Lonza Group AG

I am Sandra, the course co-operator. I would like to remind you that all participants have been listened only mode and the conference has been recorded. The presentations will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone and follow the presentation over the webcast. Please limit yourself to one question and then you can re-enter the queue in case you have a follow-up. In the webcast, we have a chat box which will 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 is my pleasure to hand over to Philippe Desquet, CFO. Please go ahead, sir.

Thank you, Sandra. Good afternoon and good morning to those of you joining us from the U.S. Welcome to our Q1 2026 qualitative update. Before we go into the details, please let me remind you that our qualitative updates are intended to provide you with a general business overview and we will not be sharing figures related to our financial performance. We will do so on the 22nd of July with our half-year update. All content, unless otherwise specified, refers to our CDMO business, which excludes capsules and health ingredients. I'll start with an overview of our group performance before we move to the performance of our business platforms our business contracting and growth projects. Afterwards, I will provide you with an update on our one-lancer journey, followed by a few comments on the current macroeconomic environment before I close for the Q&A session. Today, we report a strong Q1 performance across our CDMO business platforms, entirely aligned with our expected full-year 2026 trajectory. As already communicated in January, we confirmed that PER sales growth and core EBITDA margin would be notably stronger in the first half of 2026 than in the second half. This is primarily due to the prior year base, which was much stronger in H2 than in H1, as well as the following three drivers. Advanced synthesis with a contribution of different growth projects and a favorable batch release phasing. Second, some revenues in specialized modalities moving from late 2025 into the first half of 2026. And third, a strong sales contribution of Vacaville in H1-26 due to planned shutdowns in the second half as the site strives to have the catapult investment program and introduces new molecules. These drivers also positively impact core EBITDA margin in H1. Absolute sales, therefore, should be more balanced than in the past between the two halves of 2026. In the first quarter, we saw a strong operating performance across business platforms. We are therefore confirming our 2026 outlook with sales growth of 11% to 12% at constant exchange rates compared to the prior year and a further core EBITDA margin expansion reaching a level above 32%. Before focusing on our CDMO core business, a short word about CHI, which continues to see the robust demand trend already reported in the second half of 2025. We therefore continue to expect mid-single-digit percentage CER sales growth as an improving core EBITDA margin. I will comment on the exit process later in my update. Finally, finishing on the group overview, based on ethics rates of early May, we anticipate a year-over-year growth hedge wind of around minus 3% on sale for full year 2026, with the first half being more impacted than the second due to last year's US dollar trading pattern. However, our margins remain well protected through a strong natural hedge and our financial hedging program. Moving to the performance of our business platforms, let's start with integrated biologics. Integrated biologics continues to see good momentum driven by increasing utilization with the maturing of growth projects in mammalian and drug products. We see healthy demand for our small-scale and large-scale mammalian assets, which includes vacavale, for which we confirm our expectation to reach peak sales in the early 2030s. We also see our more mature-based business as an additional growth driver in 2026, This is supported by good operation execution and a favorable mix. We are therefore pleased to report that Integrate Biologics is performing in line with our expectations. Turning to our advanced synthesis platform, we continue to see strong growth in our small molecules and bioconjugates businesses. Growth is supported by the rapid and simultaneous ramp-up of growth projects added in 2025. which are primarily contributing to growth in the first half of 2026, reaching a high level of utilization and lapping their ramp up from last year in the second half, leading to a lower growth contribution. Furthermore, we see a strong operating execution and an attractive product mix with advanced synthesis additionally benefiting in Q1 from a favorable batch release timing. We therefore expect stronger growth in the first half than in the second and are confident that advanced synthesis can continue to deliver strong margin levels in 2026. For our specialized modalities platform, we are pleased to report that the business saw significant growth against the lower prior year base. This strong performance is mainly explained by our microbial business, with growth further supported by sustained momentum in bioscience. The LNG made further progress in strengthening its operational performance and is on track for a Q2 normalization. We therefore expect growth in 2026 to be driven by all three business platforms, as already predicted with our business outlook for 2026. Let me say a few words on the progress of our different CAPEX projects and the business momentum that we see. Our large-scale mammalian site, Invis, continues its ramp-up process with the production of different GMP batches. Commercial operations were commenced in mid-2026 in line with the previously communicated timelines. Revenue growth contribution is expected to start in the second half of 2026, as part of the multi-year ramp-up of commercial output. We also see good progress at our large-scale drug product fill-and-finish facility in Stein, with production expected to start in 2027, while we expect our large-scale bioconjugation site in Fiske to start production later in 2028, also in line with the latest timelines. At our large-scale mammalian site in Bunkerville, we are making good progress in upgrading the site to increase the operational flexibility needed to operate at the CDMO