Lonza Group AG

Ladies and gentlemen, welcome to the Lonza Q3 2025 Qualitative Update Conference Call and Live Webcast. I am Sandra, the course 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 can be heard into the phone. 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 Filip Deke, CFO. Please go ahead, sir.

Good morning, good afternoon, and a very warm welcome to our Q3 qualitative update. Before we go into more details, please let me remind you that we intend to provide you with a general business overview with our qualitative update. But we will not be sharing figures related to our financial performance. We will do so on the 28th of January with our full year update. Let me start with an overview of our group performance before we move to the performance of our business platforms and PHI. Afterwards, I will provide you with an update on our business contracting and our first project, followed by the current macroeconomic situation before I close for the Q&A session. Today, we report a strong Q3 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, which we upgraded at half-year. with sales growth of 20% to 21% at constant exchange rates compared to the prior year and a core EBITDA margin in the range of 30% to 31%. Excluding veteran, which is now expected to contribute at the upper end of the range of around half a billion Swiss francs in sales and a better-than-expected core EBITDA margin in 2025, we expect low-teens percentage organic CBR growth and a margin improvement in our CBR business. in line with our CMO organic growth model. As anticipated at our half-year release in July, we confirm our expectation of higher sales in H2 2025 than in H1. We see a healthy progression of our core EBITDA margin in line with the 2025 outlook. Progressing well on its expected recovery path, we also confirm our full-year 2025 outlook for the capsules and health ingredients for THI business at the low-to-mid single-digit percentage CR growth and an improved core EBITDA margin in the mid-20s. Based on FX rates at the beginning of October, we can reiterate an anticipated year-over-year headwind of around 2.5% to 3.5% of 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. Moving to the performance of our business platforms, let's start with integrated biologics. Integrated biologics continue to see strong momentum with robust demand for its large scale mammalian assets. This is further supported by Vacabil, as I just commented on. In our small scale mammalian assets, we see a high level of utilization and we have a good level of visibility for the remainder of this year. But let me come back to the early-stage business later to provide further context and outlook. Overall, we are pleased to report a continued good operation execution alongside maturing growth projects and growth and margin drivers in our integrated biologics business. Turning to our advanced synthesis platform, to see strong commercial demands for small molecules and bioconjugated capacities, as underlined by the deal mentioned in our Q3 release. signing a large multi-year supply agreement in small molecules. Growth is supported by new capacities in small molecules with our new highly potent API plan, training bioconjugates. The business platform further benefits from the robust operating execution and the demand for complex products, supporting margins as witnessed already with our half-year results. Our systems identity platform improves the Q3 as expected. Also, we expect the full year performance to remain moderate in the context of the software first half. Deliverance are weighted into Q4, and depending on the progress of key customer projects and decisions, sales may also fall into 2026. iScience had a good Q3 with robust growth, and we are pleased to report that microbial returned to growth in Q3 after a software H1 performance. In Celergine, ongoing pipeline variability and complex manufacturing continues to weigh on asset utilization. When we anticipate a gradual recovery in operation performance, it will remain below the strong execution seen in 2024. Celergine is a business with strategic relevance to Lonza and is our aim to increase resilience of the business over time, commercially and operationally. But in the meantime, some business variability may persist. Our CHI business returned to positive CR growth in Q3, in line with the expected full-year trajectory for 2025. We are pleased to report that also the pharma capsules business is seeing improved demand trends and returned to positive volume growth in Q3. We can therefore confirm that both our nutraceutical and pharmaceutical capsules business have moved beyond the post-pandemic destocking phase. In the current geopolitical environment, our manufacturing footprint in Greenwood, South Carolina, and Puebla, Mexico, is continuing to support CHR's customer to navigate the evolving geopolitical environment. In the U.S., recent preliminary affirmative countervailing and anti-dumping decisions continue to be in place, allowing more balanced competition for pharmaceutical and nutraceutical capsules in the U.S. We progressed with the necessary internal combat measures to prepare our exit from the CHI business. The good business momentum highlights the attractiveness of the CHI business as a leader in its markets, and we are confident in the business ability to return to historical CR sales growth in the low-to-medium-digit percentage and a core EBITDA margin of about 30%. We are therefore confident to accept the business in the best interest of our customers, employees, and shareholders, and we will do so at the appropriate time. Before turning to our growth projects, let me say a few words on contracting. For 2025, we expect, again, a healthy level of contract signing across technologies and sites. Recently, we were able to sign several significant contracts including a further strategic long-term contract for integrated drug substance and drug product supply of bioconjugates. In our small molecules technology platform, we signed a large multi-year commercial supply agreement, and in integrated biologics, we were able to secure a fourth significant long-term supply agreement for our Vacaville site. In Vacaville, we expect further contract signings in the coming months, and we continue to see strong customer interest on large-scale U.S. capacity. Let me say a few more words about Vacaville. One year after closing the acquisition, we are very pleased with the site's integration into the non-service network, which is progressing in line with the plan. The site continues to demonstrate robust operation execution in support of RoCH and is maintaining its excellent quality track record, which is also reflected in our expectations of Vacaville, contributing at the higher ends of our initial estimates for 2025. In fact, it's also preparing new product introductions for 2026. And the first phase of CapEx is progressing a plan to upgrade the size of the system and supply to purchase capabilities. Our new highly-coordinated care facility in List is progressing well and will commence full commercial operation in July 2025. Our large-scale and many facilities also in List show good progress in ramp-up activities in Q3. GMP operations are underway and commercial production is expected to ramp-up gradually from 2023 onwards. Ramp-up activities for both facilities are those progressing in line with plans. Before closing my remarks and opening for the Q&A session, let me reiterate our expectations of no material financial impact on DONSA from the currently announced official U.S. trade policies. The so far announced U.S. tariffs do not include tariffs on API, intermediates, and raw materials as described in the Annex II of the Executive Order. We further remain confident that our well-diversified global manufacturing footprint with large capacities in the US, Europe, and Singapore will enable us to support our customers' global manufacturing requirements today and in the future. We, of course, remain vigilant to the continued evolution of the situation and potential impact on our businesses. We also continue to closely monitor biotech funding trends And recent fluctuations in funding levels, I expect to have only a minimal impact on Lonza's growth momentum in 2025 and beyond, with early stage activities representing only approximately 10% of the CDMO business and only a portion of that business originating from companies requiring funding. To close, let me provide some final remarks. Lonza is on track to deliver on its full year 2025 outlook. We see strong contracting demand with customers seeking long-term services for their strategic projects. Our growth projects are on track and are contributing to our growth this year and will continue to do so also in the years to come. In the current geopolitical environment, our large commercial business provides stability and our global assets are in positions as well to support our customers with their complex manufacturing needs. Thank you for your time and hand over to Sandra.

