Hello everyone, and thank you for joining this session of the Morgan Stanley Global Healthcare Conference. I am Thibault Boutherin. I am part of the European Pharma Equity Research team based in London. Before we start the session, I just need to refer to important disclosures. Please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. For this session, I am delighted to have with me Philippe Deecke, CFO at Lonza. Thank you very much for being with us today. We will obviously go on the Q and A. But before we do that, Philippe, do you want to start with some introductory comments on the current situation and the outlook for Lonza?
Yes. Thank you very much, Thibault. Thanks everyone for joining. After a very strong first half 2026, I think we have now had another couple of months in 2026. And overall, I think we must say the industry for the CDMOs is still a very attractive one. I think we still see, or we see very strong interest from both large pharma as well as biotech companies, who by the way, make up 50% almost of our revenue. So we are a big pharma company, but also a large company for biotechs. I think we see a good environment. We continue to see good requests for our capacities and our capabilities, both in Europe but also obviously in the U.S. Overall, a good environment. I think that is an important point to make. I am sure we will have questions about the environment.
The second thing, we have progressed this year into becoming a pure-play CDMO. Remember in March, we announced the divestment of 60% of our Capsules division, which we will complete by the end of this year. And this will make Lonza now really a pure-play CDMO, really focused on the services both in development and manufacturing. That is, I think, another important step that will happen this year. Also in the plans, of course, since our investors update back in 2024, I think a much more impartial view at buying or building ourselves. We were historically a company that used to build everything we needed. We are now much more impartial in choosing what we build versus what we buy. Obviously, buying is always a matter of opportunities and is more difficult to plan ahead, but that is certainly part of our plans as well.
I think for us, a very exciting year. We also have a capital markets day upcoming in October, where we are inviting investors to join us in Vacaville. I think a very important site that we purchased almost two years ago now. And we are very pleased to actually be able to show that site to people, and to update investors on our plans, our strategies, and answer more questions. That is a little bit a kind of a roundup of where we are, but happy to take your questions.
Okay, amazing. Before we go straight on the business, maybe a couple of questions on sort of policy, tariff, these kind of things. If we start with just the sort of BIOSECURE topic, there was some progress on the legislation in the U.S. It's likely that something will materialize in some shape or form in the future. There was a recent legal win by WuXi that maybe sort of slowed this down a little bit. But I guess the question is BIOSECURE already today a key focus for your customers and showing up in your customer conversations? Or is it still sort of wait and see for the industry and for your customers?
Yeah. BIOSECURE is kind of this never-ending story. I think it started several years ago now, and I think from the beginning, we didn't really put a lot of emphasis on it, and I'll explain to you why. We see this over the years actually, location manufacturing in China has always been a discussion we have with customers, what it means, and I wouldn't say that BIOSECURE has made a big difference. Certainly not a difference that you could quantify in our numbers. Let me maybe explain why, because people think or may think this is counterintuitive. A lot of the work that's happening in China, a lot of the development work that's happening in China is for companies that are tendency smaller, and do their early-stage work in China. Why do they choose China?
There's certainly a cost aspect to this, but there's also a timing aspect to this that actually there's still many opportunities to move away to another CDMOs if your product end up being successful. If you put yourself in an early-stage company, you have one compound, phase I, you may choose to finish your phase I in China. If it's successful, you may even decide to do your phase II in China. Once you finish your phase II, this is when you have to and you're successful, this is when you really have to decide where do you want to have your launch site and how do you want to secure your commercial volumes. This is where we see a lot of company actually coming to Lonza or coming to a Western CDMO to do their work.
Therefore, you don't have kind of a mass exodus of companies now moving to exit China because they have a lot of time to do so. I think even at the beginning of BIOSECURE, you had a very long grace period I think at the time it was eight years or so. So in eight years, you still have multiple opportunities to move away. I think it's a continuation of people being worried about having exposure to China for their IP, for some of their development. Some companies decide to be radical about it and move away. Others are just waiting and see. I think most of the companies actually are in the wait and see mode.
