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Lonza Group AG
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Ladies and gentlemen, welcome to the Q1 Qualitative Update Conference Call and Live Webcast. I am Sandra the Chorus Call operator. I would like to remind you that all participants will be 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 Mr. Pierre-Alain Ruffieux, CEO. Please go ahead, sir.
Thank you, Sandra. Good morning. Good afternoon. And welcome to our first quarterly qualitative update. As you will recall, we have scheduled this meeting to have a touch point between half year and full year financial reporting. They're intended to provide a general business overview. So, we will not be discussing our financial performance today. As usual, we will share our full financial update during our half year call on July 21.
Today, I will start by sharing a view of the overall group on our macroeconomic context then provide a short update on each division. After that, our CFO Philippe Deecke will be answer any question you have.
Let me start by saying that a good performance after the first three months is in line with the trajectory we expected. This means we are confirming our outlook 2023 at high single-digit constant exchange rate sales growth and core EBITDA margin of 30% to 31%. As we forecasted when we reported our full year results in January, we anticipate a strong second half of the year balancing a softer H1.
Let's now take a moment to look at the macroeconomic context. In Q1, we have seen a number of macroeconomic factors influencing our business in different ways. In line with the wider industry, we are observing such demand for early stage services or capacity driven constraints in biotech funding. We began to see this in 2022 and the bunkie cases 2.45 early this year is continued to limit access to capital for biotech. However, commercial supply make-ups around 70% of loans at CDMO business and here we continue to see a strong interest.
Turning to a growth project, we are making good progress with CapEx spending being on track. We are also pleased to have started operation in two new facility in Visp Fill & Finish and bioconjugates. Finally, we were happy to see that FDA approved so the first oral live Biotherapeutics from [indiscernible] pharmaceutical. The scale up of this novel therapy would be supported by bacteria or joint venture with Kristian Anson.
Now, let's take a look at each of four divisions. In biologics, we see sold underlying sales goals versus Q1, 22, excluding the pioneer of Allakos termination fees and MMA sales. There is a lower demand for early stage offering driven by biotech funding constraints, but we see solid demand for long-term large scale program across mammalian, microbial an antibody drug conjugates.
This is supported by advanced commercial discussion with large pharma and well-funded large biotech. Weaker performance in China is driven by low interest for more international customer and the challenging local market.
Looking at our growth project in Q1 in this the tech confirm for the first commercial product of a new drug product line is ongoing and we have completed an extension of our conjugation facility. We also commenced the construction of a new CHF500 million commercial port product facility in Stein.
Finally, in January we mentioned two growth project but we're delayed by a couple of quarters. Since we updated the schedules in 2022, the projects are now continuing to progress as planned. In small molecule, a solid Q1 drills on the momentum of H2 last year. This is supported by good demand visibility. When industry funding challenges have caused a slight decrease in inequalities, the number of new customer signings, remain consistent with this year. We also pleased to see a continuing portfolio shift to more high value and complex small molecule.
Let's now turn to the Cell & Gene division. In bioscience sales growth is aligned with expectation and driven by good demand and pricing power. In Cell & Gene therapies, the biotech funding challenges has impacted preclinical and Phase 1 demand, this has led to a reduction of new inquiring and place pressure on margin and both in Q1. Nonetheless, we remain committed to this space which continues to hold strong long-term commercial potential.
In the Capsules & Health Ingredients division, we have seen continuing strong demand for pharma capsules. We are also pleased with the progress on pricing, which has allowed us to mitigate some of the increase in the price of gelatin, a key raw material for capsule business. However, excess manufacturing capacity has been driven by lower demand for nutraceutical in the U.S. as customer had used the inventories ahead of a potential economic downturn. This means that the division saw some pressure on top and bottom line in Q1.
In January, we announced our intention to start to share buyback. As planned it's a program commenced early April and is currently scheduled to complete in H1, 2025. The buyback is executed via a second trading line on the Swiss Exchange.
Finally, I want to confirm that we will also Capital Market Day on the 17th of October. This will replace our quarterly qualitative update for Q3. The event will be hosted in our site in Visp and we will take you on a tour of our facilities.