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

Hello. Hopefully you can hear me okay. This is Zain Ibrahim from JP Morgan. I'll stick to one question, which is on Vacaville. So just on the significant contracts you announced this morning, how should we think about the timing of tech transfer for the contract and when can it start contributing to revenues? And related to that, just based on this contract, where are you with respect to your target for being able to maintain Vacaville sales stable over the mid-term?

Thank you very much for the question. So I think as we've stated in the past, I think large commercial contracts are usually not for immediate, you know, use of batches. It takes time to take transfers, I should say. But I think all the contracts we are announcing for Vacaville are part of the plan to offset the reduced need for batches from the initial Roche contract. And so this new contract is part of our plan and, you know, reconfirms that our projected of the next few years is exactly on track. So this contract, you know, will start next year over the next two to three years.

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

Hi, guys. Joel Smith here from Barclays. Hopefully, you can hear me okay. Just a question, please, on guidance. Just wondering, given you kind of raised the Vacaville outlook to the upper end of your around half-million range this year, but you reigned the top-line guide, I was just wanting to confirm if there's one portion of your business that you think has kind of deteriorated such that you are just kind of reiterating that top-line guide. And just maybe, whilst we're on guidance, I was wondering if you could write commentary on your thoughts on FY26, guidance next year, which is currently looking for low double-digit growth. I know you don't have to comment, but worth asking. Thank you.

Yeah, thank you, Charles. I thank you for offering the answer to your second question. But more seriously, look, I think I'm guided for this year. I think we gave you a range. There's other things that move up and down. So certainly I think we're pleased with the fact that we've progressed this year and continue to be pleased with it. So that's helping us. On the other hand, you know, there are, as we mentioned, some uncertainty on SPN. So I think within that range, this is what the pool's intakes are. So that's for 2025. We're three months away, so, you know, we kind of have good visibility on what's going to happen for the rest of the year. On 2026, as you know, we usually guide in January when we report full year numbers, so we will stick with that. So for 2026, you know, I think we talked about early stage, which is not going to have material impact on our numbers, no matter what the funding level is. And I think we're very pleased with the contracting, as we said, for 2025, which will also help in 26. So I think everything is in line for 26 so far.