site, with additional upgrade measures requiring targeted shutdowns taking place in the second half of 2026. This will lead to lower sales contribution in the second half. However, on a full year basis, we confirm our expectations that sales in 2026 would be broadly aligned with 2025. Operation execution remains strong and we have successfully transferred the first non-rush product and produced the first GMP batches. The team is already preparing the sites for the introduction of the next non-rush product. In Q1 2026, we saw sustained business momentum across sites and technologies. We secured multiple drug substance drug product deals, which highlights our strong offering as one of only a few CDMOs that can provide such integrated offerings. Our cell and gene business signed an extended commercial manufacturing agreement for genetics, Synteglo, further strengthening our positioning as the leading commercial cell and gene CDMO. Customer interest in Vacaville remains high and we expect additional contract signing over the course of the year, in addition to the five contracts reported to you in January, 2026. As announced in early March, we made strong progress in our One Lanta journey to become a pure-play CDMO with the announced divestment of a 60% stake in our capsules and health ingredients business to Lone Star. Divestment of all the non-corporate businesses is a total of four divestments since the announcement of our One Lanta strategy at the investor day in December 2024. The remaining CDMO businesses are powered by the launch engine and its unique set of strengths and capabilities. With 1.7 billion Swiss francs immediate proceeds from the CHI divestment and additional future proceeds at full exit, we have significant firepower for value-creating bolt-on M&A while maintaining our commitment to triple V plus ratings. In line with our one long-term strategy, we are proactively building a funnel of public and private M&A opportunities, and we are confident in our ability to pursue some of these over the mid-term. Focus remains on delivering capacity, technology, and portfolio expansion. To rebalance our short-term capital surplus with our balance sheet strength with a net debt to EBITDA ratio below 2 today, We have decided to return 500 million Swiss francs of surplus capital to investors through an expedited share buyback on receipt of the upfront CHI exit proceeds at the close of the transaction. The close is expected to take place in Q3 2026. Before closing my remarks and opening the Q&A session, let me briefly address the geopolitical developments we are observing. Against the backdrop of recent development in the Middle East, we currently do not anticipate any material financial impact on Lonza. Supported by proactive risk management and in line with our well-established hedging policy, we have secured almost our entire energy needs for 2026 and also a sizable share of our 2027 needs. In addition, our long-term customer contracts include, as you know, price adjustment costs providing an additional layer of protection against energy-related inflation. Further, Lonza has no manufacturing footprint in the Middle East, sources almost no raw materials from the region, and has very limited revenue and customer exposure. We can also reiterate that we expect no material financial impact on Lonza from the US trade and tariff policies. This includes the outcome of the latest Section 232 investigations. Based on our understanding of the published outcome of this investigation, we also do not anticipate that our customers are materially affected. Nevertheless, we continue to expect a gradual shift towards more regionalized drug manufacturing, with regional demand increasingly being served regionally. In this context, we remain confident that our well-diversified global manufacturing footprint, with large capacities in the US, in Europe, and in Singapore, will enable us to support our customers' global manufacturing requirements today and in the future. In light of the significant recent US investment announcements from large pharmaceutical companies, with only a small part of investments going into manufacturing assets, outsourcing decisions may at times take a bit longer to conclude. The demand for CDMO solutions remains healthy in 2026. We see the CDMO industry as part of the solution in this gradual shift towards regionalized supply chains, and biotech and large pharma companies continue to outsource. These investments are likely more a shift in global capex spend towards the US, rather than a change in outsourcing strategy, with an overall increase in capital investment into manufacturing. Biotechs, which are approximately half of our revenue, are an important customer group for Lonza, will continue to rely heavily on CDMOs to minimize capital requirements into manufacturing. To close, let me share a few final remarks. Against the backdrop of ongoing geopolitical uncertainty, LOMS has continued in the first few months of 2026 to demonstrate the resilience of its CDMO business model, which supports effective risk diversification. We are on track to deliver on our strong full-year 2026 outlook. which sustains customer demand, and we are making good progress across our diversified CapEx program. With the divestment of CHI, Lonza is becoming a pure player CDMO, and we remain confident in our ability to pursue value-created M&A opportunities alongside the initiation of our 500 million Swiss franc share buyback, following the closing of the CHI transaction. The Lonza engine is firing on all cylinders, and we are well positioned to deliver strong shareholder value. With that, I would like to thank you for your time. Sandra, over to you for the Q&A.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. You will hear a tone to confirm that you've entered the queue. Kindly limit yourself to one question only. You can get back in the queue again for a 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 hands that are asking a question. In case of difficulties with understanding your question on the phone, we will ask you to submit a question in writing via the chat in the webcast. Anyone with a question may press star and one at this time. Our first question from today comes from James Quigley from Goldman Sachs. Please go ahead.

