Ladies and gentlemen, welcome to the Half Year Results 2020 Investor and Analyst Conference Call and Live Webcast. I am Sandro, 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 and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Albert Beni, CEO at Interim and Chairman of the Board of Directors of Lonza Group. You will now be joined into the conference room.
Good morning to
you all and thank you for joining us today and a warm welcome to those joining us on the phone. Also joining me on the stage Rodolfo Savinsky, our CFO. Let's start with a glance at our agenda for today. Rodolfo will talk us through the group's finances and I will provide a wider update on the business. To set the scene, I would like to take a moment to share an update on how our business has responded to the COVID-nineteen pandemic.
The first half of twenty twenty has brought challenges and uncertainties to every business in different ways. From the very beginning, our priority was to maintain operational performance, while ensuring the continuing safety of all our employees. Through these commitments, we have supported our customers by providing an uninterrupted supply of essential products and services. We have also embraced new ways of working to ensure that our sites and offices continue to operate effectively and safely. Outside of our sites and offices, we have worked to make adaptations to our transport network, where we routed goods in transit and invested in additional air freight transportation when needed.
Inevitably, this has led to higher logistic costs. You also have seen the news of our partnership with Moderna. Lonza and Moderna each bring unique and complementary skills and assets to the collaboration. Let me take a moment to share a short update on this important new alliance. Lonza and Moderna have agreed on a 10 year strategic collaboration on the mRNA platform.
Initially, our efforts will focus on the rapid delivery of a vaccine for COVID-nineteen. The success of this collaboration inevitably depends on the clinical success of the new mRNA approach. It also depends on how Lonza's abilities to ramp up manufacture at an I'll repeat it, it also depends on Lonza's ability to ramp up manufacture at an unprecedented scale and pace. Currently, we are planning the installation of 4 production lines. 1 will be located in Portsmouth in U.
S. And the other 3 will be based at our manufacturing facility in Wiesp in Switzerland. Each new production line represent an investment of some CHF70 1,000,000. Moderna will form 3 lines and Lonza, Lonza will provide the CapEx needed to develop the 4th line. After an intensive period of technology transfer, we expect the 1st mRNA batch to be delivered in Portsmouth by end of next week.
The first batch of drug substance will be delivered in the U. S. By September 2020, and the 1st drug substance batch will be delivered in Vis by end of December 2020. Equipment deliveries have been accelerated, and we have ensured that we have a dedicated workforce in place to deliver. However, I should emphasize that there will be uncertainties to overcome as the project progresses.
As we look at these target timings, it's important to remember that we are currently working with a vaccine candidate. Phase 1 trials have shown positive indications, and I will come to these in a moment. However, there are still the clinical phases 2 and 3, which need to be completed before a final review and approval by the FDA. While the vaccine candidate path to commercialization is at an early stage, it is simply not possible for us to forecast the potential sales and margin for Lonza. For this reason, we are not able to include any figures relating to Moderna in our outlook 2020.
Any predictions at this stage would be pure speculations and may prove to be misleading as the project progresses. We are happy to share what we know at the current moment. This includes CapEx, project status, next steps and project timelines. Once we have a greater certainty regarding commercial, we will be able to share these details as well. Now let's take a closer look at the progress of the mRNA-twelve seventy three vaccine in the regulatory approval process.
You may already have seen that Moderna and the National Institute of Allergy and Infectious Diseases have communicated positive Phase 1 safety and efficacy data. Specifically, the Phase 1 data indicates that the mRNA-twelve seventy three vaccine stimulates a robust immune response with all dosage levels. Finding of Phase 1 trial indicates that 100 micrograms should be the optimal dose for the Phase 3 study, which will start at the end of July. Inevitably, open questions will remain until the Phase III trial has been completed. However, initial indications are a positive and encouraging step in the right direction.
Let me now take a moment to provide a snapshot at our half year twenty twenty financial results. The first half of twenty twenty has been a time of change for Lonza. In the ELSI segment, we are finalizing the carve outs. In the LPBN segment, we are continuing to execute significant investment projects. Finally, at the group level, we have announced changes in our senior leadership.
We're also very pleased to report strong results with 7% sales growth in reported currency and an improved core EBITDA margin of 29.1%. LPBN achieved a double sales growth rate of 10.8%. LSI maintained a high core EBITDA margin of 19.7% in a mixed business environment, which included both head and tail wins. Currently, we have a solid outlook with stable margins. This takes into account the additional operating costs linked to our continued high investment in LPBN and the uncertainties in LSI operating environment.
Having shared our sales growth rates, I would like to add a few comments on the margins. At group level, the core EBITDA was up 7.9% to CHF893 1,000,000 corresponding to a margin improvement of 130 basis points to 29.1%. LPBN core EBITDA grew 9.7 percent to CHF 760,000,000 with a 90 basis point improvement in the margin. This was achieved in the context of high investments and the related increasing costs which are not yet contributing to revenue and profit levels. LSI demonstrated the resilience of its business model and portfolio in a very uncertain environment.