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

Hello. Thank you for taking the question. I wanted to stick on 2026, please, so not asking for a number. Since the large mammalian VIST asset will be ramping in 26, which could presumably be a bit dilutive to margin with a relatively high base in advanced synthesis and in Vacaville, there might be some headwinds to margin improvement year on year in 2026, perhaps a bit offset by the advanced synthesis improvements. But are there any other moving parts that I sort of haven't mentioned that could drive an improvement next year?

Yeah, Charles, so again, you summarized very well, which is great to hear. I think, again, yes, we have large growth assets that start diluted as is very normal. Buckerville, I think, is probably more of a top-line headwind because this is going to be more or less flat for next year, so that's a big block of sales, if you want, that does not contribute to growth next year. Nevertheless, I think, you know, our organic growth model is looking at low-teens growth and margin year-over-year, and that's, I think, for now, your best assumption for next year. Okay. Thank you.

The next question comes from Theodora from Goldman Sachs. Please go ahead.

Hi. Thank you for taking my question. So just on the separation of the CHI business, is the process of carving out this business now complete? And are you able to share with us anything in terms of the timing of separation or when you'll be able to communicate the decision? Thank you.

Thank you for the question on CHI. I think that the progress on the internal separation, you know, which contains both legal entity work as I said in my speech before is progressing well. I think we're nearing completion of that and I think the rest of the process is really an internal process that can be between us and the other parties and will inform when things are decided.

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

Thanks for taking my question. On Vacaville, please. I mean, you've announced you've won a new contract and there's potentially some in the coming months. So just to clarify, should we understand that, you know, there could be some by year end, but we're not going to find that out until full year in January if you don't plan to disclose more in real time like your peers? Yes. I guess I'm asking this because some of them have been more visible to the market in terms of the number of contracts they sign, which suggests a much more competitive environment. So perhaps I can also ask what you're seeing on that front. Many thanks.

Yeah, thank you, James. So, again, we usually do not communicate all the contracts we're signing. This would be issuing a lot of relief. You know, I think if you remember, our signing in 2023 was about 12 billion. Last year was about nine. nine billion right so i think this is a lot of contracts being signed we do not have a history and and uh we do not mention every single contract we're signing i think we decided to do so on bucketing to provide you um i think more visibility into our confidence uh to fill the assets over time uh so this is the reason why uh you know we're kind of providing you the back of your contracts on a more regular basis And usually our customers also have no interest for us to publicly announce their contract. So we don't do so. I think indeed, I think if we were to sign further contracts this year, you'll probably hear about it at the end of January when we report on full year numbers. And I think as stated as well, I think we should get off the rhythm of announcing contracts for a single site And probably we won't do so in 2026, but let's see. I think the contracting situation is very strong. We are also very pleased with the interest in Vacaville. So we have a lot of concurrent negotiations ongoing. Some will finalize over the next few months. Others may take longer. These are very large contracts. These are usually so complex. multi-year contracts that need time to be negotiated. In terms of the competitiveness and what our peers are doing, you would have to ask them. I think for now, we're very pleased to have a very strong footprint in the U.S. with attractive capacities available in the U.S. But also our sites in Europe and Asia see good demand and use some of the contracts that I mentioned today. That also includes some of our non-U.S. assets. So I think on the contracting side, we're very pleased with the progress and with the interest of companies, large and small, to contract with London.

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

Thanks. Good afternoon, everybody. Just a follow-up on the large contract wins. For Vacaville, is there any chance you could add a bit of color on size and types of capacities, amount of capacity required? And the same for the large bioconjugate contracts. For which site was that specifically, and can you add some color on what types of services from your end that this includes?