But we have companies that are coming to us at the end of their phase II with a successful compound, saying, "I want to be with Lonza for my phase III, my launch site, my commercial volumes."
Okay. That is very clear, and those are the pick I wanted to touch on before we move on to the business, is tariff, U.S. tariff in particular. How much of tariff and all the discussions around onshoring drove your conversations with customers? At some point this year, you mentioned that some of the major U.S. manufacturing investments by the industry could lengthen some outsourcing decisions. If you could comment a little bit on this and where we stand.
Yeah. Tariff is also a complicated topic because it keeps on changing and evolving. I think very early we communicated to the market that tariff would not have a direct impact on Lonza. Now, why is that the case? First of all, because everything that we sell, we sell at the door of our warehouse, and our customers are picking it up, and they are taking it wherever they need to take it. We actually often don't know if our volumes are being used for U.S., if they are used for Europe, if they are used for somewhere else in the world. So our production, actually, we don't import into the U.S., and therefore we are not directly exposed to tariffs, so they will not end up on our P&L. The second area where there could be an exposure is when we are importing raw materials into the U.S..
So imagine we need a raw material in Vacaville, we could potentially import this out of Europe into the U.S.. We have a policy that all the raw materials are passed through to our customers. And so if the price was before 100, we would basically do 100 + tariff, and then pass that on to customers. And the third area where this could impact us on tariffs is around CapEx. So we are building or we are renovating something in the U.S., and we are importing material, we are importing steel or whatever else equipment we need to buy in Europe. This could impact us if that good is subject to tariff, but this would be capitalized over many years and therefore also not really have a direct P&L impact for us. So the direct impact of tariff is actually very small on Lonza itself.
However, of course, we have customers that could be exposed to tariffs. Right now, pharmaceuticals are mostly excluded from tariffs. If there were some, of course, we are more than happy to welcome our customers in the U.S.. We have very large quantities and capacities in the U.S. that we are able to provide to our customers. If somebody really wants to change the supply chain, we could offer a capacity in the U.S.. Overall, I think we are fairly well protected from tariffs, the way they are today. Of course, it is constantly evolving, so we need to keep an eye on it.
Interestingly, a lot of the tariffs that were charged on some of our raw materials have been reimbursed to our suppliers, so we will basically pass that on to our customers. Money is coming back. It is a small amount, but this is what is happening today.
It is not going to show on the P&L, right? Because we have seen other companies having tariff refund that were visible on the P&L. You do not actually—
No, this is basically pass through for us, yeah. Again, it is very small because a lot of the pharmaceutical products are actually exempt.
Yeah. Okay. That makes sense. If we dig a bit on the segments of the business, maybe if we start with your Advanced Synthesis business. Very, very strong growth in H1. Can you give us a flavor on how the mix is evolving between traditional small molecules and bioconjugates? Maybe starting here, when we see the very strong growth of this business in H1.
Yeah. Advanced Synthesis, again, the combination of our small molecules business and conjugation. This is the mix of two very strong businesses. One, over the last 10 years, we've basically been moving away from what you would call traditional small molecules. It's been a while. We don't do tons of APIs, we do kilos. These are very complex and much more high margin type of small molecules. This business has evolved into already a high margin and actually very attractive parts of small molecules. This is one business that is doing well. We are here focused a lot on highly potent API that you use for many different things, but among others, of course, for ADCs. The second part, conjugation, also a very attractive business, was two years ago, still with our biologics division, has now moved into Advanced Synthesis.
Also a platform that is very attractive. Conjugation is constrained globally. It's a skill that not many CDMOs can do and that very, very few CDMOs can actually do at scale. We're probably one of the only CDMOs being able to do large scale commercial conjugation. You put these two businesses together, and this creates a high margin and quite attractive business. Now, the growth of 28% in the first half this year is not something that you'll see again. I think a lot of things came together here. The ramp-up of different assets on both sides, small molecules and conjugation, that were not here in the first half of 2025 and have ramped up in the meantime, and therefore, you see the full effect of new capacity on this business. 28% is not what you should expect from it.