It reported flat sales and a positive effect of 70 basis points on the core EBITDA margin of 17.7%. I will now hand over to Rodolfo to take us through the details of Hartshoeir Financials.
Thank you, Albert, and good morning from my side. Albert has briefly highlighted our strong financial results for the first half. He will also take you through the operational results in more detail in a moment. Before that, I would like to take a moment to highlight some of the key levers behind these numbers. Growth in LPBN continues to be fueled by strong momentum across all businesses, but particularly by biologics and cell and gene therapy.
In LSI, we see a more mixed performance with strong growth in hygiene and home care compensating for headwinds in other categories like composites for electronics and aerospace. In H1, we have seen exchange rates playing an important role in our results. We have around 4 percentage points difference in sales growth between currency corrected and reported currency given the appreciation of the Swiss franc against the U. S. Dollar by 4% and the euro by 6%.
Looking at the core EBITDA margin, we see a significant improvement, as Albert mentioned, for the group of 130 bps in reported currency. Here, the impact of currency on the margin is limited as our revenue and cost structure provides a natural hedge. There have been a number of important profit drivers behind our margin result. Let me start with the impact of growth projects. As you may remember, the investment in growth projects has both a CapEx and an OpEx component.
Of these 2, the OpEx carries a negative impact to profitability during the ramp up years. Now let's focus on LPBM. Its core EBITDA margin went up by 90 basis points despite a negative 170 basis points margin impact from growth investments. This was more than offset by the positive contribution of operating leverage and productivity initiatives delivering 260 basis points improvement on the margins. Now for the second half, the impact from growth investments is expected to be more significant with around 300 to 350 basis points negative impact on the core EBITDA margin of LPBF.
In LSI, we also show an improvement in core EBITDA margin in constant currency and this is as a result of contingency measures related to the COVID-nineteen pandemic. Returning to the growth investments. We have continued to invest in CapEx in H1 at around 14% of sales, in line with the overall level in 2019. This slide provides a breakdown of our CapEx investments and shows that the projects in LSI and LHL are relatively small. The majority of CapEx has been allocated to our pharma segment, LPBN and the split of LPBN CapEx is roughly 80% in growth projects and 20% in maintenance.
The investments in growth projects are critical to long term success and value creation for Lonza. They are underpinned by solid demand projections, in many cases already backed by commercial contracts or customer commitments. They also have a very attractive financial return profile. Broadly speaking, these investments deliver more than CHF1 1,000,000 sales after 6 or 7 years for every CHF1 1,000,000 invested. Such growth projects tend to deliver rates of return of around 20% to 30% and an incremental return on invested capital well above 30% when sales have fully ramped up.
Now with all these investments, cash flow remains for us a central priority. And our H1 results reflect the strong improvement in operating cash flow compared to the same period last year. The increased cash flow is driven by a strong EBITDA net working capital discipline. These have offset the higher level of investment in CapEx. Turning to our net working capital, we have achieved enhanced collections despite the COVID-nineteen pandemic.
Currently, we have stable days outstanding in line with our target and a low level of overdue receivables. Nonetheless, inventory remains a focal area for the business as progress in this area has been slightly slower than expected. We are deploying a program to further improve supply chain management and we expect to see benefits already in H2 in the second half and early next year. This brings us to our net leverage, which remains below 2 times and we're fully on track to maintain a strong investment grade rating. Importantly, we have secured a very comfortable financing headroom considering the uncertainties arising from the COVID-nineteen pandemic.
You may remember earlier in the year, we issued a CHF300 1,000,000 bond with a 1% coupon and our inaugural Eurobond of Euro 500,000,000 with a 1.625 percent coupon. The Eurobond was a resounding success with 12 times oversubscription and very importantly, it was the first ever inaugural issuance in the European market with 100% virtual roadshow. With these financing measures, we ended our first half with an extended debt maturity of close to 4 years and an average funding cost of 1.3% and this compares against 1.8% in 2019. This brings me to my last slide, which provides an overview of ROIC. It gives us a nice summary of our group financial performance.
Return on invested capital slightly increased to 9.8 compared to 9.5 9.4 in the first half of twenty nineteen and this despite our growth investments. The increase in net operating profit after tax was more than 3 times higher than the one for average invested capital. While operating profit before taxes grew double digit, our tax rate increased to a more sustainable 15% level compared to 2019 where we saw a number of one time tax upsides. Our first half tax rate in 2020 is nonetheless still well within the guidance of below 20%. The increase in invested capital reflects the absence of acquisitions as we focus on organic growth opportunities.
Looking back at H1, we can confidently say that our financial metrics were exceptionally positive. We expect this positive momentum to continue in the second half, but we understand the impact of growth projects will be higher and therefore the margin levels will most likely be lower than in H1. All in all, a very encouraging picture for the first half and for the year. And now back to Albert.
Let me now provide a business update on LPBN. We continue to see strong demand across substantial or significant negative impact from the challenges of COVID-nineteen in H1. Moreover, our capsules and health ingredients business has benefited from a solid nutrition market. In this context, the LPBN segment has delivered double digit sales growth rates. Then let's take a closer look at each of our Pharma and Biotech businesses.
