Fagron NV

XBRU:FAGR

Earnings Call Analysis

Strong Revenue and Margin Growth with Strategic Investments

Fagron achieved 12.8% organic growth, pushing revenues to EUR 429 million in H1 2024. EBITDA margin rose to 19.7%. Full-year revenue guidance was upgraded to EUR 850-870 million with improved profitability expected. Regional performances were highlighted, with North America leading with 26.2% growth, driven by compounding services' 36% increase. EMEA faced Poland reimbursement challenges but grew 3.3%. LATAM grew 5.7%, focusing on innovation. The company announced EUR 50 million and $39 million investments in their Netherlands and Wichita facilities, respectively, to expand capacity and product offerings.

Strong Revenue Growth and Upgraded Guidance

Fagron reported a remarkable 15.5% increase in revenue for the first half of 2024, reaching EUR 429 million. This growth is underscored by particularly robust performance in North America, which saw a staggering 26.2% growth. The company has updated its full-year revenue guidance to between EUR 850 million and EUR 870 million, indicating continued optimism about its market position.

Regional Dynamics: Navigating Challenges and Opportunities

In the EMEA region, organic growth was modest at 3.3%. However, compounding services delivered solid growth of 27.4%, aided by regulatory changes in Poland that shifted customer purchasing strategies. The company is adapting to these changes by optimizing pricing strategies and enhancing product offerings. In LATAM, strong organic growth of 5.7% was driven by market demand while operational efficiencies provided a boost to profitability.

Expansion and Investment Plans

Fagron plans significant capital expenditures, including a EUR 50 million investment in a new FSS facility in the Netherlands, expected to be completed by 2027. This investment will enhance capacity and support growth initiatives. Additionally, a USD 39 million investment is planned for its Wichita facility, which is anticipated to increase overall capacity by approximately 200 million units.

Improved Profitability Metrics

The EBITDA margin expanded by 30 basis points to 19.7%, attributable to operational efficiencies and synergies from recent acquisitions. The company expects further improvements in profitability throughout the year, maintaining a strong focus on managing operational costs amid expanding revenues.

Focus on Cash Flow and Debt Management

Operating cash flow improved by 35%, highlighting Fagron's solid cash-generating capabilities. The net debt-to-EBITDA ratio, while slightly increased to 1.5x, remains healthy and indicates ample capacity for strategic acquisitions in the future. The company aims to reduce factoring by 50% in 2024, setting a path toward lower interest costs.

Market Positioning and Competitive Landscape

Fagron operates in a highly fragmented market with strong growth potential. The focus on personalized medicine and the ongoing shift towards outsourcing in the healthcare industry present an expanding opportunity for Fagron, particularly in North America and LATAM. The company continues to emphasize high quality standards and operational excellence as key drivers of its success.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to Fagron's H1 2024 Results Conference Call, hosted by Rafael Padilla, CEO; and Karin de Jong, CFO. [Operator Instructions] Post call, if you have any questions, please reach out to the Investor Relations e-mail address that is [e-mail]. At this time, I'd like to hand the call over to Rafael Padilla, CEO.

[Rafael Padilla, executive]

Thanks, Francois, and good morning all. We are very happy to see the continuation of our strong performance as we achieved 12.8% organic growth at CER, with revenues increasing to EUR 429 million for the first half of the year. This growth was driven by positive contributions by all regions and particularly accelerated by the exceptional performance in compounding services. Our EBITDA margin increased by 30 basis points to 19.7%, reflecting synergies from acquisitions and benefits from operational excellence initiatives.



As we look ahead, we're upgrading our full year revenue guidance to a range of EUR 850 million to EUR 870 million while still expecting an improvement in profitability year-on-year. Karin will give more color later on. Moving on to the regional dynamics. In EMEA, B&E's performance showcases the benefits of our diversified footprint across the region and as announced during H2 2023, changed to the reimbursement system in Poland continued to impact results.



The compounding services impressive performance is supported by strong market demand and growth with the Netherlands, benefiting from the new product launches and secular drug shortages. As mentioned, the integration of Parma Produkt in Hungary and LSP in the U.K. is going as expected with both of them already contributing to the region's results. In EMEA, we see the underlying demand for compounded medication developing very well, and it is strategically important to capture this opportunity while maintaining the highest quality standards.