But this will normalize over the second half, and so the full-year number would be a much more normal number for this business.
Okay, that is clear. Similar to gross margin as well was very strong in H1 and probably should normalize in H2. Yet you are at 48% EBITDA margin in H1. In general, even with the normalization, has the margin profile of this business improved materially compared to the past few years? If yes, what are the key drivers for the margin improvements you have seen in Advanced Synthesis?
Yeah. Of course, it did not exist three years ago. You are putting together two very attractive businesses, and so this creates, both growth-wise, but also margin-wise, an attractive business. I think we said that margins around 40%, sometimes a bit more, sometimes a bit less, is probably what this platform can deliver. Yes, it is an attractive business. You have, on the one hand side, something that is more complex, doing highly potent APIs, doing APIs with many synthesis steps that not everybody can do at scale. On one hand. On the other hand, you have a constrained capacity in conjugation. Putting the two together creates quite some attractive margins, and this is probably here to stay. Not at the 48% level, but probably hovering around 40%. It can be sometimes better, depending on the mix that you are producing in that moment.
But in general, yes, this is attractive.
Okay. That is very clear. You touched a little bit about how difficult it is to do conjugation, the technological challenges and the capacity in the industry. It is very consistent, very attractive area of CDMO. Do you see more investments from the competition? Do you see competition participating more in the new ADC products that are being allocated to the CDMO industry? If you can comment a little bit on the evolution of the competition for conjugation.
Yeah. If we look at the market, the beautiful thing around ADCs is you have very large pharma companies building entire platforms around ADC. On the same platform, they would have several molecules that they are developing in multiple different, for now, oncology indications. But you also have a significant amount of small biotech companies doing development and early-stage development in ADC as well. This is really a category that is very broad. A lot of investments from the pharma side flowing into ADC. And we see the market growing roughly 20% over the next five years. This is a high-growth part of healthcare, and so we are very well positioned for this. Again, we are one of the very few players that actually can offer everything for an ADC.
In a couple of years, we will be also able to fill-finish to put this into a drug product. But today we can offer, of course, conjugation. We can produce the protein, the mAb. We can produce the linker. We can produce the payload. We conjugate everything together, and we have own IP for linker. We bought a company called Synaffix a couple of years ago with own linker technology. So you can also use our linkers, which will then generate royalty revenues in the future. And we are one of the few players that can actually offer all of that, from early-stage development all the way to commercial.
Okay, amazing. Moving on to specialized modalities. Again, exceptional growth in the first half of 2026. There was an element of catch up after the challenges you had last year. But do you expect that business to continue to outpace the group in terms of growth? And on the EBITDA margin as well, at what sort of time frame do you expect that this business could catch up with the group in terms of margin?
Yeah. Specialized modalities for the folks in the audience, this is a combination of our cell and gene business, our microbial business, our bioscience business unit, which is a product business, if you want, and then a smaller mRNA business. This is what makes specialized modalities. This is, again, a construct that the market didn't know before because we put this together in 2025. In 2025, both the performance of our cell and gene unit and our performance of our microbe unit were not at the right level. We had both an asset change in microbial, which meant that we had a shutdown for part of the year, and also on the cell and gene side, we had some manufacturing challenges in 2025. The performance in 2025 of this new combination was actually not what you could expect from it.
2026 is much more what you can expect from this combination. Bioscience, a high margin business, niche product business for media, for testing, actually performing really well in 2026. Cell and gene, again, from a low base, performing a lot better. Also our microbial unit, which is a very attractive modality, actually, which was also part of our biologics unit in the past. A little bit probably a forgotten child, is actually quite an attractive business. You put these three together at the right level, and this creates nicer margins than what we are used to see in the past. Again, the growth is probably a catch-up from last year. Probably looking at 2025 and 2026 in combination is probably more correct in terms of the dynamic of this business. But certainly, the margin would be now at a much more acceptable level also for us.