First, let's turn to Small Molecules. Demand in this business has been driven by our high potent API technologies. This has delivered a solid pipeline of projects and during H1 we have closed a number of multi year customer contracts. Our H1 sales were negatively impacted by a one time effect. Without this effect, our sales would have been in the high single digits.
We're expecting a solid H2 and full year results with small molecules. Let us now take a moment to review the mammalian and microbial business. Healthcare continues to outperform the broader market. This outperformance is supported by the continuing high level of demand for large molecules. In the mammalian and microbial area, there have been only minor impact arising from delays to clinical trials.
These delays were caused by more immediate priorities relating to the COVID-nineteen pandemic. In the first half, we signed new commercial and development agreements across our modalities and sites. We are facing some delays on some construction projects, largely caused by a shortage of contractor resources. Apart from this, the COVID-nineteen pandemic has not impacted our performance and we have delivered double digit sales growth in the first half, Core, mammalian and microbial. We have experienced some high operating costs linked to our growth initiatives.
However, we have maintained solid operating margins and we are confident about the business as we look forward to H2. Full year sales are forecasted at double digit growth rates. Now let's take a look at cell and gene therapy. Overall, I am pleased to report that we have an excellent pipeline for both cell and gene therapies alike. In the course of H1, we accelerated the implementation of initiatives to reach a high level of process excellence.
We also signed several novel technology deals and secured several clinical programs. In the first half, we saw double digit top line growth. This strong performance was supported by improvements through the operating margins. We expect this growth momentum to continue in the second half. Next, we turn our focus to the Bioscience business.
Bioscience has been negatively affected by a reduction in demand for products from academic and research customers. This has been caused by the temporary closure of many labs across both Europe and North America. On a more positive note, we have seen strong and continued recovery in our media business. These positive and negative impacts have balanced the performance of the business. Sales in the first half were slightly up, and we expect to see stronger sales in H2.
Finally, in our LPBN segment, we turn to our capsules and health ingredients business. In H1, the COVID-nineteen pandemic drove greater levels of interest in supplements. As a result, the nutrition business experienced increased consumer demand across all regions. We also saw some inventory build. The pharma capsules market has experienced weak demands, in particular in North America.
In this geography, the lockdown in H1 has led to fewer visits to the doctor. In turn, this has led to a decrease in medication prescriptions. The lower demand levels have been balanced by modest growth in Europe and stronger growth in Asia Pacific for pharma capsules. Also sales were flat for hard pharma capsules. We saw double digit sales growth for both our Nutrition Capsules and Health Ingredients.
As a result, the Capsules and Health Ingredients business experienced high single digit sales growth. Having taken the time to review the LPBN segment, let us now turn our attention to the Specialty Ingredients business. During the first half, Elesa experienced both positive and negative impacts from COVID-nineteen. As a result, total sales were flat versus H1 twenty nineteen. It will come as no surprise to hear that demand was very strong for hygiene products and for home and personal care.
We experienced a disproportionately high demand for biocide during H1, which caused some temporary shortages of raw materials. In contrast, many of our industrial markets were not immune to the COVID-nineteen. We saw low demand in businesses, including wood and material protection, paints and coatings, consumer electronics and composites for civil aviation. All our manufacturing sites remained open through the first half with the single exception of our wood operations. Let's start by looking at our Microbial Control Solutions business.
We saw high single digit sales growth in Microbial Control System in H1. It was driven by high double digit sales growth with both professional hygiene and home and personal care. This was balanced by wood production sales, which were below the level of H1 twenty nineteen. Sales for patents, quoting and coatings were down, reflecting overall weaker levels of demand. Material protection sales also have been negatively impacted by the industrial markets.
We have seen particular impacts in the automotive and oil and gas businesses. Finally, our crop protection business was negatively impacted by the dry weather in Oceania and Southeast Asia. Now let's take a moment to review the Specialty Chemicals Services business. A challenging business environment coupled with some one time effect has impacted negatively a top line growth in this business. Total sales growth was down by low double digits.
We saw overall low demand across our composite business, mainly consumer electronics and civil aviation. There was a mixed picture in the CDMO business. We saw stable sales in chemical and weaker sales in the fermentation business. The performance of chemical intermediates was resilient to COVID-nineteen with strong vitamin B3 sales. Finally, let me briefly touch on the LSI carve out.
I am pleased to confirm that the project is almost completed. We have provided additional detail on this slide. However, at a glance you will see that there is a small number of remaining issues regarding specific geographies and service agreements. We are also working to complete and finalize the carve out of the IT function. As the carve out draws close to completion, the Board has taken time to consider the strategic options for the long term future of the LSI segment.
We consider a wide range of alternatives we have come to the conclusion that LSI should be divested from the Lonza Group business through a sales process. In its current state, LSI has proved itself to be a profitable specialty chemical business with a leading position across a range of attractive end markets. It has also shown an encouraging level of resilience in the challenging market conditions arising from COVID-nineteen pandemic. In this context, we believe that LSI may attract offers from strategic buyers and from private equity firms. The sales process will deliver advantages to Lonza.
