In the Half Year Results 2024 Investor and Analyst Conference Call and Live Webcast, Lonza Group AG (LONN.SW) announced a sales growth of 1.8% reaching CHF 3.1 billion and a core EBITDA margin of 29.2% for the first half of 2024.
CEO Wolfgang Wienand and CFO Philippe Deecke confirmed the company's outlook for flat sales growth and a high 20s core EBITDA margin, in line with their midterm guidance for 2024 to 2028.
Lonza highlighted new contracts in their CDMO business, including a significant agreement in their Cell & Gene division, and the expected Q4 acquisition of the Genentech site in Vacaville. The company also reported progress on ESG commitments and was recognized by Ethisphere as one of the world's most ethical companies.
Key Takeaways
- Lonza reported a 1.8% increase in sales to CHF 3.1 billion with a core EBITDA margin of 29.2%.
- The company confirmed its group outlook for flat sales growth and a high 20s core EBITDA margin.
- New contracts were signed in the CDMO business, particularly in the Cell & Gene division.
- The acquisition of the Genentech site in Vacaville is expected to close in the fourth quarter.
- Lonza is on track to meet ESG commitments, including 100% renewable electricity by 2026.
- The Biologics division saw a 7.3% sales growth, while the Small Molecules and Cell & Gene divisions also experienced solid growth.
- The Capsules & Health Ingredients (CH&I) division is facing increased competition and negative pricing and volume impacts.
Company Outlook
- Lonza maintains its midterm guidance for the 2024 to 2028 period.
- The market for hard empty capsules is expected to return to previous growth rates.
- Current capacity, including the Vacaville site, is believed sufficient to meet customer demand in the short to medium term.
Bearish Highlights
- Margins in the Small Molecules and Biologics divisions may decrease in the second half of the year due to product mix changes and increased costs.
- The CH&I division is expected to continue facing headwinds, including negative pricing and volumes.
Bullish Highlights
- Lonza's Biologics division demonstrated strong demand, particularly in mammalian and bioconjugates.
- The company's strategic growth is supported by new long-term commercial contracts and increased demand for early-stage work.
Misses
- No immediate new business is expected from discussions about Biosecure with new customers and drug developers.
- The impact of the Synaffix acquisition on revenue is currently not significant.
Q&A Highlights
- Lonza is engaged in ongoing discussions with customers about supply chain options and the timing of transitions to Biosecure.
- The company does not anticipate a significant effect on Biologics division yields or investments in facilities year-over-year.
- ADC capacity is currently constrained, but it presents an attractive entry point for early-stage ADC customers.
- Early-stage work, accounting for 10-15% of business, is seeing more RFPs, potentially leading to more business in the near future.
- Capital investment priorities remain focused on commercial capacities, including conjugation fill and finish, with no significant changes since October.
In conclusion, Lonza Group AG has reported a solid financial performance for the first half of 2024, with strategic initiatives in place to support continued growth. The company is navigating market challenges while maintaining a focus on its long-term goals and commitments.
InvestingPro Insights
In light of Lonza Group AG's recent financial performance, InvestingPro data provides additional context for investors considering the company's stock. With a market capitalization of $48.87 billion and a P/E ratio adjusted for the last twelve months as of Q4 2023 at 37.16, Lonza is positioned as a significant player in its sector. The company's revenue growth for the same period stood at 7.94%, indicating a solid upward trajectory in earnings. Moreover, the stock has experienced significant returns, with a 1-week price total return of 11.64% and a 1-month price total return of 17.65%.
InvestingPro Tips suggest that while the company's stock is currently trading at a high earnings multiple, indicating a premium valuation, it has maintained dividend payments for 25 consecutive years, demonstrating a commitment to shareholder returns. Additionally, Lonza's stock is noted for its low price volatility, which may appeal to investors seeking stability.
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Full transcript - Lonza Group AG (LZAGY) Q2 2024:
Operator: Ladies and gentlemen, welcome to the Half Year Results 2024 Investor and Analyst Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] 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.
Wolfgang Wienand: Yes. Thank you very much, Sandra, and good morning and good afternoon and a warm welcome 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 Lonza as CEO at the beginning of this month. I joined Lonza from Siegfried where I was CEO for the last 5.5 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 road 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 and to build a broad network in our and the 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, Philippe 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 Philippe.