As a result, we will be investing EUR 15 million in our FSS facility in the Netherlands. It will be a state-of-the-art one, enabling us to expand capacity, widening our product portfolio and increased automation. Lastly, Costas [indiscernible] will be leading the EMEA region following Martin's departure to pursue other opportunities. We thank Martin for all his efforts and hard work and wish him all the best. Costas, previously the head of Southeastern Europe has been 5 [indiscernible] 2014 following our acquisition of Cartus.



His very impressive track record and expertise make him the ideal candidate to take EMEA to the next left. Moving on to the next slide. During the last few conference calls, we have been providing updates on the changes to the reimbursement system in Poland. These changes resulted in a shift in market dynamics with customers now moving towards bigger units of measure, however, at a lower price point.



As announced, the regulator will be implementing during the second semester price adjustments, which are in line with our expectations. Also, as foreseen, the strategic initiatives we set out towards the end of last year have allowed us to clearly remain the market leader and better position ourselves in a market with strong fundamentals. Moving on to LATAM. We remain the market leader in this highly attractive and competitive market.



Our operational excellence programs, especially around procurement and our strong innovation power supported margin performance. B&E was able to capture the rising demand and drive revenue growth mainly due to our heavy focus on innovations and broadening our product portfolio. All of these translated into a strong performance for brands despite the seasonality effect of Easter holidays. On the compounding services side, once again, Colombia has delivered impressive results, driven by strong market demand and successful execution. Moving on to North America.



The B&E segment saw sequential improvement quarter-on-quarter, resulting in a 4.1% organic growth. This is mainly driven by improvements on operational excellence and the consolidation of our Letco facility. Still at B&E, last year, we announced a $20 million investment for the construction of a repackaging facility indicator. However, we have decided not to proceed with that investment and pursue an alternative by optimizing our existing facility to targeted upgrades while leveraging the robust capacity of our global network.



We remain committed and confident of achieving our stated ambition of market leadership. In Compounding Services, FSS achieved exceptional results driven by capturing the underlying demand that is constantly expanding. Boston continues its standing performance, and we can now ship to 46 states. Of course, we continue to onboard new customers and constantly look for ways to better serve.



On Anazao, growth remained impressive as we continue to capitalize on strong underlying demand for prevention and lifestyle coupled with benefits from the short-term drug shortages. We now expect this to continue into the second half of the year, and the revenue will be the same as in H1, that is $12 million. Our investment in Tampa's new facility is progressing as planned and is currently running its final validations.



We expect the transfer of operations to occur during the second half of this year. During this transition stage, we will be running double cost in line with what we had communicated during our full year results. On both FSS and Anazao, we are positioning the business to capture the rising demand while maintaining the highest quality standards. For this, we have been increasing our employee base, which will impact our operational leverage for this year.



Also, I would like to announce a $39 million investment in our Wichita facility, which is in line with the announcement we made during our Capital Markets Day and will support us in achieving our midterm organic revenue growth target. This will allow us to increase capacity, maintain the highest quality standards and better position the business to capture the rising demand. Before moving to the financials on quality, this is a big factor in our industry, and we remain committed to maintaining the highest quality standards across all our regions in line with the rapidly increasing regulatory requirements.



So far into the year, we had 7 audits globally, including a 2 weeks one at Wichita, which resulted in 7 observations. Our team has submitted its data response and is working towards a satisfactory close. And now Karin will go through the financial highlights for the period.

[Karin de Jong, executive]

Thank you, Rafa. Good morning, everyone, and thank you for joining us on this call. Let me walk you through the first half of 2024 financials and provide more color on the full year 2024 outlook. On this slide, we have the financial highlights for the first half of the year, during which sales grew by 15.5% to EUR 429.3 million. All regions show a positive growth, while North America once again reported a strong growth of 26.2%.



Gross margin improved by 19 basis points compared to the same period of last year, driven by better performance in the LATAM region and the product mix. Operating expenses grew 17.5% compared to H1 2023. This is in line to what Rafa mentioned earlier that we have been increasing our workforce on the compounding services side in North America to support the rising volume growth while maintaining the highest quality standards.



Our EBITDA margin expanded by 30 basis points compared to the previous year. The rise in profitability mainly showcases our improved operational performance and the synergies from our acquisitions. Strong cash flow conversion reflects our solid cash-generating capabilities with operating cash flow improving 35% to EUR 58.3 million, excluding the factoring impact. Lastly, the net debt-to-EBITDA show increased slightly to 1.5x compared to 1.4x at the end of 2023, leaving us ample headroom for future acquisition opportunities.