It will provide a swift, clean and clear break, allowing LSI to find a home where it can develop and grow. As LSI departs, Lonza will become a pure play pharma and biotech company. The sale will allow us to concentrate on our strengths in this space and develop our position as a leading manufacturing partner in the life sciences space. As we look forward towards H2, we are pleased to confirm our guidance for above mid single digit sales growth for the group. We're so pleased to confirm a stable core EBITDA margin.
We anticipate that sales growth will be driven by pharma, biotech and nutrition. In the LPBN segment, we expect to see high single digit to low double digit sales growth. However, we anticipate that LPBN performance will be offset to some extent by flat to low single digit sales growth in the LSI segment. A stable core EBITDA margin should be generated in the context of the investment incurred by our growth projects in the PBM. Of course, our outlook assumes no expected adverse impacts or disruptions arising from the COVID-nineteen pandemic.
As always in these sessions, we have covered a lot of ground. To summarize what we have shared in a few words, the business has so far maintained operations and performance through the pandemic. This is reflected in our financial performance, which shows resilient margin at group level. At the current moment, we are working internally to finalize the carve out of LSI segment. We are pleased to report a resilient performance in Intuance, and we are hopeful that the second half will allow us to continue in the same trajectory.
However, I must emphasize that this remains a unique moment in human history in which we must continue to expect for the unexpected. With this in mind, our forecasts are inevitably subject to high levels of uncertainties. Many thanks to you all for your time and attention. And now we come to the Q and A session. We will start by taking questions in the room, and then we will move to questions from callers on the phone line.
If you are asking questions in the room, please wait until you have the microphone so that our callers can hear your questions as well. Who would like to ask the first questions?
Yes, thank you very much. I'm Daniel Bockner from Vontobel. Three questions, if I may. The first one on Capsugel. I mean, what you are providing now in qualitative terms, if I see the consumer part was extremely well, but probably you had some pre buying.
Can you maybe quantify what an underlying growth rate was because Capsugel business in the past 1 to 2 years was a bit struggling? And then on the pharma side, do you see any underlying improvements because I think the Q1 was even negative what you said? And the second question on the timeline for the LSI disposal. Can we expect an announcement on this finalization already this year? Can you share a bit maybe something on price expectations?
And also is there any restructuring still to come related to that? I mean, the carve out is done, but it's just still something to come? And then the third one on the guidance, you reiterated your margin expectation, stable given the strong first half. I understand what you said on ramp up costs being more pronounced, but is there anything we are missing here? Because otherwise, if I add everything together, I still would expect margins to be up this year.
Thank you very much.
Thank you
for the question. To the last question, you just underestimate the level of OpEx linked to the CapEx investments. We're not talking about $10,000,000 $20,000,000 $30,000,000 We're talking about more than $150,000,000 OpEx for the year linked to the CapEx and these 100 of 1,000,000 plus are not generating any sales and margin. So to believe that we can maintain, that we can increase margins, the good business we are developing to increase the margin with such high cost, it's impossible. I mean, it's a fantastic performance to be able basically to balance €150,000,000 plus extra costs, no generate sales and margins and maintain high margins.
I think this is a fantastic performance and I don't see how people can doubt and can say it's a bad performance. This is remarkable results. Don't underestimate the size of the investments. In LPBN in 2020, we will be investing net net net more than CHF600 1,000,000 and this correspond to more than CHF150 1,000,000 in OpEx, I repeat it, generating no sales and no profits. And we tell you that we will be maintaining the core EBITDA margin at the level of 2019.
I don't see where we can get critics on this one, to be honest. This is remarkable performance and we invest for the future. If we don't invest now, in 2 years, you will see what the hell, you miss the opportunities. So this is business as usual and we invest as much as we can to be able to generate in the future further double digit sales growth for LPBN. So you are just underestimating the amount of investments and the amount of costs linked to these investments.
I wanted to make it very clear, It's not peanuts. It's not €20,000,000 or €30,000,000 Huge amount of money. But for the future, and we maintain margins. I said it with a serious tone, I apologize for that. Now I come back.
Yes, regarding re earning LSI, we have been very consistent from the very beginning, which means since last year. We have said all the time, 1st carve out. In parallel to the carve out, the Board is analyzing and reviewing all the strategic options for LSI. So we are finalizing the carve outs. We did our homeworks at the Board level, and we are communicating today.
Carve out is almost done and we have decided to go for a sales process. Now the next steps are number 1 is to plan the process and step number 2 will be to execute the process. And I can't say more today than that. We will be fast, but I don't have the final plan for this process. We plan the process.
We execute it. And as usual, we are not slow. We move fast. On the capsules business, excellent performance of the business. The capsule business had high single growth rates.
This was the combination of flat sales for the pharma business and double digit sales growth for the nutrition business. I said in the introduction that maybe there are some inventory builds. If this inventory build will be again part of the business in the second half, I don't know. I can only comment when we will have the second half behind us. Take it as it is, it's a very strong business, strong first one first half results.