To close I will summarize by saying that we are in line with the expected trajectory towards also 2023 and as we anticipated in January, our H2 performance looks that to be stronger than H1. Looking at our industry fundamentals, we are well positioned to capture value with those don't focused on quality - our broad sense of offering of global asset base and our technical expertise.
With that, I would like to thank you for your attention. And I will now pass back to Sandra for the Q&A session.
[Operator Instructions] The first question comes from Matthew Weston from Credit Suisse. Please go ahead.
Thank you for taking my questions two please if I can. The first is around the cadence of the first half versus the second half. You flagged that there is weakness in cell and generated, but also in the capsules and healthcare business. Can you tell us if that that's been offset by a stronger than expected performance in the other businesses or whether or not you now need the second half of the year to be I guess, even stronger than you previously anticipated?
And then the second question, we've recently seen more positive data in Alzheimer's. It's always been an area for Lonza where investors have been interested about the potential for CDMO to get involved in manufacturing. Can you just update us as to where you are as to any role Lonza may play in the manufacturing of late stage Alzheimer's drugs in the near future? Thank you.
Thank you, Matt. Maybe let me take the first question before handing over to Pierre-Alain for the Alzheimer question. So, I think first of all, I like to reiterate that we are confirming our outlook for 2023. And we won't be going much deeper into the divisional mix. As we said before, Lonza is a stool with many legs. And it's not uncommon to have headwinds in different parts of the business and offsetting them in other parts.
And so, we don't necessarily need to have a strong imbalance between H1 and H2. But as an entire portfolio, we happy to reconfirm '23, knowing that we have the headwinds you mentioned before.
Thank you, Philippe. Regarding Alzheimer, I think like everybody and every patient, we were very pleased to see a second study having a significant impact on patient, I think there is now two therapies showing efficiency. I think as you know, both therapy require significant amount of protein, which again, is going to be very positive for the industry. If you make some calculation and here again, I would not speculate for the future.
But the capacity utilization driven by these two drugs are going to be definitively in the high single-digit rates of total capacity, and even without being bullish on that. Actually we believe this will really increase utilization rate and be positive for the industry. I'm not going to be more specifically on any discussion with company we may have because of [indiscernible] is not for public disclosure.
Many thanks indeed.
The next question comes from Vineet Agrawal from Citi. Please go ahead.
Hi, Vineet her from Citi. Thanks for taking my questions. So may be again, coming back to the guidance, just trying to understand if this is something that you have baked into your forecast the softness that you've seen in certain pockets. I guess what I'm trying to understand is, what biotech funding assumptions have you used for a second half of '23? And then maybe even for '24?
Do you expect the funding environment to remain fairly similar to where we are today? And still confident of achieving the guidance or does it need to improve significantly to meet those targets? And then maybe just on the same topic, on the biologics early stage projects? Can you just help us understand if the sort of impact? Is it something you started to see only recently or has the weakness been there for a bit longer now?
Yes thanks, Vineet. Let me take one more stab at it. So I think - we probably all of us are looking at the same data in terms of biotech funding, an early stage company funding. And you've seen that this goes in waves. But you've probably seen that the overall funding is down versus prior year, probably around 30% or so on the data we're looking at, and certainly way off from the peaks that we saw in 2021.
Now compared to, you know, a couple of years back, we're probably just about the same level, maybe slightly below. In terms of what we assumed for 2023, we probably assumed to have some, some pick up again, which we don't see yet coming and we won't be necessarily speculating on - if that's not going to come in Q3, Q4, or maybe slightly after that.
So yes, I think there is weakness in this business, which is mostly visible in our cell and gene therapy business. So a part of our cell and gene division, that's sort of the place where we have the most early stage business that needs to be more frequently replenished. Now, as Pierre-Alain said, we still believe this is a very interesting field of the CDMO business. And we will continue to be to be playing in that field and continue to grow in that field.
You also wanted to know the impact on biologics. I think, as our biologics business is very different from the cell and gene therapy business in the sense that it is much more commercially weighted with over 70% of our revenues and margins coming from commercial stage business. And so yes, we do have early stage business in our biologics division. However, the impact is of course much less.