Great. Thank you for taking my questions. I hope you can hear me. I've got a question on bioconjugates. So, Daiichi Sankyo today highlighted provisions for overbooking capacity at CDMOs, and in the approval documents, Londra is listed as a manufacturer for inheritance data away. So, is there any impact here for Londra in the short or medium term to what extent does the guidance already account for cancellation fees? Again, I appreciate that's difficult to predict, but is there anything that's already in the guidance to take this into account? And then, If you talk to the demand growth you're seeing in bioconjugates, in a recent interview, Christian said that 70 to 80% of all ADCs are outsourced. So where does London fit in the production chain, and do you see strong growth in this area? Thank you.

Yes. Hi, David. Thanks for your question. So obviously, we have also read the announcement issued by Daichi Sankyo this morning. I'm not going to comment specifically on Daiichi Sankyo, but I think we are – we continue – we have always been a leader in the ADC space. This is a category that is showing significant growth. There is projected growth of over 20 percent a year for the next five years, so this is a very interesting space. We are certainly the largest commercial manufacturer for ADCs and are recognized as the largest a very secure source for this very complex modality. I think I can confirm that today, as of today, there's no cancellation fees planned for this year. I mean, there's nothing sizable. We always have small cancellation fees here and there, but there's nothing significant that I would have to mention to you. And so I think, for us, this is a continued area of high interest. Christian mentioned that in his interview. We continuously build capacity to expand our footprint on conjugation, and this is a business area that is going really well, and you'll see this once we publish our numbers in half a year.

All right. Thank you.

The next question comes from Zain Ibrahim from J.P. Morgan. Please go ahead.

Hello. Thanks for taking the question, Zain Ibrahim, J.P. Morgan. We'll stick to one question, which is on contracting momentum. which you talked about in the program. But maybe if you could elaborate in terms of what you've seen from customers in Q1, because it indicates the customers are taking longer or may take longer to sign contracts amidst the U.S. investment. But have you seen any change in customer behavior in Q1 specifically? And tied to that, your confidence level in Vacaville seems to be unchanged and you're retracing peak early 2030s. So what are you seeing from customers that continues to underpin that confidence?