We expect strong sales in the second half. Pharma, it will depend on how the mainly the American patients will visit the doctors, how many medication will be prescribed. I don't have the answer now. We can only comment when second half is behind us. Otherwise, I will be speculating and it's not my style.
I'd rather deliver than speculate.
So the first question is the CapEx for Moderna, the $70,000,000 is that just entrepreneurial risk or do you get something back if the drug fails?
It's of course stupid to say it's a no risk investment, but let me explain it why. We have a 10 year collaboration agreement with Moderna. It's a 10 years collaboration agreement on mRNA technology platform. Assuming the the FDA, there is a long list of other projects based on mRNA technology and then we will be using these assets for other projects. So basically there is almost no risk with $70,000,000 investment in one production line from our side in this because if it doesn't work, we have the assets, the technology for other projects.
Okay. And the second question, I mean you always talk about Moderna and some analysts for Moderna, they are freaking out with talking about $75 per injection, which is crazy, dollars 17,000,000,000 peak sales potential. And so why do you always talk about Moderna? You have 140 other inquiries with COVID-nineteen drugs or therapeutics because you're not allowed to tell or I mean you have hundreds more projects in this area?
No, no, no, no. There are many projects where there are limits to our capacities in terms of human resources and in terms of manufacturing and research capacities. Moderna is certainly the most important project we have currently in our portfolio related to the COVID-nineteen. And it was a wish from Moderna and from us to inform the market openly why, because we need Moderna and Moderna needs us. So it was not a problem to communicate.
We joined forces. They have the basic know how. We have the manufacturing know how. We have the know how to scale up lab processes and we have plants around the world. So it makes a lot of sense to say this is strong collaboration.
We have other collaboration for other topics related to COVID-nineteen, but some of our partners are not willing to be open on this collaboration. It's why we are focused and we talk a lot about Moderna, 1 because it's the most important one. We're in a kind of pole position and it is for sake of the humanity medium and long term.
Okay. And the third question if I may on slide 21, that was a bit fast. You talked about biologics and some 6 ks investments. What was that? And the 2,000 active therapies in development, that's for the market?
This is the market.
And you have some 800 I think you have in mind. That's the
We have a lot. We have a long list. I don't want to give the exact numbers. By the way, I wouldn't know the exact numbers to be fair. When you talk mammalian and microbial, you talk about the size of the fermenters.
You have 20,000 liters and 6 ks is 6,000 liters.
And why 6 ks? Because if
you want to participate successfully to the market, you need small scale 1 ks, 2 ks, medium scale, 6 ks, 5 ks and you need a large one for the blockbusters 20 ks. You play with 2 ks and 1 ks at the beginning of the process for clinical trials, then you move to midsize 6 ks, 5 ks. And if you are lucky to have a blockbuster, you need the 20 ks. And you need all this portfolio of scales to be a strong player. And you need specifically the small scales 1 ks, 2 ks for the startups.
But we are equipped to serve the market with 1, 2, 5, 6, 20 and we stop at 20.
This is Patrick Rafais, UBS. Three questions as well for me please. The first
question by question, it's easier for me.
Sure. No problem. The first one is also Moderna and the CapEx. To what extent is that incremental on what you anyway guided, the 13.5% of sales for this year? Or is that displacing other projects you would have had otherwise?
No, first of all, we are not communicating. We don't put any sales in our outlook 2020 because we don't know how much sales we will be generating with Moderna. So, if you see PhD type of works, this is speculation because we don't know ourselves. And I don't want to speculate in this room and with you, it would be unfair. I suspect that early next year, we will have very good view on how much sales and margin we may be able to deliver out of this Moderna.
To date it's impossible.
But I meant just the CapEx.
The CapEx is 70, it was not planned of course when we prepared our business plan last year, we didn't include Moderna. So it's on top of the normal, but we can absorb this 70,000,000 It's not dramatic at all. We are pleased indeed to have this CapEx opportunity.
Okay. Thanks. And the second question is on the quarterly sales development at LPBN. Quite an acceleration in the second quarter from what you showed us with the Q1 update. What should we assume as a run rate?
Were there any special effects, very favorable batch runs? Will there be more qualification batches in the second half? So we look at H1 or Q2 as our best estimate?
I don't want to come back to Q1, but basically you didn't read me between the lines. I didn't say it, but in Q1 this business was up double digit, but you didn't trade me between the lines because I combine LBB with I combine this business with the nutrition. But between the line asset, as the capsules business has a growth rate below 10% and it represents 1,000,000,000 it's driven on an annual €1,000,000,000 basis, the rest of the business was double digit. So Q1, Q1, this business was already at double digit sales growth. You didn't read me between the lines because I've been been as transparent as I am this morning.
So that means if it will depend also on the capsules business in the second half and here you sound more optimistic than you did.
We are very confident that the LP B, you see the pharma and biotech business will be delivering double digit sales growth. And then capsule business is a bit more uncertain because of the pharma business evolution in North America and the nutrition business. It's why we're a bit more prudent. But the pharma and biotech will be delivering double digit growth rates in second half. Yes.
