility and biotech funding and FDA uncertainty that you highlighted, or is it continued to be strong momentum from an RFP perspective? Thank you.

Thank you, Zain. Yes, I think we provided some commentary on H1 and H2. I think the change being more on the margin side than on the top line. So I will not go into further details on the top line. We mentioned that H2 sales in absolute will be bigger, will be higher in the second half than in the first half, and I'll leave it at this for now. But I think please note the more balanced margin outlook that we now provide. In terms of Vacaville, I think equally we're not providing more detail on the Vacaville phasing, but we'll of course provide you with an update in July. In terms of the early stage, I think we've been clear to not talk about momentum because I think we see good utilization of our assets. I think we have seen good RFPs levels, and I think they were improving during 2024. I wouldn't say the same for 2025, but that doesn't concern us for this year and for early next year. But given the environment, especially in the U.S., I think we would prevent from talking about momentum.

The next question comes from Charles Weston from RBC Europe. Please go ahead.

Hi. Thanks for taking the question. You've mentioned the timescales for the commercial aseptic facility of nonstop, but I recollect you've signed a number of development deals that include these aseptic services. So could you just comment on interest in general for this facility, whether this delay creates any issue for any of your clients? and also whether we could expect the ramp-up timelines for that asset in line with other large assets, i.e. three years from opening. Thank you.

Hi, Charles. Thanks for the question on our fill and finish facility in Stein, Switzerland. I think the shift, the small shift in time scale does not impact customer programs. and therefore does not create really a larger issue or a material issue on our financials for 26 and 27, as I mentioned in my intro. I think in terms of the ramp up, probably this is a smaller ramp up than a facility where you do drug substance. Why? Because we are using this to provide fill finish capacity to our drug substance customers, and therefore they will come when they're ready. rather than piling up customers at the beginning to get them started as quickly as possible.

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

Yes, hi. Thanks for taking my questions. A quick one to begin with. I think you originally mentioned Carvel Financial will be available in June. Just wondering what the latest thinking is and when we may get those. And then my second question is, you signed an agreement with Vertex in 23 for a dedicated facility for type 1 diabetes in New Hampshire. In March, VX264 is discontinued. So just how should we think about conceptually the financial impact from developments like this? Do dedicated suites require more work to make ready for new customers? Thank you.

Yeah, thank you, James. Maybe just to be clear, I did not promise Carbide financials for June, which I think you're probably talking about capsules and health ingredients. So I have not made any promise on Carbide financials and will certainly not be providing these externally. What I was talking about are restated financials because we have changed our organization structure from the four divisions up to the first quarter of 2025 to the new platforms. as of April 2025. And so what we will provide you by the end of May are basically the half year 2024 and the full year 2024 in the new organizational structure with the new platform. So you'll be able to see that advanced synthesis with this amount of top line and bottom line in 2024 versus what we will then be presenting in July this year. Here we're talking about our new One Lonza organizational structure. We're not talking about the CHI Carbide financials, which will not be provided externally. Second, on our Vertex agreement, indeed, we are building a manufacturing site for the Type 1 diabetes product. Remember, Vertex has two Type 1 diabetes candidates. One is VX264. The other one is VX880. And while we have as well heard about the VX264 results, the VX880 candidate continues and therefore there is no, at this point in time, no change in our plans with Vertex.

The next question comes from James Quigley from Goldman Sachs. Please go ahead.

Great. Thank you for taking my question. So I've got a high level one on capacity and following the tariff announcements we've seen. a number of big numbers for investments for pharma companies in terms of investments in the U.S. Now, a lot of that obviously relates to R&D as opposed to CapEx. But what are your views on these announcements and how they might impact the supply and demand balance, as well as outsourcing rates in biologics? And in your modeling, how much of this capacity was already anticipated versus brand new additional capacity that may have been in a different location relative to the U.S.? Thank you.

Yes, so I think we've seen, of course, the big announcements, 150 billion plus, depending on when we stop counting. I think what we've also seen, probably like you, is that there's actually little detail on what the mix is of investments, what is the mix between R&D and manufacturing, let alone understanding if we're talking drug substance, drug product, or modality. So it's still relatively opaque, and therefore hard to judge. Our understanding is that most of these investments are not necessarily additional, but have been announced in one go. Most of these investments over time would probably have happened. So I think this is one thing, but we don't know much more than what you hear or what we have been able to read. So probably time will tell. Important to note that if If the capacity is actually being constructed in the U.S., this will take five to 10 years to materialize. I think unless you're sitting on land with permits, you need to find the land, you need to apply for permits. We've heard now President Trump asking to speed up the permit delivery, but still this takes time. And then you need to start designing the asset, constructing the asset. So all of this takes time. And I guess we will see over time how much this is. I'd like to remind you, that in terms of driving the volume for the CDMO industry in general, there are three main drivers. One is the need from biotech company, as most of the innovation actually comes from biotech companies, who by design do not invest in own capacity as they prefer to spend their money on R&D and ultimately commercialization. So that's one driver. The second driver being biosimilars, where again, biosimilars entry usually increase the need for volume across the world. And also most biosimilar companies do not build their own facility. And only third are the investment by Big Pharma. So the last one is impacted by these, potentially impacted by these announcements. The first two are not. So we remain confident on the demand and value for the next years. But of course, we would adjust our models as we understand better the investments that are being made.