Philippe Deecke: 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 dives. We will also make sure there is enough time for Q&A at the end. Before we start, let me remind you our figures are reported in Swiss francs. Growth is reported in 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 CHF3.1 billion, growing 1.8% versus H1 2023. We delivered a core EBITDA of CHF893 million, representing a margin of 29.2%. We have also reported solid free cash flow at CHF296 million. 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 midterm guidance 2024 to 2028, 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 & 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 & 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 ADC linker technology which was integrated into Lonza as part of the Synaffix 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 US 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 (NYSE:TGT) initiative has validated our target 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 Americas power agreements together, around 90% of our electricity will be renewable from 2026 onwards. Finally, we have been recognized by Ethisphere 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 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 offset by a weaker-than-expected market demand for our hard empty pharma capsules and to a lesser extent softness in our Bioscience business unit. Sales and profits were negatively impacted by currency exchange rates due to the Swiss franc 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 1% 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 a decrease of 0.8 percentage points in H1 2024 versus H1 2023. This is mainly due to a higher base in H1 2023 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 continued commitment to growth, we invested more than CHF 600 million of CapEx in H1 2024, mainly in the Biologics 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 up 20% due to the timing of CapEx spending which is expected to accelerate in the second half. Overall, while we may have slightly lower than guided 25% of sales for the full year, our gross project delivery remains in line with plan. Finally, let's take a look at cash generation. We achieved a strong free cash flow of CHF 296 million 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 hard empty pharma capsules. Now, let's take a more closer look at each division in turns. Starting with the Biologics division, we have seen 7.3% sales growth versus H1 2023, corresponding to mid-teens sales growth, 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 a favorable product mix in the first half, strong operational performance, and cost focus. Looking at two of our Biologics business units. In mammalian, 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 has evolved since the beginning of the year. As we noted before, we are taking steps to optimize our extensive global mammalian 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 bioconjugate 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 this space. As I mentioned, there's also strong interest in our extended ADC offering since we completed the acquisition of Synaffix 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 full year expectations due to the timing of customer campaigns. We expect higher sales in the second half, which will also include sales from our new HPAPI facility in Visp 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. In Cell & Gene, 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 Cell & Gene Technologies business delivered solid sales and positive CORE EBITDA margins. Performance was supported by a focus on operational improvement and strong commercial manufacturing. This strong underlying performance was partially balanced by headwinds in Biosciences. In this business unit, we provide researchers with tools and materials to support treatment discovery, quality and testing. Here, sales of media and cell discovery products were impacted by lower customer demand resulting from the recent early-stage funding constraints. Despite these challenges, Bioscience delivered solid margins due to a combination of product mix and strict cost control measures. Finally, let's take a look at our Capsules & Health Ingredients division. After an extended period of post-pandemic destocking we see demand recovery in our nutraceutical hard empty capsules business. The same applies to dosage form solutions and health ingredients. However industry capacity for nutraceutical hard empty capsules increased over the past years to meet demand and this has led to increased competition for volumes today. With pharmaceutical hard empty 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. Here 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 shorted the demand line 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 expect the destocking for pharma hard empty capsules to be completed by the end of 2024 or early 2025. From this point onwards, 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 Lonza strongly positioned 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 concluded two 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 9:00 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 (NASDAQ:MRNA) contract termination. Margin in the second half are expected to be lower than H1 and mainly due to less favorable product mix across businesses. Looking quickly at each division Biologics will mainly benefit from the ramp-up of gross 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 (NYSE:HPQ) API asset coming online. In Cell & Gene we're expecting our Bioscience business to stabilize after a softer start in the first half. We just spoke about Capsule & Health Ingredients where the recovery is anticipated in 2025. And now, before we move to the Q&A, I hand over back to Wolfgang.
Wolfgang Wienand: Yes. Thank you, Philippe. Indeed, I would like to share a short update on Board governance as well as some of my own impressions and thoughts for the second half and beyond. First, let me share an update on our governance at the Board level. Jean-Marc Huët 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, NGC will oversee talent development and succession planning, while the new Remuneration Committee, RemCo 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 Mäder continues to hold the role of our lead independent director. The Board will also read your 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 Drapé, who most recently held the role of Executive Vice President, Head of Global Operations and Member of the Executive Committee at Teva Pharmaceuticals. If elected both will bring a wealth of experience from their former roles in managing complex global technical operations in pharma. From customers of Lonza both will also bring the customer voice to Board discussions. Finally, 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 Lonza, 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 Lonza so far. Impressed by their 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. So, 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 and 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 that 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 ambition. 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 Vacaville site and its team into Lonza 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. 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 [ph] 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 2024 and 2025. 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 view 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 Philippe 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.
Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Richard Vosser from JPMorgan (NYSE:JPM). Please go ahead.
Richard Vosser: Hi. Thanks for taking my question. Question on margin phasing please in the two key divisions small molecules and biologics. So just small molecules given the positive impact of batch phasing on revenues in that business how should we think of the margins there in the second half? And then in Biologics in the second half -- and then Biologics 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 [indiscernible] and continued strong performance of the Biologics top-line into the second half? Thanks very much.
Philippe Deecke: Yes. Thank you, Richard. Thanks for your question. Obviously as you know we're not actually guiding at -- 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 margins 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 in Bio we expect margins to be lower in the second half than in the first half mainly due to product mix and this includes sales that we do around raw materials that we always do but that'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 can do your own math, but that's as much as I'll say on the division.
Richard Vosser: Thank you.
Operator: The next question comes from Gary Steventon from BNP Exane. Please go ahead.
Gary Steventon: Hi there, thanks for taking the question. Just interested in your thoughts on longer-term mammalian capacity earlier this week at one of the big bioprocessing players as said they think capacity to increase certainly for commercial and Phase III projects. and they imply that longer-term capacity wasn't sufficient particularly at CDMOs. So, maybe you've got this maybe you got back a bill coming online but you've also got the midterm CapEx target. So, 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 midterm CapEx outlook? Thank you.
Philippe Deecke: Thank you, Gary for the question. So, we have been fairly consistent in saying that we continue to see large scale mammalian capacity overall has been 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 size in Vacaville, 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 feel 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.
Operator: The next question comes from James Vane-Tempest from Jefferies International. Please go ahead.
James Vane-Tempest: Hi, thanks for taking my question. Given those divisions tend to have a second half weighted year, I've got a group not a segment question got know how you guide. You mentioned lower margins are expected in the second half. Can you help me understand why even that these are typically higher I guess you 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.
Philippe Deecke: Yes James, as I said before, I think the products that you produce in the facility are key to drive the margin. And we have some products that are very good and we have products that are extremely good. And we just had more extremely good products in the first half than we have in the second half. And so 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 in small molecules again we are ramping up the facilities. And we've explained in the past 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. And the margin -- the lower margin has nothing to do with Lakeville. So, depending on when the Vacaville close will happen, we'll inform you on the impact. We expect no significant impact from the close.
James Vane-Tempest: Thank you.
Operator: The next question comes from Charles Pitman-King from Barclays (LON:BARC). Please go ahead.
Charles Pitman-King: Hi, thank you very much for taking my question. I have just got a question on your comments around new contract CDO signings over the first half. I'm wondering if you could just give us a little bit more detail on kind of what the big drivers are for that? Have you seen any direct benefit from earlier stage demand as people try to offset a potential risk from the BIOSECURE, for example or is this kind of a broad-based return post-COVID? And just maybe kind of second part to 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.
Philippe Deecke: Charles let me maybe start the question by saying that most of our contract signing to reach the levels that we are signing and we communicated CHF10 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 signed, this will not lead you to signing one billion value. 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 in 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 a biotech company. I think funding is almost up 30% in this first half versus prior year. So, a different market. Now, it always takes a while between the funding and to see the impacts on our financial numbers. Company needs to receive the fund, redo their plans, issue RFPs, companies enter the RFPs and then we end up starting 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 limit 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.
Operator: The next question comes from Patrick Rafaisz from UBS. Please go ahead.
Patrick Rafaisz: Thanks and hi, everybody. I was wondering you talked about the interest in Vacaville from both existing and new customers. Can you provide some more color or maybe you talk about the split here? And can you also add a bit more color on the first letter of intent that you signed for the site?
Philippe Deecke: Yes. I won't go to 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 US.
Operator: The next question comes from Dylan van Haaften from Stifel. Please go ahead.