The bridge on the slide shows the sales development during the first half of 2024. EMEA experienced a modest organic growth at CER of 3.3%, while North America witnessed a remarkable 26.2% organic growth at CER as the compounding segment continues to drive performance. Meanwhile, LATAM saw a strong organic growth at CER of 5.7% due to the execution of our strategy. Our recent acquisitions of LSP and Parma Produkts contributed EUR 9.6 million to the results, further confirming our disciplined and strategic approach to M&A.



The P&L on the right side of the slide illustrates a 15.5% top line growth, while EBITDA increased by 17.2% before nonrecurring items. The financial costs have increased primarily due to higher interest rates on our debt and debt lag items. As a result, earnings per share increased by 22.2% year-on-year to $0.55 for the first half of the year. Turning to the next slide. In the EMEA region, we witnessed growth being supported by compounding services.



EMEA continued to be impacted by the changes in reimbursement law in Poland, which was compensated by higher prices and benefits from registrations and drug shortages in other markets. Compounding Services experienced solid revenue growth of 27.4%, driven by all markets and our acquisitions. Organic growth at CER in Q2 shows a slowdown after a very strong Q1 start. However, we expect growth to normalize through the year.



In terms of profitability year-on-year, the EBITDA margin was impacted by the Poland developments. Looking ahead to the second half of the year, we expect the margin to improve in line with our strategic actions in that market. Lastly, on Capex. As Rafa mentioned, we will be investing EUR 50 million in our FSS facility in the Netherlands. The project is expected to be completed by 2027, and this Capex is a one-off Capex.



It will be on top of our regular Capex. We will be incurring a very small portion of the EUR 50 million in 2024, but the majority will be spent in 2025 and 2026. Moving on to LATAM. Sales increased by 6.8% to EUR 86 million or 5.7% at CER. LATAM remains a highly competitive as well as an attractive market as we see rising underlying demand in the region. This resulted in higher volumes, which partly offset the lower prices that had to be implemented to sustain our market position.



Overall, the Essentials growth at CER was flat in the first half of the year, though during Q2, it had a positive growth after many quarters. Brands saw a substantial growth of 19.5%, driven by new product launches and innovation. Meanwhile, compounding services continues its impressive growth trend, achieving a 42.3% growth rate year-on-year. Gross margin for LATAM increased due to increased brand sales as well as operational efficiencies.



The revenue growth, combined with gross margin expansion and a strong focus on cost savings in Opex resulted in a 160 basis point revenue margin expansion for the first half of the year. Looking at the second half of the year, we expect a margin increase year-on-year. Turning to the next slide on North America. Sales during the first half of 2024 amounted to EUR 183.1 million, translating into a 26.2% increase. B&E delivered a quarter-on-quarter growth as we benefited from improving operational excellence and consolidation of the repacking activities.



As Rafa mentioned, will not be proceeding with the EUR 20 million Capex at the dollars Capex at Decatur. The better alternative is capital light and enables us to achieve our targets. Compounding Services continues to meet the sales growth as it delivered a 36% increase year-on-year, primarily driven by the outstanding performance at FSS and Anazao. FSS saw a 40.2% sales increase during the period attributed to increasing orders from existing customers, new auto wins and drug shortages.



Our EBITDA margin increased by 130 basis points as we benefited from synergies and efficiencies from our acquisitions and improvements in operational excellence. Looking ahead, we expect full year margins to slightly increase compared to the full year 2023 due to extra labor force higher to accommodate our future growth and the double costs running at Anazao at Tampa while we complete the transfer to the new facility. We have also announced a one-off Capex at Wichita of USD 39 million.



The project is expected to be completed by 2027. And as this is a one-off Capex, it will be on top of our regular Capex. We will be incurring a small amount of the spend in 2024, while the rest is being incurred between 2025 and 2027. Moving on to our cash flow slide. Strong cash conversion remains as one of the strengths of our business model.



Operating working capital as a share of sales increased by 290 basis points year-on-year to 14.5%, reflecting the phasing out of factoring impact. Operating cash flow decreased slightly despite the EBITDA growth, though when adjusting for phasing out of factoring, it increased considerably by 35%. As mentioned during the full year 2023 conference call, we expect to reduce factoring by 50% in 2024. The reduction in factory will increase our receivables but will decrease our debt levels, resulting in lower interest costs and banking fees.