Thank you. Very clear. And the last question is on the OpEx investments and the margin dilution. So if I combine H1 and H2, maybe 2.50 basis points, how fast will this dilution be phased out over the coming years? Is that a function of the 6 to 7 year ramp time or how should we think about that?
I suspect you have the business plan in your eyes Rodolfo, go ahead.
Yes. So I mean Patrick to your question, the investments of course we it takes we say typically 6 years to achieve what we call more or less, let's say peak sales and then of course you have 2 or 3 years to finalize the construction program where you start hiring the FTEs and you obviously don't have sales And then as of year 2 or 3 depending on the project you start generating revenue and so pretty fast, you don't have a negative impact from the project. But of course, you only get to let's call it target margins by year 6 or 7. But I would say the negative drag it gets neutralized already at the as soon as you start operating the facility.
But I think the key message we are investing really in the future to secure high sales growth rates years
ahead.
David, I didn't see you. I apologize. Now last question in the room because we have to share with the other persons.
Hi, thanks a lot. I just have a question about a status update on Ibex. Can you maybe just comment when you exactly plan to start operations in which facility etcetera? Thanks a lot.
So I am commenting on the Ibex Building 1, which is 100% owned by Lonza. This building with 2 wings very important to make this distinction. Wing 1 is basically sold out and we will start using producing this Wing 1 during 2020. The Wing 2 is today empty, but we are starting to put more infrastructure in the Wing 2 because we have gained projects which will be incorporated into the AbEx Wing 2 Building 1. Said differently, we are very satisfied half of the building is sold out and we are on the way to sold most of the wing 2 of building 1.
Why I make this distinction between 1 because there was another building, the joint venture with Sanofi. So I was commenting only on Lonza's 100 percent ownership of Building 1. So we are very satisfied. So we take now questions outside of the room.
The first question from the phone comes from Jo Walton from Credit Suisse. Please go ahead.
Thank you. Just a couple of questions. I'm sorry to go back to the Moderna situation.
Can you go the question after the other, please?
Of course. Starting then on the Moderna situation, and I understand that you cannot be very specific, But can you guide us as to how to think about this because there are so many different forecasts out there in the market? From your discussions today, it looks as if we should think of your investment being €70,000,000 in capital investment and then some additional staff costs and that we should be looking for return on that level of investment because Moderna has invested the majority of the money and therefore, presumably, you're only going to make a limited return. So we should think of it as a return on capital investment type of business?
Well, I said clearly in my introduction that we are not going to make comments on commercials. I stick to that because it will be pure speculation. And I'm not prepared to comment speculations and hypothesis you can read in the market. So sorry for that. My answer is that I don't comment because it's too early and I don't want to mislead you.
I'll stick to that.
Okay. I'll try to
comment on Moderna commercials today because I don't know.
Would it be reasonable for us to believe that in a few years' time Moderna could be as important to you as one of your current biggest customers. So your current biggest customer is only 5% of your sales. Is that the way that we should be thinking about it? Again, not precisely, but is that the sort of thing we should be thinking about?
Well, if you are assuming that the pandemic will last for 2 years, 3 years, 5 years, 10 years, it will be worse year by year, then most probably that Moderna will become a very important customer. But I don't want to make that hypothesis, sorry. I can't answer without making hypothesis. I'm not willing to do it.
Okay. And then my final question I can't speculate
on the commercials of Moderna. I'm here to comment H1 results and the outlook for the year.
Okay. And then my second question would be sorry, my final question. All of the companies in your industry have done extremely well in their share price over the first half of this year. And I think people have assumed that there is a material shift from in house manufacturing towards more demand for your CMO style business. What I'm interested have you seen and are you able to execute on an increased number of deals?
Are people right that you are seeing more demand and therefore you've been able to sign more deals in say the first half of this year than you did last year?
The general answer would be I suspect around the following. First of all, the market as well as the big pharma and realized that CDMO players, CDMO know how, CDMO's capacities are very important. Why? Because they bring flexibility first of all in the market in terms of capacity, having access rapidly to capacity. We bring this opportunity to the big pharma.
And secondly, we have the broadest range of modalities in this business. We can we know how to manufacture small molecules, large molecules, mammalian, microbial, bio conjugates, cell, gene, viral vectors, autologous, allogeneic, and now we put on top of that the beautiful mRNA technology. So we are in demand and the market realized that we are at the right place with the right portfolio at the right moment. And the need to work with Lonza like Edoza is increasing. We offer flexibility, capacities and broad know how.
And we cannot satisfy
Do I take it from By far not,
because we don't have enough manufacturing capacities and human resources. Thank you for your questions and thank you for accepting the no answer to your first question.
Next question from the phone comes from James Quigley from Morgan Stanley. Please go ahead.
Hello. Thank you for taking my questions. So one is a clarification on the margin and sorry to come back to that. So I totally get the point that Rodolfo made that the additional investments could have a 300 basis points to 3 50 basis points in the second half. But in the first half, you had 2 60 basis points of efficiency gains and margin improvements from leverage, etcetera.