Dylan van Haaften: Hi, guys. Thanks for taking my questions. 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.
Philippe Deecke: 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 in the same margin. So, 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 returning for 2024 pricing and volumes will remain a drag. Even so to be -- sorry 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.
Dylan van Haaften: Excellent. Thank you.
Operator: The next question comes from Max Smock from William Blair. Please go ahead.
Max Smock: 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 around whether or not you're already having conversations with new customers as a result in 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.
Philippe Deecke: Yes. On Biosecure, our view has not changed much. I think as you know, the bill now would contain a great period until 2032, which has brought some relief to customers that they did not need to act immediately, but 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 the timing of a 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.
Max Smock: Thank you.
Operator: The next question comes from Sebastian Bray from Berenberg. Please go ahead.
Sebastian Bray: 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 we released reads in a more confident way than the company expressed itself as 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.
Philippe Deecke: 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 volumes that we know from the past. So I think this business has continued as we expected. And I think the other businesses we knew was phasing because we had planned in the CDMO, you plan a little bit ahead as you can imagine. So we knew what was coming in H2. So I don't think that 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.
Sebastian Bray: That’s helpful. Thank you.
Operator: The next question comes from Naresh Chouhan from Intron Health. Please go ahead.
Naresh Chouhan: Hi, there. Thanks for taking my question. Just one on yields please in the Biologics division, could you help us 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.
Philippe Deecke: 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 massive, the recipe of the product. And so whatever you do things they go slowly they need to be often resubmitted to the authorities. So 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 and this is where we put products or molecules that need these latest technologies called 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 now produce 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 in being able to offer customers whatever technology they need being it single-use being in stainless steel being at perfusion or no perfusion.
Naresh Chouhan: Thank you.
Operator: The next question comes from Falko Friedrichs from Deutsche Bank (ETR:DBKGn). Please go ahead.
Falko Friedrichs: Thank you, and thank you for providing a bit of direction on the margin in the Biologics 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 & Gene and the CHI business whether those margins should be up or rather down in the second half? Thank you.
Philippe Deecke: Yes, Falko that's always the risk. When I give one finger you guys from the entire hand. So look I prepare not to do so. I think we've provided a lot of transparency on our CHI business which will not change dramatically the comps being easier. And on Cell & Gene, I think we had a good start. We need to see how Bioscience will develop. So I prefer not to guide you. Bear in mind, Cell & Gene is the most volatile division given that it's usually a lot of small numbers and a lot of clinical work. It's also not that significant for the group in the end. If we're a little bit up or down, I'd prefer to not start guiding you on the divisions.
Falko Friedrichs: Understood. Thank you.
Operator: The next question comes from Daniel Jelovcan from ZKB. Please go ahead.
Daniel Jelovcan: Yeah. Good afternoon. Just a clarification question, in the Cell & Gene you mentioned 10% growth excluding Kodiak. I guess that's included for the whole segment including Bioscience, right?
Philippe Deecke: This is correct, Daniel.
Daniel Jelovcan: So in other words, Cell & Gene itself was probably up quite more excluding the negative Bioscience is that correct? I mean can we talk about 20% growth or so?
Philippe Deecke: Yeah. Look, I am still not going to the reveal level, Daniel. But no we're very pleased with the Cell & Gene Technology BU within Cell & Gene. I think we had very good commercial production out of our Houston site. And as we've always said, this division needs to move into a more commercially driven BU from the clinical bias that it has today. So 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 BU performs better. But we won't go into that level of detail but you're correct. This was a good half year for Cell & Gene Technologies.
Daniel Jelovcan: Yeah. And a follow-up if I may, on the microbiome write-down Bacthera 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 is there no future at all now for that? Or yeah, that's the question.
Philippe Deecke: 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 Cerus (NASDAQ:CERS) Therapeutics. Bacthera 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 wanted to be prudent and don't see the high cash flows 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.
Daniel Jelovcan: Very clear and thanks.
Operator: The next question comes from Thibault Boutherin from Morgan Stanley (NYSE:MS). Please go ahead.
Thibault Boutherin: Yes. Thank you. My question is on the outlook for the antibody drug conjugate offering and conjugation offering in general. You highlight a high demand for bioconjugation technologies from Synaffix technologies from Synaffix. Could you just remind us how meaningful the ADC offering is today as a share of your Biologics business? And also in relation to that what is your view on the CDMO industry's capacity to address the upcoming demand for ADC, 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 would be helpful.