It will take a while for all of these businesses to reach the group average. So it will still be probably dilutive for a little bit, but much closer actually to our group average of now 32%-34%.
Okay. Amazing. If we focus a bit on cell and gene, obviously driven by the commercial clinical and then commercial success of your partners. You mentioned recently you are manufacturing six approved cell and gene therapies. Do you have some visibility on uphold timelines for additional products? So, how do you think about the pace of new commercial therapies in your portfolio over the next few years?
Yeah. So we have a rich pipeline, but I think probably the risk or the probability of success is probably smaller on the cell and gene side and on average for late-stage compounds. So, I will not do a prediction now, but of course, the future of cell and gene has to be in having more commercial products and being able to actually repeat a similar process over and over again, because this is when you can optimize the process, this is when you can utilize your facilities much better. So I think the future is to have more commercial products, but this will take some time, and I will not do a prediction now as to how many products we will have.
I think back in 2023, we forecast, I think six by 2026 or 2027. So we are there. We have six products. We are quite pleased with that.
Not all are large products, but all are saving lives. All of them are actually important therapies for patients. I think we are in cell and gene to stay in cell and gene. We believe in the modality, we believe in the use of cell and gene, and you have to be willing and capable of riding the waves of cell and gene, because this is certainly something that if this is the only thing you do, it's actually very difficult to actually manage these waves. If this is part of our portfolio, we can actually manage that. We are therefore, so much more attractive to companies because they know we'll be here in two years, we'll be here in five years, we'll be here in 10 years to manufacturing their product, which is more difficult if you are a standalone smaller cell and gene manufacturer.
Perfect. That makes sense. Moving on to the other part of your business, which is integrated biologics. I think when we look at the performance of Lonza in first half, I think it's been obviously very strong. What has been surprising some investors is the mix of this growth where Advanced Synthesis was really strong, as we mentioned. Specialized modalities was very strong. Integrated biologics, I think you're guiding for around 10% growth this year, which is maybe on the lower end of where investor were expecting biologics to grow based on the industry trends. Just if you could sort of coming back on this, is it sort of a business that's getting a bit in a more mature phase? Is it this year is seeing a bit of a sort of phasing in terms of the ramp-up projects?
How to help investors sort of understand the 10% growth we're seeing this year with integrated biologics.
Thanks for the question. I think probably two fundamental things to explain. First of all, we are very pleased with the performance of integrated biologics. We said this in July. They are absolutely delivering on what we expected from the platform. There is no kind of dark cloud or anything that did not work the way we wanted. Fundamentally, when do you grow as a CDMO or how do you grow as a CDMO? You need to be adding capacity. If you see the significant growth we discussed before on ADCs in the platform, this is because you had new capacity coming online. Now, if you think about IMB, there is no large capacity coming online now. What we are doing is we are finishing some of the ramp-ups we had on smaller assets.
We are basically growing the base by squeezing out a little bit more here and there. But there is no large capacity coming online right now, and therefore you need to wait for capacity to come online to create that growth. Once the assets are full, you are basically back at zero growth. This is the way a CDMO grows. When we are promising the market that we will grow 10% to 13% on average over years, this means that we have capacities coming up in the different modalities at different point in time to generate 10% to 13% growth every year. They may not all come equally every year. For biologics, if you think about what we are doing today, we are basically changing Vacaville, making Vacaville CDMO-ready or entirely CDMO-ready, which basically means that Vacaville, for now, is flat.
It is going to be flat until 2024, and then we will start, 2028, then we will start growing. So until then, it is actually even a headwind to growth for the platform because in year-over-year, you basically have CHF 500 million of revenue that is not moving. The next wave of capacity will come from our 6 x 20,000 in Switzerland, in Visp, that is actually starting this year. Over the next two to three years, they will provide growth. Then Vacaville will provide growth starting 2029. In the meantime, we also have some of the fill and finish assets, which are also in IMB, that will provide growth over the next few years starting in 2028. So you only grow with new capacity and therefore 10% for IMB, fully in line with plan and actually we are quite satisfied.