Why would that not sort of carry over to the first half? Is it a sort of an annualized thing or do those efficiency gains run out? First question.
Well, I suspect we go in a lot of details, but Rodolfo you have everything under your eyes.
Yes. James, no, that's a fair question. It's clear. I mean, if we would, let's say, add the growth investments, let's say, add back to the half year numbers, we and then we say in general we foresee a stable margin. It's a fair question.
There's a gap. And here What we see as well is we have a very broad portfolio across our different businesses and there's mix effects in the portfolio. So I would say we have and Albert has provided a lot of transparency as well from my presentation on the growth initiatives. The operating leverage and productivity remains, but this is more complicated than that. There's mix effects in the portfolio, certain areas have higher growth with lower profitability, etcetera.
So at this point in time, we let's say relative to the first half, we see mainly a different mix in the portfolio in certain areas, particularly the product businesses. But again, this is how we see it and therefore the guidance of a stable outlook at this point in terms of margin at this point in time.
Thank you for the question.
Thanks for that. And then maybe I've got a second question if that's all right. So in the cell and gene again sort of related to that, the cell and gene therapy in the past you've mentioned is has been loss making and there's a comment that there's been operational improvements in this area. So can you give us an update of sort of where you are in contracting and how you're going about capturing the additional value that may have been lost for some of these contracts?
Well, first of all, CEL Engine is delivering high double digit sales growth rates, and we will maintain this trajectory in the second half of the year. I can openly say we are sold out on cell engine. We don't have enough capacities. So we are investing and we will be investing year by year on additional suites. We have been opening up with you and saying that this business so far is not delivering positive margins but we have a plan in place to improve the situation.
It does not happen overnight and we will see improvement in the margin quarter by quarter and certainly by end of 2021 we will see best much better results in terms of margin for Celngene, but this business is growing very rapidly and we are putting a lot of emphasis on operational excellence.
Very helpful.
The next question from the phone comes from Patrick Moot from Bank of America. Please go ahead.
Perfect. Thank you very much. First question please on the cost savings. I think you guys touched on it a little bit, but how much because they were very substantial, how much of the cost savings in the first half was associated with travel and things like that, the naturally occurring things from COVID? And how much was active programs that you guys were working on?
And can you give any color on the sorts of measures that you were taking?
You want to give a qualitative answer, Rodolfo, please?
Yes. So look it's a combination. Therefore, that's why we kept it at the general level. Of course, like every company travel was a big savings area, right? I mean, no one pretty much was traveling.
But given the uncertainty, particularly at the beginning of the program, we took some contingency measures like being very prudent in hiring and other cost containment measures in terms of consulting, etcetera. Now given the overall good momentum of the company, of course, we keep the tight cost control, but there's no need for any further measures beyond that.
Thank you.
And then just sorry, I was going to say a second question, if I can, just quickly. I'm just curious how when travel is a little bit more restricted, how winning new contracts looks in the industry now? Because obviously, you might have invited customers to come around your facilities or gone out to see them. How is the sales process and the contracting process strategically changed for you guys?
Well, basically nothing has been nothing's changed. The fact that we have been able to manage all these contract and discussion negotiation on a virtual basis, it works extremely well. Of course, from time to time, we would prefer having the customers in our sites. We would like they would like to come. It's not possible because we want we don't want to take any risk in any sites.
We want to operate the sites. But the I would say the current technology allowed us to negotiate a long list of contracts mainly in NPBM without any specific problems. So works.
Super. Thank you for taking my questions.
The world did not stop.
The next question comes from Naresh Chouhan from Intron. Please go ahead.
Hi there. It's Naresh Chouhan from Intron Health. Thanks for taking my questions. I have 3, please. Just to go back to Moderna, I'm definitely not asking about commercial.
I just want to understand timing. I think Moderna said they would, in effect, produce the vaccine at risk they'd produce before they had the full trial readout. And they have a capacity of about 100,000,000 themselves. And in your press release, the wording seems to suggest that you would only ramp up production, if the clinical tests deliver positive results. So can you just help us understand how we should think about timing and volumes of that production ramp up for the COVID vaccine?
Will you have a few 100,000,000 dose of rates to go a day of approval or will we have to wait for that? And is that more of a 2021 event? I'll stop there and I'll book 2 more.
Yes. First of all, I would like to remind everybody that we are not producing Wilonsa the final vaccine. We are producing the drug substance, number 1. Secondly, every single production line should be able to manufacture 100,000,000 dose a year. We installed 4 production lines, so Lonza will be able to manufacture in average 400,000,000 doses a year.
In parallel to that, Moderna has also a manufacturing line, which will be installed and that will add 100,000,000 doses on top of that. So currently, we are planning 500,000,000 to 600,000,000 doses. But we have the possibility to increase this €500,000,000 to €600,000,000 to €1,000,000,000 with additional investment, which could go rapidly. This is where we are. We are planning to produce the 1st mRNA batch end of July this month.