Yes, thank you, Zain. So, look, I think Q1 was a good contracting quarter for us. I think given the uncertainty in the markets around tariffs, around geopolitical situations, around investments in the U.S., et cetera, I think it's understandable that companies are maybe taking a few months longer to take decisions. Remember, these are anyway quite long negotiations if you're talking about commercial contracting. I think what we want to say is that we continue to see strong demand and strong requests for our capacities in the small-scale area as well as in the large-scale area. But yes, I think discussions tend to take longer. Remember, we sit on a high backlog of contracts. This is not worrisome, but I think it's a fair reflection of what we see when discussing with large companies, which we wanted to share with you. I wouldn't read into this a change in strategy for pharma. I've mentioned this in my script before. The interest for pharma companies, both large pharma as well as biotech, remains unchanged. There is still a significant need for outsourcing. Remember what is driving outsourcing. One, of course, is an attractive pricing, which we always need to provide, but second, it's de-risking the capital investments of pharma and thereby creating a true economic value in the industry. So this has not changed, and so we are not worried about contracting in general. If you want to talk about Vacaville, I think, again, I'm not sharing details on a side-by-side level, but people obviously continue to be interested in U.S. capacities. Vacaville is a very strong, high-quality capacity available in the U.S., and so we see, continue to see good interest for the site.

Okay. Thanks very much.

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

Hi, guys. Thanks very much for answering my question. My key question just relates to the comment you made about the base business being able to support growth based on improving execution. I'm just wondering if you could speak a little bit more around the potential delta that's available to you from improved yield as a result of AI. That seems to be an area where investors can see a great opportunity for the CDMO space. I'm just wondering if you see that as an opportunity as well for yourself. And just a very quick clarification on back-end contracting. Can you just confirm that you're not going to be talking about back-end contracting? earlier in your statement.

Thank you. Thank you, Charles, for your questions. So on the base business, I think I'm happy to address AI in a second, but this is a lot, I would say, a lot lower tech than what you may be reading to this comment. I think when we talk about our base business, these are assets that have been online for a while, and I think we have renewed our intensity in improving operations, de-bottlenecking some of these assets, really driving what we call value stream mapping, so employing all kinds of Six Sigma and Lean methods. And so you're basically creating capacity in older or more mature assets. And this capacity can be sold, and therefore we are generating, if you want, growth out of older assets and not only relying on new assets to create growth. all possible to be done without AI. These are our engineers and technicians and operators that are working together to deep bottleneck assets. This is how we improved it. Of course, the other thing which takes longer, which is what we call portfolio management, where we are replacing all the contracts with more attractive contracts. I would say this is something that has been ongoing, but I think the renewed push on de-bottlenecking is what is creating the help on the base stations. Now AI, I think we see as a positive tool for us in the future. I think the specific use case of AI in terms of what probably people now understand as large language models is probably still early stage. But we've been using AI in terms of machine learning for a while. And this is used, we're as long as sitting on a wealth of data from the decades of work we've done with many different molecules. And this data can be, of course, used to improve yields or improve how we synthesize certain molecules. So, you know, I would kind of say that AI in terms of large language model, early stage, but we have applications in the back office, in quality, et cetera, where we are using that. I wouldn't say that we're using that extensively yet for years.

Thank you. Any comments on the factual control announcement?

Oh, yeah. Sorry. Yeah, yeah, yeah. Sorry, Charles. This was not my intention. But, you know, you're right. I think, as we said, in January, we have now fully integrated Vacaville into our main network. And so I think contracts for specific sites will not be shared unless these contracts represent something very special, which we've done in the past. So large strategic contracts or integrated contracts that we will continue to share with you as long as the customer is also okay with that. But we will not be counting contracts with you on Vacaville anymore. Thank you.

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

Hi. My question is on the specialized modalities division, please. First of all, we talked about cell gene therapy normalizing in H2. I guess those separation issues have been going on for over a year or maybe now. So can you just talk about the journey there and perhaps any phasing we should be thinking of in terms of weak or strong COGS half to half And on that same division, just how core is bioscience? Because that's not what we would normally think of as a CDMO business model.