During the first half of 2024, Capex, excluding one-offs, amounted to EUR 12.9 million. Free cash flow conversion was 54% when adjusting for phasing out of the factoring and the one-off Capex. Moving to the next slide. The bridge illustrates the evolution of our net debt during the first half of 2024, going from EUR 234 million to EUR 275 million. The EUR 41 million increase is mainly related to the acquisitions and investments we have announced and the dividend payout that took place in this period.



Regardless of the increase, our net debt to EBITDA to remains at a healthy level of 1.5x, which compares to 1.4x at the end of 2023. Going forward, we will continue our disciplined M&A strategy while maintaining our internal threshold of net debt-to-EBITDA as of 2.8x, which gives us ample room to maneuver. We remain focused and committed on maintaining a sole balance sheet while pursuing growth opportunities aligned with our strategy.



So before I hand it back to Rafa, let me guide you through our upgraded full year 2024 outlook. We are upgrading our full year 2024 revenue guidance to a range of EUR 850 million to EUR 870 million. Additionally, we continue to expect our margin to improve year-on-year. Maintenance Capex will be around 3.5% of sales, excluding the already announced projects and investments across the region. Regarding the long-term working capital guidance of 12.5% to 13.5% by the end of the year, we expect to be within the guided range.



I would now like to hand it back to Rafa for his concluding remarks.

[Rafael Padilla, executive]

Thanks, Karin. To conclude, Fagron is a global, vertically integrated niche defensive high-generating company operating in a highly fragmented market. Our resilient business model is fortified by a diverse geographic footprint and these factors coupled with demographic trends and our emphasis on personalization are the basis of our success.



Our quality focus, together with our ongoing operational excellence initiatives will help optimize our business through global synergies and best practices while a disciplined M&A strategy remains a key part of our growth. Sustainability is a paramount priority and a strategic cornerstone for us. As together, we create the future of personalizing medicine. With that, we open the floor for questions. Thank you all.

[Operator]

[Operator Instructions] The first question comes from the line of Frank Claassen from Degroof Petercam.

[Frank Claassen, analyst]

Yes. Three questions, please. First of all, on the Semaglutide revenues. Did I understand it correctly, there was a $12 million in first half and will also be in the second half, $12 million. And what is roughly the underlying growth of Anazao excluding these drug shortages? That's the first question.



Then secondly, on the Wichita investment, 39 million. Can you elaborate how much capacity -- revenue capacity you think you can build with these investments? So what is roughly the max revenues for the current facility? And what can it go to in the future? And then thirdly, the factoring. Could you help us out what was roughly the factoring number at the first half results? And I understood it will be half in '24. Will it then be fully gone in '25? Or what is roughly the path of the factoring going forward?

[Karin de Jong, executive]

Yes. So Frank, I will start with your first questions on the shortages in the U.S. So you understood it correctly that the impact is around USD 12 million for the first 6 months, and we expect a similar amount for the second half of this year, and that's also embedded in the guidance.



If we look at the underlying growth of the Anazao business, excluding this shortage, we're around 12% growth in the first half. So if we look at the second half, as you know, in 2023, we also sold this product in the second half of that year. So the comps are getting stronger, and we expect Anazao then to go back to the normalized growth pattern.

[Rafael Padilla, executive]

Regarding the investment in Wichita, this is in line with what we announced at the Capital Markets Day. And this will bring us 200 million more capacity. It will be a facility fully dedicated for IV bags and with a high degree of automation. So when you take the existing 250 million capacity with both Wichita and Boston, and you add this new 200 million will be as from, of course, H1 2027 at $450 million capacity.

[Karin de Jong, executive]

And maybe on your final question on the factoring, yes, so indeed, we announced that we will reduce the factoring amount by 50%. So at the end of 2023, we were at 35.5 million of factoring. By the end of June, we were at 19.1 million. So we brought it back with 16.4 million in the first 6 months, and that's also what you see translating into our working capital because we increase, of course, our receivables, we bring back our debt, and we're also reducing costs, of course.



So we expect saving -- full year saving next year of approximately 1.5 million based on this action. For the rest of this year, we expect still a couple of million to go, but not that much because we're almost at 50%, and that's it. So we don't expect further decreases in 2025. I hope that answers your question, Frank.