Now the 1st batch of drug substance from Lonza in North America should be produced by September 2020. And the same should happen in December 2013 in this where we will be producing the 1st batch of drug substance. This is where we are. This is the plan, the timeline of Lonza and I cannot comment the time plan of Moderna. Moderna being in charge of producing the final products, the drug product or the vaccine.
Is that clear?
Okay. I think so. So will all four lines that Lonza run, will they all be running as of July? And so will you be able to in effect, let's say, 6 months of the year, will you have, let's say, roughly 200,000,000 doses by the end of the year? Is that the way to think or 200 doses worth of API by the end of the year?
Is that the way to think about it?
No, you have to think the following. What I said before, sorry, we will be producing the 1st batch of drug substance in September 2020 in North America and we will be producing the 1st batch of drug substance in this in December. Now I cannot comment exactly when we will have when the production line will be in full capacity mode and we need a bit more weeks to do that. I can only say when we intend to produce the first batch from these manufacturing lines in the U. S.
And in Switzerland.
Thank you. That's very clear.
I understand you want to know more, but I can't speculate more than I don't want to say more than we know. And we know when we will
be in
the size, but not when
Understood. And then a question on Ibex Dedicate. It would appear to me, at least on the outside, this is an excellent offering, especially as lots of companies are looking to outsource more capacity, optimize their footprints. And there's lots of pipeline drugs where there's potential for 0 or 100 kind of doses. And that flexibility, I would assume, would be in great demand.
But it would to me, I know you sold half of the plant that you have signed with Sanofi and half of the JV. But I would have thought there would have been kind of more Sanofi like deals being struck. Can you help us understand whether or not this is in line with your expectation, whether the demand softer than you'd imagined and where you expect the dedicate part of the Ibex offering to kind of go in the future?
When I answered the AbEx question before, I was on purpose talking about the Building 1, Wing 1 and Wing 2. The Wing 1 is reserved to design and develop. The Wing 2 will be reserved to dedicate. And I said, we have signed we are on the way to sign long term contracts for Ibex Dedicates, which we'll be using the Wing 2 of Ibex Building 1, sorry for that but I want to be precise. So the demand is there and we are signing deals for Ibex dedicated.
Have you ever can you tell us how big that dedicated volume is?
No, because we are in the process of signing these deals. So again, when we know it, we will be willing to share it, but not today.
Okay. And then the last question is, again, on IFRS. The CHF 500,000,000 CHF 500,000,000 revenues by mid-twenty 20 that you've kind of guided to in the past. Is that still intact and on track?
Can you repeat the question? I was not fully concentrated, sorry.
The IABEX, the guidance for roughly CHF 500,000,000 of sales from Ibex by mid-twenty 20s. Is that guidance still intact?
There is delays. On the Ibex in all of our construction projects, there were around 2 to 3 months of delays because lack of contractor capacities and the largest longest delay is in China where we are 4 to 5 months behind our plan. So the guidance for Ibex 2020 is a bit wrong because we can only start Ibex design and develop with 2 to 3 months delay. This is COVID-nineteen related.
Sorry, my question was okay, that's very helpful. And my question is more towards the longer term guidance of CHF 0.5000000000 CHF 0.5000000000 of sales by the mid-2020s. Is that also delayed in pushdown?
No, this is not I mean, if you take the long term, I mean, 2 or 3 months of this is peanuts in the long term perspective. So we can maintain this outlook. Okay. Thanks a lot. I think we have to stop because time is running and we take another
The next question comes from Richard Bosser from JPMorgan. Please go ahead.
Hi, thanks for taking my question. 2, please. Just obviously, with PBM having double digit growth or yes, we should be thinking should we be thinking about future investments? How should we be thinking about that in 'twenty one in terms of CapEx? With that strong demand, should we be thinking about more CapEx projects to deliver the demand for COVID and other things?
And how should we think about that impacting margins beyond this year and in 'twenty two? That's question 1.
Well, I suspect we have reached the peaks of the CapEx. I mean we had high CapEx in 2019, 2020. This was basically not only because of the strong demand but because we underinvested the years before. But you can expect in the coming years still high level of CapEx. If it would be 10% of sales, 9% of sales a bit too early but we will need this kind of CapEx level to satisfy the growth in the market and to satisfy or so we want to participate with this growth.
But it's too early to give to go into more details. But the level of CapEx will be maintained at a high level, yes.
Okay. Thank you very much. And then just one thinking about obviously LSI being sold at some point in the future. When we think about areas of investment for those proceeds, should we think about moving into fill finish in the biologics to complement some of the Capsugel elements that have been brought on board in the small molecule area? How should we think about that?
We can think about that together once the board will have made his homeworks, which means that we are in the process of analyzing, reviewing the alternative for the proceeds and we have not yet taken any decision step by step carve out decision to sell LSI, define the process, implement the process and consider the options for the proceeds, but it's too early to comment on that. Thank you for the question.
Thank you very much.
Thank you for joining us. See for the last question and we can have a coffee or water together in the room here. Thank you very much. All the best.