Thank you, Philippe. And on the biologics part, I would like to stress at Lonza we are definitively positioned as a premium CDMO until the onset of biologics part while we see a decrease in inquiry. We still have a fair winning rate so again, we don't claim to - don't play that we see the impact more in cell and gene therapy than in biologics.
Thank you.
The next question comes from James Quigley from Morgan Stanley. Please go ahead.
Great, thanks for taking my question. So, the first one is on Fill & Finish and drug products. So your client just not going to invest so what are your ambitions with respect to Fill & Finish? You've had development capabilities since around 2016/2017. How important has that been to differentiating your offering now that you also have large manufacturing facilities and what are you expecting in terms of a ramp up for this plant and then also coming into 2026?
When you have the larger scale capacity in Stein? And then can you talk a little bit also about the price and volumes dynamics that you're seeing across this the different divisions from biologics due to consuming and nutrition? Thank you.
Thank you, James for the question. Clearly on Fill & Finish, I think we are overall, very happy with what our progress in this business. As you recall, we started to invest a lot in formulation I think good progress on that, followed by the acquisition of capacity from Novartis for clinical manufacturing. And we continue on this trend. So according to what we are actually developing, as we planned by bringing a strong base of early phase customers getting synergies when we make a drug substance also offering the drug product offering which is really key for us.
And we see a lot of demand for high quality Fill & Finish services. So we are on that one. And we are happy with the development. Regarding hand pap, hand pap is probably in syringe as we have mentioned multiple times of two years. So we are not considering the first product, we will soon come with the next product and when you have so classical, putting it back on stability, going for submission and getting approval.
So it's actually executing according to plan. So for us to wrap up the topic, Fill & Finish is really a strategic decision we have made. We are investing from early development to commercial we are making very nice progress on building our commercial facility. So I would say it's fully on track. I'm not sure I fully understand your question regarding price and volume dynamics. Can you perhaps clarify it?
Sure. It's just basically asking what you're seeing in terms of price and volume, maybe across the whole portfolio? You said high single-digit growth? What element of that is, is price for this year for the 2023 guidance versus volume? And are there, any sort of areas of your business that you're seeing a greater impact on price or a more limited impact in terms of your subdivisions?
Okay, thank you, Philippe will take that one.
Yes, hi, James. So I think first of all, I'd say that on the pricing front, you know, this is pretty much going as per plan. If you remember, we have two very different types of businesses. One is more product business, which we see in our capsules business and our bioscience business unit. They of course, the pricing - is easier or faster to get through and we're taking the price increase that we had planned to take.
And we see we see actually good pickup from that. Now looking at our CDMO business, the approach is different obviously, because - we have a lot more long-term contracts where price is usually negotiated at the beginning of the contract and is included in the in the contract laws. And there as well, we're making the progress we wanted by having adjusted several of the contracts prices that we could adjust.
So it's going as per plan. We do not disclose a detailed price volume mix for the company, again, something that we can certainly take offline, but it's a very complex thing to do in a CDMO business.
Of course, thank you very much.
The next question comes from Richard Vosser from JPMorgan. Please go ahead.
Hi, thanks for taking my questions. First question on your growth projects clearly you've let us know that your equipment is in-house. How's the ramp up going there? Is that coming on? Are those coming online a little bit faster than expected potentially or yes, how is the ramp up? And then just thinking about China, you mentioned, of course, you know, a difficult market in the local market and the - multinationals are not ordering at the moment, maybe give us a little bit more color and how you think about the timelines to that turning around? Thanks very much.
Thank you, Richard. Regarding China again, I would like to remind you of the big picture. I think Lonza it sells below 5% in China, split in three businesses. So, we are making capsules for the local market and this business is doing well. We even saw a chemical facility for intermediate and it's doing well. And my comment was more to the small scale, disposable biotech facility, we are heading in China.