[Operator]

[Operator Instructions] The next question comes from the line of Thomas Vranken from KBC Securities.

[Thomas Vranken, analyst]

Congrats on, on the nice results. I wanted to see it on recent news with regards to compounding Semaglutide that were some reports by the FDA or by the regulator with regards to some misdosing at the level of health care practitioners. I just wanted to ask if there is any read-through to fit as well as it didn't seem to be related specifically to one of your products? And then secondly, on the EMEA business, I also wanted to ask if you've seen any impact so far from the Medios acquisition of Ceban in the Netherlands, if that has any impact on your business there?

[Rafael Padilla, executive]

Sure. And regarding on the Semaglutide, we have seen, of course, as you said, this the release. And it is indeed because of the administration form at the patient level, right? We have not experienced at Anazao, any claim or observation on this one. Regarding Medios, as we said during the last conference call, it's business as usual. So Ceban was a competitor since 2004, and we have seen at the same level of operation during the first 6 months, what we have seen historically. So again, this is as usual, no impact.

[Operator]

[Operator Instructions] The next question comes from the line of Victoria Lambert from Berenberg.

[Victoria Lambert, analyst]

The first one is just on the U.S. business. Are you open to compounding more GLP-1 products or other products other than [Vigorve]? And then are you also open to doing this and maybe other countries? And then could you just provide more detail on your Capex spend changes? So how you will be servicing orders that would be coming from the Decatur facility? And then thirdly, just on M&A, what is the outlook for deals in H2? Are they still looking relatively expensive with competition from private equity?

[Rafael Padilla, executive]

Thanks, Victoria, for the question. Regarding your first on the GLP-1 compounding when it's possible through a regulatory framework, of course, we will compound, right? And at this moment, as you said, we're only compounding in the U.S. because it's the only market that we can compound this material.

[Karin de Jong, executive]

Yes. So maybe on your Capex. So indeed, we announced 2 additional ones, a new investment in the U.S. in Wichita to serve the markets and the underlying demand and also increase capacity. Same for the Netherlands, which is also an additional investment on top of our maintenance Capex. For the investments we earlier announced on Decatur, we are substituting that to a facility upgrade.



So we see the increasing benefits of our operational excellence programs. And we also saw on timing and execution complexity in the investment. We see that with the current footprint we are having that we can solve it throughout our current network of production facilities, and we are able to serve with this facility, upgrade the U.S. market and still can aim of being a market leader in that specific segment in the U.S. Maybe on your M&A outlook. So indeed, we have an M&A strategy on top of our organic growth.



So we continue our disciplined approach, and we are assessing new opportunities globally. We will focus on all regions. We have a full pipeline. We're also looking at opportunities to partner. So on timing, it's always a bit difficult with these types of deals. So we do expect on the short and the long term to do additional M&A and to contribute our top line sales with acquisition growth. So we are still working towards that.

[Victoria Lambert, analyst]

And then maybe just one more. On the Brazilian market, what is the outlook looking like for H2 and maybe going forward? Are the regulators maybe pumping down on some of the competition? Yes, just some more color here would be helpful.

[Rafael Padilla, executive]

Regarding the competitive landscape, of course, as you know, Victoria, it's a highly competitive market, right? It is, for sure, the biggest one in the world. We have not seen so far any restriction from the regulators in this case [indiscernible] to our competitors. What we also want to state is that we follow our global strategy of maintaining the highest quality standards in line with the rapidly increasing regulatory requirements. So sooner or later, this will for sure benefit us.

[Karin de Jong, executive]

Yes, maybe to highlight a bit more on the financials for H2. So LATAM will continue their pleasing performance, reflecting the strategic actions we have taken historically. So will show a similar growth pattern as we have seen in H1 for H2. And on the profitability side, we always have a seasonality impact in that region. So we expect the profitability in H2 to be better than in H1 for the LATAM market. So we are very confident in this market as we are moving more towards our long-term guidance for this region.

[Operator]

Next question comes from the line of Maarten Verbeek from IDEA.

[Maarten Verbeek, analyst]

It's Maarten [indiscernible] for the IDEA. Firstly, you have obtained 4 additional licenses for stage delivery for your Boston facility. Since you didn't mention any additional important states, I presume they are still missing. And do you still expect to obtain licenses before year-end for all states in the U.S.?