Yes, I think I'm happy to take your question. So I think on On the back of the contract, I'm not going to directly answer your question, but maybe give some more color about the contracts that we have signed so far. I think all of these contracts, including the latest one, are multi-year contracts that are significant for the site as well. and which are very important for us to offset the declining revenue coming from Roche. So I think these are very helpful projects because they start contributing very soon, helping us to maintain flat sales for Vacaville. Important also to note that we see great interest from both assets within Vacaville. I think, as you know, we have a 12,000-liter asset and a 25,000-liter asset. And I think also coming from the market, I think there were certainly question marks around the markets still requiring such large reactors, like the 25,000 meters we have. And we're very pleased to say that, yes, indeed, there is big demand for such large reactors. So we see contracting for both our 12,000-liter reactor and our 25,000-liter reactor. Again, for us following a very or tracking very well along the plan that we had and this confirms our outlook for kind of sales to 2028 and then, you know, increasing sales further on as we ramp up utilization of the site. For the integrated offer contracts that we also mentioned today, I think here we are offering several services including producing the protein, the conjugation, and the drug product. So, again, I think the reason why we mentioned this contract to you is because, again, the interest from pharma company large and small to ask us for integrated business which cover more than one modality. So more and more we get asked to do not just the protein or not just the conjugation or not just the drug product but the combination of several modalities across our platforms. And I think we believe that this is, again, something where Long-Sung can clearly differentiate, of course, in the areas of ADC, but not only.

The next question comes from Thibault Botterrand from Morgan Stanley. Please go ahead.

Yes, thank you. My question is just on Paris and the capex announcements in the U.S. by large pharma players. Clearly, there is a push from the U.S. administration to bring more manufacturing to the U.S. So did you have discussion with the administration and confirmation that investing through CDMOs such as Lonza meets the administration goals for locating manufacturing in the U.S.? So it makes sense that it does, but just wondering if you had an explicit confirmation that it would fit what they're looking for.

So I think there are multiple discussions happening. I think with the U.S. government certainly some companies are talking directly. The Swiss government is talking directly. We also have contacts that we use. I wouldn't go into more details of what's happening in these discussions until there's a result. I think this would be premature. So I think we'll wait until something is official and is being communicated. But overall, I think I reiterate that also we at Lonza are investing significantly in the U.S. So, of course, if you compare this with the numbers of Big Pharma, this is a different magnitude. But I think as an industry leader, we are investing significantly in the U.S. in multiple sites. You know of our investments in Portsmouth. Of course, you know of our investments, of our large investment in California, in Vacaville. And there are other sites that are receiving further investment. So I think we feel very confident to also here be very much in line with the intention of development, but more importantly, the intention of our customers to have capacity and strong capacity in the U.S. So we will continue to offer increased capacity in the U.S., And if our pharma customers can leverage this, then even better. But in any case, having a footprint in the U.S. is helpful to our customers.

The next question comes from Manisiotis Odysseas from BNP Paribas. Please go ahead.

Hi, thanks for taking my question. First one, Philippe, I wanted to follow up on the details you provided on the contracting between Vacaville by reactors. Is it fair to interpret the details you provided there as that you've landed in these four contracts? At least one of them has to do with the 25k liter. And on top of that, within these four contracts, you also have contracts for more than one by reactor. So that's the first one. And secondly, could you remind us the pace of the new VISP mammalian capacity ramp? Is this still expected to run at soil utilization by 28, 29? And has there been any plans changed given the recent push to reshore capacity in the U.S.? Thanks. Thanks.

Yes, so let me give you maybe reconfirm what I wanted to say just before on the VACAVIL contract. So indeed, I think we have been able to contract for both assets, for the 25K and for the 12K. So I think there's a different mix in the contracts. I'm not sure I understand what you meant with contracts for more than one reactor, but I think I can confirm that the new contracts that we assign are involving both 25K and 12K assets. I think on our large-scale facility, I think we mentioned a while back how the profile of such large scale facilities look like and indeed it usually takes two to three years also to rent. So since we started, you know, late this year, you can do the math as to when we would expect utilization to be high and contributing federally to our bottom line, to our margins. So I think this asset is a typical large-scale asset that will follow this path. Yeah, so everything is in line. We started GMP processing this quarter, so progress is in line with our plans.

The next question comes from . Please go ahead.

Good evening. Thanks for taking our questions. Maybe just a quick one here on Vacaville. Appreciate the fact that revenue is going to be flat next year in 2026, but in the past you've talked about margins at that facility ramping up as you replace some of that Roche revenue with additional third-party customers. Can you just talk about how you expect Vacaville margins specifically to trend next year?