Yes, thank you, Charles. So on SPM, I think we're pleased with the start of the year for the platform. Again, if you remember last year, we had a weak first half and a better second half. And I think the first half had proven to be now much stronger versus that low base. Also, some of the phasing that we had at the end of 2025 moved successfully, if you wanted to, into the first half. So I think we were right in kind of that phasing forecast. And so I think the first half was strong on the microbial side, was strong on bioscience, and also our cell and gene improved. I think Celengene would be probably a further improvement over the course of the year to go. Very pleased as well to be recognized by other customers to give us their commercial products. You saw that we signed one more commercial product, which is helping to stabilize, of course, the production and the manufacturing for Celengene. So overall, I think SPM looking at a much better year than last year, and this is also driving our stronger first half because the first half in SPM would be better than the second half in terms of growth. In terms of buy signs, I think you saw that we've cleaned up a little bit buy signs by selling our software business within buy signs. And we now are really focused on the areas of this business that we want to maintain and keep because they are actually very closely related to our CDMO business, being it around testing or being around media. So these are really things that are an integral part of our CDMO manufacturing offering. So from that point of view, I think this is core to us. And I think we believe that we have now reached a level of businesses that are fit. We have actually done a small acquisition as well called Redberry in the high-speed testing. We believe this is a place where we can help our customers, but we can also significantly benefit in our own manufacturing.

Thank you.

The next question comes from Charlie Haywood from Bank of America. Please go ahead.

Hi, Joey here with Bank of America. Thanks for taking the question. Just on the fainting commentary, which was helpful, you've inserted notable into the commentary, along with, I guess, slightly more committal on first half and second half margin saving. I imagine some of the 25 batches that were delayed would have been, you know, the base case to come in first half 26. I wanted to understand if anything... a change in second half, i.e. a pull forward or different batch phasing, or if first half is maybe just trending better than expected. And then did on that, if you could provide a bit more color on the back of those sort of first half versus second half phasing and this sort of shutdown or sort of commentary on second half that you alluded to, just a bit more color would be helpful.

Thanks. Yeah, thanks, Charlie. I'm not sure I fully, fully understood acoustically the very start of your presentation, So if I'm not answering properly, just ask again. I think I understood that you were asking more about the phasing of 25 into 26 and then H1 and H2 dynamic. So I think, indeed, remember during the summer of 25 last year, we said that some of the batches and some of the business in specialized modalities could be very late in 25 or could move into early 26. This has happened, which is, of course, the first half of 2026. So this, in that sense, has been developing the way we had expected, so no change on that. And then in general, I think, you know, our first half was always expected to be stronger than the second. We've mentioned that in January. This is not accentuated. If you want, it has not become more than what we were expecting, which is confirming to you now that this is the case. And I provided you a few of the drivers, which is really across the platforms where each platform actually sees a little bit of benefit in the first half versus the second half. For integrated biologics, this is really around Vacaville as well. I think remember as well we were talking about Vacaville having a simple year in 2025 where we were basically continuing to produce what the site had done before. a more complicated year if you want because the site has to manufacturing for our important customer Roche. We have to do a CapEx construction work and we have to introduce new products. It's a much more busy year for the site. However, we can confirm now that the sales will be roughly in line with what we did last year, so will the margin for the site. But yes, we will have a strong first half because we have a planned shutdown in the second half to implement some of these, you know, productivity investments into the site or upgrades. And therefore, this is expected to have an impact on the revenue and the margins for the second half.

Thank you.

Thank you, Charlie.

The next question comes from Paul Knight from KBank. Please go ahead.

Yeah, thanks for the time. The China market is becoming the top or second largest originator of biologics. How do you see this playing out? Will they manufacture those ex-China, or will it also be in China, and will you participate in China, or will you select the ex-China? I'd love your vision on what happens in that market.

