Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lonza Group Ltd (LZAGF, Financial) reported sales growth of 1.8% in H1 2024, reaching CHF3.1 billion.
- The company achieved a CORE EBITDA of CHF893 million, representing a margin of 29.2%.
- Strong free cash flow of CHF296 million was reported for the first half.
- Healthy number of new contract signings in the CDMO business, particularly in biologics and cell and gene technologies.
- The acquisition of the Genentech site in Vacaville is expected to double the company's global mammalian network and increase its presence in the US market.
Negative Points
- Sales and profit were negatively impacted by currency exchange rates due to the Swiss franc depreciating.
- The CHI division faced challenges due to weaker than expected market demand for hard empty pharma capsules.
- Margins decreased by 0.8 percentage points in H1 2024 compared to H1 2023, partly due to the termination of COVID-related mRNA business.
- The Cell & Gene division declined by 6.6% versus the prior year period, despite showing underlying growth.
- The Capsules & Health Ingredients division experienced continued destocking in pharma and increased competition in the nutraceutical business, impacting margins.
Q & A Highlights
Q: Can you provide insights on the margin phasing in the small molecules and biologics divisions for the second half?
A: We are not guiding specific margins for divisions, but overall, we benefited from a strong product mix in the first half, which we do not expect to repeat in the second half. For biologics, margins are expected to be lower in the second half due to product mix changes. Small molecules will see healthy margins but will also incur ramp-up costs for new facilities. (Philippe Deecke, CFO)
Q: How do you view the longer-term supply-demand dynamics in large-scale mammalian capacity?
A: We see large-scale mammalian capacity as constrained over the next several years. Our acquisition of the Vacaville site will double our mammalian capacity, and we believe we are well-positioned to meet increased demand. We are not planning additional large-scale capacity beyond Vacaville at this time. (Philippe Deecke, CFO)
Q: Why are margins expected to be lower in the second half despite higher sales in most divisions?
A: The product mix in the first half included more high-margin products, which will not be the case in the second half. Additionally, ramp-up costs for new facilities in small molecules will impact margins. The lower margins are not related to the Vacaville acquisition. (Philippe Deecke, CFO)
Q: Can you provide more details on the new CDMO contract signings and the drivers behind them?
A: Most of our contract signings are driven by large, long-term commercial contracts. We have seen increased RFPs for early-stage work, attributed to healthier biotech funding rather than Biosecure. The funding environment has improved, leading to more early-stage inquiries. (Philippe Deecke, CFO)
Q: What is the interest level in the Vacaville site from existing and new customers?
A: There is strong interest from both existing and new customers. Having a proven capacity in the US is highly attractive, offering flexibility and security in large-scale production. We have already signed a first letter of intent with a key customer. (Philippe Deecke, CFO)
Q: How has pricing impacted the Capsules & Health Ingredients (CHI) division, and what is the outlook for the remainder of the year?
A: Pricing was a negative factor in the first half, with roughly half of the decline due to volume and half due to price. We expect pricing and volumes to remain a drag for the rest of 2024, but the comparison will be easier in the second half. (Philippe Deecke, CFO)
Q: What is the impact of Biosecure on your business, and are you having conversations with new customers because of it?
A: Biosecure has led to many discussions with customers about their supply chain options, but it has not resulted in immediate new business. The impact of Biosecure is expected to be more of a mid-term tailwind rather than an immediate one. (Philippe Deecke, CFO)
Q: Can you provide an update on the antibody-drug conjugate (ADC) offering and the outlook for supply-demand dynamics in the industry?
A: Synaffix is not yet significant in size but is important for early-stage ADC projects. We see ADC capacity as constrained and are looking at our investment strategy to meet demand. Some customers may build in-house capacity, but they will still rely on CDMOs for part of their supply. (Philippe Deecke, CFO)
Q: How are yields progressing in the biologics division, particularly on the commercial side?
A: Yield improvements move slowly due to regulatory requirements. Year-over-year changes in yields are not significant. We continue to invest in technology to offer customers the latest options, but yields have not played a major role in this year's financials. (Philippe Deecke, CFO)
Q: What is the outlook for the Cell & Gene therapy division, and how much of the growth is attributed to pipeline progress?
A: New commercial therapies were not a major driver in H1. The growth was mainly due to better production of existing therapies. We expect new commercial products to come online later, which will be communicated in due course. (Philippe Deecke, CFO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