And yet again, during the pandemic, basically, none of our customer was able to fly over there. And so, we really see real slowdown. So we are not looking at recovery. And we will comment more later this year. For the growth project, you are correct. I think we were getting all the equipment in ours, which were delayed - we mentioned that during the previous goal. And we are currently very happy we done path of validation and starting off operation. So basically, it's happening according to plan.
Thank you very much.
The next question comes from Patrick Rafaisz from UBS. Please go ahead.
Thank you and good afternoon, everyone. Just a question on H1 and where we have various one-off impacts last year that we need to consider or take into account. If you look at the current H1 and in particular, I'm thinking about the small molecules business with the phasing issue from today's point of view, do you think, could something like that reoccur or are we back on normal track? And we should just add back the delayed revenues into H1 from H2? Just from a modeling perspective?
Yes, Patrick, let me take that one. So I think we were clear last year already that the volume in H1, we moved into H2, 2022. So from that point of view, the year was whole for our small molecule divisions. Now, can something like this always happen of course they always happen. Currently, we don't see this repeating. So, we're very confident with the performance in small molecules today.
Great, thanks.
The next question comes from Max Smock from William Blair. Please go ahead.
Hi, thank you for taking our questions. First one from me and apologies, if I missed this I just wanted to confirm that the guide that you laid out for 2024 that midterm guide is still intact. And then I also want to follow up on a prior question around Fill & Finish curious of some of the issues with a major competitor that we've seen in this space and the explosion of demand that we've seen for obesity drugs, whether or not those have changed your views around capital allocation at all?
Obviously, know you are building out a lot internally, but given the significant opportunity, and the fact you pointed to a three-year ramp up time for some of these new facilities? What are your thoughts about potentially acquiring some assets that could increase your footprint in Fill & Finish more aggressively here near term? Thank you.
So thank you, Max defensively, our mid-term guidance is intact, and it's confirmed so no change at all on that. Regarding issue with competitors, I think it's just underscoring the importance of quality for Fill & Finish even modern facility allowing to, provide good service to customer is key. And I think it's why we have decided to invest in this field, providing good quality service which is needed and having synergy with our business.
So open is not changed. Yes, we always try to ramp up as fast as we can, but doing it the right way. And there is some time then we cannot compromise during ramp up so basically making validation batches, performing stability, as well as getting the approval of authority.
I think Pierre-Alain if I can add in terms of acquisitions of course, we're always looking at available capacities. The reason why we decided to go organic is mainly because of the quality of assets that we see on the market. What we can do with them? Do they have the right flexibility for CDMO business and the right quality or do they require a lot of investment and renewed maintenance? So I think we are not objected to buying capacity. We've mentioned that before that our M&A strategies are around large capacities or early technologies, but there's not a lot of good assets on the market.
That was very helpful. Thank you.
The next question comes from Paul Knight from KeyBanc Capital Markets. Please go ahead.
Thanks very much for your time. Are you finding that in the cell and gene size of the business, the approval outlook, we hear is pretty robust, very strong for 2023. Are you seeing that yourself as maybe some significant approval change globally?
I think we are getting similar things. These treatments are really, I think patient in area where there is no other medical treatment. Generally, the success rate of clinical is high in Phase 3 you see good success rate good impact on patient. And we continue to see a positive outlook for that. Yes, the pipeline currently - all pipelines the pipeline of industry is mainly early phase. But we have seen last year, a couple approval we were very proud of. And we continue to work with a couple of treatments which are in late stage. So we don't see any changes based on the funding. I think the funding is more impacting new IDs, which obviously gets much more difficulties to get money.
Okay. And then our last question would be, we understand in the industry that customers approach Lonza, as much as you approach them. Are you still having a lot of your expansions already largely prebooked? And what level does that prebooking mean? Is it will you build the UM [ph] 60% or 80%, booked or what is that trend right now?
So this actually not changed, because, as we mentioned, for large asset, we want to make sure that we have survived majority of the capacity committed before we build. We never provide the exact figure and you can depend from asset-to-asset that is probably in the range of what you have mentioned. So it's the vast majority of the capacity being booked.
And this is not going to change. For early pipeline, as said obviously, you don't have prebooking for 10 years, but we make sure we have the right pipeline of projects before committing to that. So develop phase for our asset is not changed.