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

Excellent. Thanks for taking my question. So just a question on the call out of the early stage and the clinical stage strength. I think on one hand we had a weaker 1Q last year specifically here. But on the other hand, if you look at the street more generally and you look at CRO activity, it still feels kind of soft. Could you explain a little bit where that view to strength comes from? And is that pharma? Is that biotech? And, you know, is that, you know, concentrated on U.S.? Any color would be helpful. Thank you.

Yes, I think 2024 saw an improvement of the funding levels in biotech. And at that point in time, many companies start to think about what they – could do and wanted to do with the money and which trials they would start. This has led to an uptake in RSPs, which we're not delivering upon in 2025. And therefore, our commentary that the current utilization level of our lab and smaller scale assets is good, and we have good visibility for 2025. So remember, there's always a time delay between the funding in the industry and the impact on our business. First, this is just a little bit of lab work and only after several months you would start to actually produce something in smaller scale assets. And so, this is what we're seeing now. We're seeing basically the impact of a positive 2024 signing for this type of business and also late 2024 signing. The signing today, I think, are still at good levels. I wouldn't say that they're increasing, but I think the signings also in Q1 were actually okay.

The next question comes from Charles Pittman King from Barclays. Please go ahead.

Hi there. Thanks so much for taking my questions. Just two from me. Firstly, just on the Stein equipment delivery slippage, I'm just wondering if you can give us any more detail around who the supplier was for that equipment and how confident you are that this is just a one-off delay and this will therefore remain only a small slippage in impact, as you've highlighted. And then just secondly, in terms of the CNHI expectation for divestment, can you just give us a little bit more to think about in terms of what would be the correct timeline to dispose of this business and whether or not the current market volatility and policy uncertainty precludes this potentially occurring near term? Thank you.

Thank you, Charles. So I think on Stein, you know, I will not go into detail of telling you who supplies what, but as you can imagine, in the current environment also of GLP-1 short-dition fill-and-finish, fill-and-finish lines are in very high demand. And therefore, I would say this is a one-off because this is about fill-and-finish lines. And so this does not really impact the delivery of materials for all our drug substance facilities we're building in the other key projects. So, yes, this is isolated. This is an industry issue, if I can call it this way, where these lines are just in very high demand, and so delays happen. In terms of CHI, you're taking your second question. I think we were clear that we were preparing for the... the exit of CHI during 2025. We've made good progress in terms of assigning our advisors. We're doing all the internal work that is necessary in terms of preparing the carve-out perimeter and all this work that is needed internally. The teams are appointed, et cetera, so I think we see good progress on this. We're also very pleased with the with the development of the business itself, which has seen a trough in the second half of last year and is now seeing an improving trend. And as we mentioned, we are expecting the growth rate in the second half to be ahead of what you would see in the first half and ahead of what we saw in the second half of 2024. So I think the timing is right. And, you know, we should be probably making progress this year, but we don't mention any more precise timeline.

The next question comes from Patrick Raffaez from UBS. Please go ahead. Mr. Raffaez, your line is open. You may proceed with your question.

Yes, thank you. A follow-up on the biotech funding environment and early stage, right? Because last time we had this scale of drop in the funding levels, Lonzo was caught a bit off guard. Now, I'm just wondering, right, you have visibility until the end of the year, but to what extent do you already prepare or flexibilize your cost structure? Should the... RFPs start to decline again next year?

Yes, Patrick, I think, as you know, we have taken action already last year, actually at the end of 23, to prepare into 24 as we basically close two small-scale facilities. So, you know, we've done the work. I think we believe that our early-stage network is rightly sized. And so far, I think with the level of demand that we see and also new RFPs that we're seeing, we're not concerned by that. However, I think it's right that we need to observe the next months and quarters. I think, you know, I think where we see Q1 2025 is not a bad level, actually. It's pretty much in line with what you would have seen on average over the last five years. However, the question would be how does Q2 and Q3 develop? So I think once we see that, we can probably be clear on the outlook for now. I think we are ready to go up or down, but we don't expect to have to go down at this point. Maybe I can ask Sandra for the last question.

Yes, sir. The last question for today's call will be from Justin Smith from Bernstein. Please go ahead.

Yes. Thanks very much for taking my question. It was just a very quick one with regards to opportunistic acquisitions of CDMO capacity? Is it fair to say you've got so much to deal with at the moment that this is probably more a story for 2026 and beyond?

Yeah, I think as you rightly said, this is opportunistic. And so if the opportunity arises, we would take the opportunity. So I think we are very capable of doing the organic program that we're doing at this point and going after opportunistic acquisitions if they were to happen. So I think, unfortunately, you cannot time such acquisitions. So when we see the opportunity, we would go after it if it's the right one. And we believe the launch engine can add value to that acquisition. So yeah, any time is the right time for the right asset. With that, thank you very much. And I would like to thank you all for attending the call and for the good questions. And looking forward to talking to you again in a few months at our half-year results in July. So with that, thank you very much. And goodbye, everyone.

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