And secondly, initially, you had stated that you expected a high single-digit organic growth rate for this year. Now you have made that an absolute one. If I make some calculations, is it then fair to assume that you expect your organic sales growth to be around 10%. Is that incorporated in this new outlook guidance?

[Rafael Padilla, executive]

Thank you, Maarten, and good morning, and indeed, you are right. We are now able to ship to 46 states from our Boston facility and our ambition is to have this ability throughout the whole country, right? Of course, we have filed everything needed to get those 4 remaining, and we await until the state boards give us the license in order to ship to the 4 remaining states.

[Karin de Jong, executive]

Yes. And on the second one, Maarten, so if we look at indeed the range that we have given, the EUR 850 million to EUR 870 million, the reported growth will be between 11.4% and 14%. And for the acquisition growth, we expect a similar amount as in H1, which was 9.6 million. Maybe a bit of color for the different regions. So in EMEA, we will see an organic growth in line with our long-term guidance, which is low single digits.



If we look at the LATAM, as I explained also to Victoria, we expect a similar growth pattern as we've seen in H1 for H2 2024. And then lastly, on North America, they as said, continue to benefit from the drug shortages for another 2 quarters. So there's approximately USD 12 million embedded in the guidance. And of course, the comps are getting stronger.



So one for Anazao. And secondly, of course, the FSS business, which has a very strong performance, and we do expect this to continue. However, also the comps here are getting tougher. So the percentile growth will go down based on this. But the B&E business in North America will continue its good performance quarter-on-quarter. So overall, we expect a good performance for 2024 on topline growth and also on profitability.

[Operator]

The next question comes from the line of Eric Wilmer from Kempen.

[Eric Wilmer, analyst]

I was wondering if you could talk a bit about the phasing of the Wichita investments, both in terms of annual Capex phasing during '25 and '27 and the step-up in capacity during these years. And secondly, I was wondering if you could give some more color on the U.S. opportunity for IV bags in terms of market growth expectations, what competition is doing, et cetera. Also given your focus already on this field, but now also out of Wichita. So keen to hear that.

[Karin de Jong, executive]

Yes. Thank you, Eric. So to start with the first question on Capex of sort of 39 million. We will have a couple of million, so 2 million or 3 million this year. And then most of the spend will be divided between 2025 and 2026. It will depend a bit on timing for invoices and obligations, but that most of the spend will be made in those 2 years. And then maybe a small bit in 2027, but that will basically be spent on the validation part of the processes and the registration phases. So most of it is spread over those 2 years.

[Rafael Padilla, executive]

Good morning, Eric. And your question is very interesting because when you look at the total market, right? And you look at the independent reports that explain how the market is situated. The total market amounts at around USD 3 billion. 50% in-sourced, 50% outsourced. And then when you look in the product categories, you have, of course, different ones, but the main 2 are the syringes or syringes and the bags.



And you would say it's 70-30. So 70 bags, 30 the syringes. I think that, of course, the banks are bigger, so it has more complexity logistically in a basement of a hospital where you normally find the pharmacies and the compounding units. So this is what it tends to be outsourced more frequently. Having said that, when you look at the competitive landscape and to your question, almost all outsources prepare those bags.



Nevertheless, when you look at FSS and historically, we started in 2017 when we opened the new facility after the acquisition of JCB Labs, we decided at that time to start with the OR syringes and then include the IV bags, and we became quite substantial in the market as from 2020. Now we see that here lies the big opportunity. Our thesis of outsourcing remains even increases, right quality regulation, as we said, is increasing. So this is a perfect mix for us to have a full dedicated line automated across the street where we have the warehouse and, of course, the quality control lab in order to make the -- and compound, of course, the IV bags.

[Eric Wilmer, analyst]

That's very helpful. And regarding the capacity step-up during these years, is it very much at the end geared to the end? Or is it basically following part of the Capex?

[Rafael Padilla, executive]

Sure. That's correct. You see it correct. It will be at the end when we have the full line ready H1 2027 when we will entertain the 200 million extra capacity.

[Operator]

The next question comes from the line of Matthias Maenhaut from Kepler Cheuvreux.

[Matthias Maenhaut, analyst]

Yes. Sorry, I joined the call pretty late and other reporting, but I had maybe one question from the press release, it's not exactly to speak about expansion Capex in Wichita and the Netherlands. But I don't see any additional new targets or sales that you ambition from these investments. So I was just wondering if you could elaborate a little bit on that and how you see the scaling from the additional revenues. That would be my question.