Philippe Deecke: Yeah. Thank you, Thibault. Probably two sides of your question. I think first Synaffix, 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 with CapEx we are really at the beginning of research and development for ADC drugs as offering link 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 Synaffix 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 linker, toxin, mammalian, or drug products. So I think this is something that customers are looking for. Today, we see the ADC capacity is constrained. 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 customers may decide to build in-house. Now, remember that all the large drugs 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 mass 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.
Thibault Boutherin: Thank you.
Operator: The next question comes from Yifeng Liu from HSBC. Please go ahead.
Yifeng Liu: Hello. Thank you for taking my question. I just wanted to follow up on the Cell & Gene therapy. 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 coming online this year and next year. And just wanted any color on that and how we should probably see the second half of this year. Whether there will be more coming or sort of phasing between the 2024 and 2025. Thanks.
Philippe Deecke: 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 had more commercial products, this is usually something that we would communicate at some point in time. So I think, no, in H1, this was not the driver. I think the key drivers were just better production of molecules that we have today already or therapies that we have today already.
Yifeng Liu: Thank you.
Operator: The next question comes from Lucas Baranowski from KeyBanc Capital. Please go ahead.
Lucas Baranowski: This is Lucas on for Paul Night at KeyBanc. It sounds like you're seeing some signs of a recovery in early-stage business 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.
Philippe Deecke: Yes. So Lucas, I think what I said on a lot of early conversations, it would be more on the Biosecure 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 in more business. But yes, it all starts with RFPs. Multiple companies are being asked to pitch for that business. Than 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 Lonza 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.
Operator: We have a follow-up question from Gary Steventon from BNP Paribas (OTC:BNPQY). Please go ahead.
Gary Steventon: Hi. Thanks for taking the follow-up. Just on pricing in the CDMO 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. Just whether there are any particular segments or divisions in the CDMO portfolio where you're seeing price evolution being dramatically different? Thank you.
Philippe Deecke: Yeah, 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 2022 and 2023. So from that point of view is something that helps us. It's something that maybe is not as extreme as it was in the last two years.
Gary Steventon: Thank you.
Operator: We have a follow-up question from Charles Pitman from Barclays. Please go ahead.
Wolfgang Wienand: Charles?
Charles Pitman-King: 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 fill finish being taken out of the market if Canon is approved. I'm just wondering if how you're thinking about long-term CapEx investments, where you think will be the best return on investment. Thanks.
Philippe Deecke: 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 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.
Charles Pitman-King: Okay. Understood. Thank you.
Operator: A follow-up question from James Vane-Tempest from Jefferies International. Please go ahead.
James Vane-Tempest: 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 reach their own target inventory levels? And does this conversation differ by product across the business? Thank you.
Philippe Deecke: Yes James. I think on Bioscience, we don't see too much as being a stocking or destocking discussion. I think, it's just the demand of when these early program starts. And so we see this more as an impact of the biotech funding that happened over the last 1.5 years 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.
James Vane-Tempest: Thank you.
Operator: The last question for today's call is a follow-up from Max Smock from William Blair. Please go ahead.
Max Smock: Hi. Thanks for squeezing me in here at the end. I just wanted to ask a follow-up on Synaffix. I know at the time of that acquisition it looked like Synaffix had a number of agreements that included milestone and royalty payments. I just wanted if you can an update around whether or not you are expecting any contribution just beyond the initial ABC or the ADC manufacturing revenue and whether we can be expecting any sort of meaningful milestones or potential royalty streams as a result some of the Synaffix agreements that you signed here in the first half of the year? Thank you.
Philippe Deecke: Yes, Max, the Synaffix 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 Synaffix 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 Synaffix. And we are quite happy to see more and more customers being interested in the platforms that Synaffix has to offer. But in the level or in the size of the Synaffix contribution is welcome, but not significant.
Max Smock: Understood. Thank you.
Wolfgang Wienand: So, thank you all. And I guess the close of this that was actually great to reengage, and thank you very much for your interest and for your time. And we're actually looking forward to reengage later in the year on how the business of Lonza progresses throughout the year. Thank you very much and have a good day.
Operator: 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.
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