Yes, Max. So I think on Vacaville, again, we said two things. One, I think revenue will be more or less slashed to 28 and margins will progress over time to basically be neutral to group by 2028. So I think this continues to hold true. I think margins this year were a bit better or better than we expected as we mentioned in our first half call. Now, of course, this was also an easier year, 2025 was an easier year for Vacaville since there was basically to produce the products that they knew from before for Roche with not a lot of new, you know, to do, et cetera. So, 2026 will be more challenging if you want from . because they have not only the implementation or the execution of the capex investments to do, but they also need to start to onboard and tech transfer new programs while still delivering the batches for Roche. So it's a more complex year. Nevertheless, I think we believe that our goal for 2028 is confirmed, and we'll have to see closer to... to next year, how the margin exactly behave versus what they do this year. I think we had before the question from Charles around the dilutive effect in terms of growth for the company. So in terms of growth, yes, this is a dilution. In terms of margin, we have to see if we can replicate this year's margin or not.

Got it.

But the progression over the next three years is confirmed.

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

Thank you. My question is on your cell and gene business. And now that we are in the middle of your fourth quarter, can you speak a little bit more about your level of visibility into this year-end pickup and what exactly is driving that?

Yeah, so I think we should talk only about the cell and gene business. I think there we mentioned H1 that we had also operation issues. I think we know this is a much more manual and very complex manufacturing process. So there I think we see improvement in the second half, and that business certainly improved versus the first half. But I think we're still managing the complexities and overall for the year, we don't expect this to be as good of a year as we had in 2024. Now, if you talk about SPM as a platform, I think they also, we saw better performance in the third quarter. We remain with several customer decisions and customer projects. that are late, have been late this year in Q4, and so these are the ones that could still move between 25 and 26, and this we will only know probably late this year. Microbial, which is the second largest business in this platform, is performing well and, you know, is usually a very stable, and strong business. We explained the first half in our July call with mainly a very high base and some construction in our assets in microbial, but otherwise this is kind of a stable and nice business. So overall, we see SPM better in the second half, but for the full year, certainly it would be difficult to offset what happened in the first half.

The next question comes from Sebastian Bray from Burenburg. Please go ahead.

Hello. Good afternoon, and thank you for taking my question. It's on the early stage fraction of the portfolio. It was mentioned earlier in the call that it looks relatively robust, at least on a few months' view. How far does the visibility extend in this area? And if conventional biotech funding measures which suggest that this business the faces of funding squeeze in 26 are no longer a reliable guide. Where is the money for these end customers coming from? When they go and sign the contract and the research funding is not there anymore, where is it coming from instead? Thank you.

Let me first. We confirm what you said very quickly. I think the early stage business is strategic for us because it allows us to look very early into the pipeline of pharma companies as to what services and technologies would be needed in the future and also contributes clearly to our future commercial utilization. So I think this is an important business for us. But again, this is not a very large business for us given the sizable commercial contracts and commercial assets that we have. So this early stage work is about 10% of our CDMO revenues. And also for us, the funding in biotech is only a portion of what drives this early stage work for us because many of our customers don't require external funding. This can be large pharma, large biotechs, midsize companies that have their own revenue and own funding. Only a portion of these 10% is actually really relying on external funding being from tribes, follow-ons, venture capital, et cetera, et cetera. So I think what we wanted to make clear is that the funding levels that we've seen today, and I'll come to this in a second, will not play a major role in the long-term performance. And we have visibility of roughly six to nine months in that business. It's usually the delta that you see between any movement of funding and then again these smaller companies relying on funding being able to deploy. the capital they received or having to reduce their spending because the lack of funding. So this is usually the visibility that we have. So for now, we would see roughly into the first half of 2026. And for there, I think we see good level of utilization, certainly for 25 and early 26. I think the inquiries that we're seeing, have reduced slightly throughout 2025, but not dramatically. And on the funding side, actually, it's good news. Q3 was actually better than Q3 last year. So I think this is not only bad news there. I think we saw a great increase in pipe funding, which is one of the other mechanisms for these companies to get money. VC, I think, was holding well at a similar level as previous quarter. So I think this is still something that's volatile, but the decline that you've seen since early 25 at least has been put on hold for Q3. That's actually what we see, but it's probably the same data that you are all looking at. I would say we're happy with the progress of year 25. We're confident that we can manage 26 and that we will continue to see interest for early stage work to then, you know, be retained within the Lonza network over the years to come.

Ladies and gentlemen, this concludes today's question and answer session. I would now like to turn the conference back over to Philippe Deke for any closing remarks.

Thank you, everybody, for the question and the interest in long-term. Again, a strong 2-3 and confirming our outlook for this year. So I think good news from our end, and I wish you a great end of today and talk to you in January.

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