[Karin de Jong, executive]

So we have 2 different investments. We have one in the Netherlands, our sterile facility in [indiscernible], which will offer a sterile portfolio of products. These products are now sold to hospitals, pharmacies and they take care of the pharmaceutical care and then dispense them to the patient.



So if we look at the market in the Netherlands, it's -- that market is approximately 150 million, which is mainly in-sourced. As you know, we are active in that market, but the biggest part of our business in the Netherlands is still non-sterile. So with this acquisition or with this investment, we want to capture more of that market share and also capture on the outsourcing trends we also see in the Dutch market.



So if we look at the specifics of the business case, as you can understand, we're not disclosing that. So we're reiterating our long-term guidance. So we do see that market is growing faster than our other markets. So our sterile market in the Netherlands, our business is growing faster than our non-sterile business. And of course, that's the main driver for doing this investment, same for the U.S. investment case.



So there is also exactly the same as I said. So we're extending in the U.S. our capacity to serve the growing market. And we believe that with this investment, we will ensure ourselves from continuing to benefit from this attractive market, and we can leverage the knowledge of our teams in Wichita by building that in the same area. So as I said, we're adding $200 million of capacity in that region, and that will serve the high demand that we facilitate -- that we see in that market. So currently, we're not disclosing any details for those specifics in the business cases as you can imagine.

[Matthias Maenhaut, analyst]

I do a short follow-up on the Netherlands. Maybe just you said that most of this is still in-house of the business that you will face, could you maybe elaborate what you see as key catalysts for increased outsourcing? And then secondly, I do anticipate that there is already somebody that is presently active in that market, so could you maybe elaborate on the competitive environment of the market for the business that is already outsourced?

[Rafael Padilla, executive]

Yes. Sure, Matthias. When you look at the key trends of this market, again, is what we reiterated many times, right? There are 2 elements here. The first one is the increased regulatory scrutiny that the low market faces and of course, also the hospital pharmacies. So this is really pushing the outsourced trend and the compounders or [indiscernible] are capitalizing on this one. So this is one.



And secondly, of course, the volumes are increasing. So you see with drug shortages, that is something that is in our end in our business. It's a trend that we all spoke during our Capital Markets Day. It's there. It's there also to stay, of course. This is also driving an increase in the volumes for the B market. And then when you go into the competitive landscape, you have the list of the outsourcers in the FDA website, of course.



And here, you divided more or less two parts. One would be the prevention and lifestyle, whereas our Anazao is situated and the other one in the outsourcing, the hospital outsourcing, of course. And in this one, we would account approximately around 15, 1 5 players, which are active in this market. And of course, internally, when we look at the market and the dynamics we can have in Tier 1, Tier 2, Tier 3.



Historically, we were Tier 2, Tier 3. Then we have scaled it and as from 2020, when we adjusted some of our processes, when we introduce from Eric's question, the IV bags. Of course, we went into Tier 1. And of course, now we are benefiting from the 2 other trends that we set before, and we see increase in volumes on the underlying market can we're referring, and we are capturing this one.

[Matthias Maenhaut, analyst]

Yes. Sorry, I might not make myself fully clear, but I was more pointing out to the Netherlands to the Dutch market.

[Rafael Padilla, executive]

You were referring to the U.S. Sure. So here on the competitive landscape, and as Karin said very well, the majority of the market is in-source. So you see that hospitals compound a substantial part of it, and the rest is being outsourced. We are one of the players.



We would say we are also Tier 1 in this space, but with a very low share because, again, everything is -- almost everything is in-sourced the market, as also Karin was referring, is around 150 million. So we believe that, of course, with the extra capacity, we will be able to capture this trend, that sourcing trend. The 2 drivers are the same like with in the U.S. So you can copy base nevertheless, at a lower pace.

[Matthias Maenhaut, analyst]

What would you say is the percentage of outsourced business at this point in time?

[Rafael Padilla, executive]

This is substantially low. So substantially in-sourced. The bigger part is in-sourced and the lower part is outsourced.

[Operator]

We currently have no questions coming through. [Operator Instructions] There are no further questions, and this ends our Q&A session. Thank you for participating to today's Fagron H1 2024 Results Conference Call. You may now disconnect your lines.