Okay, thank you.
The next question comes from Peter Welford from Jefferies. Please go ahead.
Thanks Pierre-Alain. I've just got three for you quick ones. Firstly, just with regards to stocking in terms of both your levels of I guess consumables, et cetera that you're using and equally from the customer side? And how are you doing with regards to both utilizing existing stocks to perhaps return to normal prepandemic levels? And equally have you seen any signs of any of your customers, reducing their stocks that they have on hand?
Secondly, then just on cell and gene wouldn't have you can perhaps tease out what percentage if any, do you think of the impact is due to clinical trial holes, failures, et cetera rather than funding? I guess I'm just curious do you think the vast majority of this impact is funding or actually it is a sizable puzzle. So the attrition that perhaps is higher than anticipated.
And then just finally, just on the inquiries, I heard [ph] that you've got a slight decrease in inquiries, just to be clear, was that relevant to the small molecule business? The way you've got consistent signings overall, or was that for biologics? Because I think you also mentioned a shift to higher value molecule? Thank you.
So thank you, Peter for the question, I will briefly take two of them and leave the stocking for Philippe. So regarding the number of inquiries, we have seen a decrease overhaul of inquiry, but we still wins the same number in small molecules. So no impact on molecule pipeline. We see a small decrease on so in biology with very little decrease and basically the most impact is on Cell & Gene.
To your question on Cell & Gene. No, it's a dual effect. You always ever set an attrition rate due to clinical and this is no change, is not better than before, or worse than before. But the main difference is founding. So we still have the seller rate in Phase 1 as before. But obviously you get less new customer coming with new ideas and new project. And we see reasons - the main reason for the decrease we see.
Philippe do to you take the stocking.
Yes, Peter. So on the stocking. Just to reiterate what Pierre-Alain in his introductory remarks, I think we do see inventory reductions in our capsules customers. So that's the place where you would see some correction in inventory. We do not see this in the rest of our CDMO business. So that's certainly a good news. We don't we don't see these movements.
Now we are continuing to be committed to reduce our inventory. We did increase inventory levels during the COVID pandemic to ensure availability of our raw materials and ensure that we could produce the batches for customers. And we've committed to reduce that level by about a month over the next 18 months. And so we're tracking into that. We are utilizing raw materials that were purchased earlier. And therefore we will see a decrease in our days coverage of inventory over the next 12 to 18 months.
Actually we are able to do so because we see a more reliable supply from the big supplier. So operator, we will take the last question.
The last question is a follow-up from Mr. Matthew Weston from Credit Suisse. Please go ahead.
Thank you. That's kind. It's a question regarding your customer concentration. Actually, I noticed in the annual report that we've seen a very significant increase over the pandemic of your single largest customer from basically 5% to going up now to over 9%. Now I know you're going to be very sensitive about discussing customers. But I would love to understand whether that increased concentration is something unusual associated with the pandemic and we're likely then to see it come down as business normalizes. If you can say whether it was associated with M&A, so essentially two big customers have merged? Or whether actually you're just seeing a single customer emerge and be 10% of your business and what you can then do to mitigate that risk?
Okay, thanks for the question, Matthew. So, I would like to rate that we believe we have a very healthy base of customers. We to gain 10 customers representing 50% of the sale with many of them adding multiple product. We see a little of all what you have said many are for biotech - small biotech customer gets acquired in one day or the other by your Big Pharma. So this is part of the consolidation.
We see it so customer moving a product to a free commercial. So when we see big ramp up, and it could be a lot of money when it's expensive product like ADC or antibodies. So we see that. We don't see the need to mitigate that because as I mentioned, many customers many products and long term contact which is for us a very robust and solid base of customers.
Many thanks indeed.
With that, I would like to thank all of you for the question. And thank you Sandra for hosting the call. As a final overview, we are confirming our outlook '23 which is still is supported by a strong industry fundamentals and a good momentum across biologics and small molecule. We are looking forward to speaking to you again at half year results on July 21. In the meantime, I wish you all a great day.
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.