Yeah. Thank you, Paul. Indeed, I think if you look at the statistics, it's quite impressive how much of the innovation is coming out of China. I think our view on this is that most of the China innovation will need to go broader than China to be successful and financially viable. The Chinese market at the price level of China would not be sufficient for this company to become economically viable. they will need to spread beyond China. Some may do this alone, others are doing this through collaborations and licensing, like we've seen several occasions over the last few months and quarters. So we have strong beliefs that once they do this step, either through another pharma company, a Western company, or themselves, they will need a Western partner to do that with them. And here, Lantai is very well positioned to be the partner of choice for Chinese biotech companies wanting to expand the reach of their product. We are working with China today already. I think our cell line, our Lantai cell line is being used in China in several locations by several biotech companies. So the Lantai name is known in China, and it's a well-respected name. So I think on the one hand, we have this type of work, so the cell line, and this is then a more natural fit for these companies to come to us for manufacturing and development. And we also have seen at different occasions that the buyer or the in-licenser of such molecules are actually relatively quickly reaching out to Lanta to support them in expanding the reach of the molecules. I think what we hear also from PE companies is that, of course, having a PE or pharma company, having a longza in your supply chain is usually making due diligence much easier. So I think it's a big difference if you have longza in your supply chain or if you have no-name Chinese CDMOs. And so this is also helping making these molecules more attractive for partnering. Thank you.

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

Hi, thanks for taking my questions. I've got one clarification, which is on the prepared remarks, just in two points, actually. You mentioned in your phasing commentary about first half, second half, about a naturally stronger second half, similar to how that was viewed in January. I know we had a question on this already, but the word notably was introduced today compared to a full year. So I was just wondering what change are you to update that language? And then the second clarification is I know you don't want to share individual site-level contracts, but on Vacaville you mentioned additional signed contracts over the course of the year in addition to those announced in January. So that reads like none have been signed since January. So I just wanted to clarify the prepared remarks. Thank you.

Yeah, thank you, James. Yeah, I think the word notably is probably introduced because when we look at the collective consensus of all of you on the call, I think it was more of a timid reaction to our comment in January. So we wanted to make sure that we were probably thinking about a slightly higher difference between H1 and H2. So that's the hints we're getting today. Second, I hope that answers your question. Nothing has changed in terms of our underlying view of the two halves. In terms of Vacaville, I think I will not get into that discussion. I think we are not commenting on additional contracts for Vacaville. The only thing I would like to reiterate and reconfirm is that we continue to see high interest in the site. We continue to have very strong commercial discussions and negotiations with customers. So all this is really on track for Vacaville. We reconfirmed today the mid-term outlook. We reconfirmed today the outlook for 2026. So Vacaville continues to be a success story and a very good opportunity for us and for customers. Thank you.

We will now take the last question from Max Schmock from William Blair. Please go ahead.

Hi, good afternoon, everyone. Thanks for taking our questions. Maybe just a quick one on some of the language here in the press release around M&A. You know, you talked about building out a funnel of M&A opportunities. Just wondering if you can give more color around where exactly you're prioritizing in terms of your focus, and just when we can expect any sort of update around, you know, adding additional capabilities to the platform moving forward. Thank you.

Yeah, hi, Max. Look, M&A will remain opportunistic, obviously, but I think the big difference from where we are today versus where we were one year ago is that we have truly created an attractive pipeline of opportunities that will be triggered when they become available. I think what we are really doing is looking beyond probably what everybody gets offered and really reaching out to companies or that have assets we like or that have part of the business we like and really actively approaching to see if there is a business combination that makes sense. So I think the discussions are much more intense if you want or developed, but I think the timing remains opportunistic and will happen when it happens. The priorities on this remain the same. I think we are highly interested in capacities of high quality. Why? Because they basically accelerate the ability to offer more capacity to our customers. And usually you get a team that is used to operate that asset. Like we've seen in Bacaville, people with high experience running an asset just generates more high quality and so these are things that are really interesting. Second, obviously, I think the U.S. is an interesting location in general, given, I think, the shift in the supply chains to be more regionalized. We have a lot of sites in the U.S. We have a lot of power capacity in the U.S., but we don't have all modalities in the U.S., and so this is also something that we are trying to see if we can accelerate that. Thank you. With that, thank you very much for all your questions. I hope this Q&A was helpful to you, and we will close the call for today. And back to you, Sandra.

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