That is very clear. Maybe taking a step back when we think about the industry and the key trends, one of the topics that has been emerging is biotech funding sort of coming back more strongly. Is it something that you have seen? Are you seeing sort of an impact on your business already? To what extent is this important for Lonza? If you can, come back a bit on the biotech funding piece.
Yeah. Biotech funding, obviously, we are pleased to see that the funding is coming back. I think we see also some venture capitals having made money and reinvesting it into early stage compounds. This is not a KPI that we follow too attentively because in the end, early-stage work is a very small part of Lonza. It is roughly 10% of our revenue. So it is financially not the most important piece of our business. However, it is strategically very important, and so we are very interested to see healthy early-stage companies, early-stage compounds, because first of all, we want to capture them early. A compound that we capture early in phase I usually will not leave Lonza. We have a retention rate of 99%, so people that join us early have successful molecules, will stay with us until they are commercial.
So the earlier we can grab these customers, the better. Second, you learn a lot about a molecule. You learn a lot about a company. You know how to deal with the molecule. You know how to scale it. You know how to make it successful commercially. So it is very difficult actually for another CDMO to be more attractive than we are, because we know the molecule so well that we can price it correctly. If you take a compound in the later stage, you do not know exactly how the molecule will scale. You are basically making buffers in your calculation, so you are usually less attractive. So strategically, it is very important to get access to early-stage compounds.
It is very interesting to be in touch with biotech companies, but financially, it is not a big driver. Therefore, no, we do not see it in our numbers today. But I think we see the interest increasing, and we see that actually, the demand is quite healthy.
Okay, amazing. Just one thing I wanted to mention. So you talked about the phasing of growth over time, depending on projects coming in and out. If we think about the margins, what we have seen in the past at Lonza is periods where margins were sort of slowing down or declining because of precisely a wave of new projects starting their ramping up phase. So I guess the question is, could this happen again in the future in terms of new projects coming in at the same time and margin being impacted? Or are you confident that now with the sort of scale you have, you can manage this transition without impacting meaningfully on the downside of your operating margins?
Two aspects as well to this question. I think one, of course, new assets are diluted. Usually, when you construct the assets, you capitalize, so no impact on the P&L. Then you start operating a very fresh, young asset. It is usually underutilized for a few years, and therefore, during that time, this is dilutive. This always happens, and this will continue to happen. There is no way. This is the part of the game. They become accretive when they reach a good enough utilization, and in full peak utilization. This will continue. However, I think there is a difference. We are coming out of a phase where we are investing over 20% of sales into CapEx. This was a catch-up phase. There was also a lot of infrastructure that needed to be updated.
This phase is behind us, and in our organic growth model, we are basically promising a growth of 10% to 13% by investing mid to high teens CapEx in percent of sales. This is the model. You need a healthy market. You need 14%-1 9% of CapEx. With these two components, you generate growth of 10% - 13%. With a level of 14%- 19% of CapEx, we will not go back to this really being visible to you. We will offset this through margin improvements, through productivity, operating leverage, et cetera. The model actually works very well when you are in that band of 14%- 19%. Therefore, yes, there will be continuous dilution, but our promise is to grow margin every year.
Okay, amazing. As you touched a little bit on the sort of CapEx algorithm, can you come back on free cash flow? How should we think about the free cash flow generation of the business going forward? You mentioned CapEx management. Do you have other levers to improve free cash flow conversion, free cash flow generation over time?
Yeah. Free cash flow is an increasingly important It was always important. Obviously, you need cash, but it is increasingly important now for the next phase. I think we have been making sure that the growth is coming. We have been making sure that the margins are coming, and now we need to make sure that also the cash follows. There are several levers to improve cash in our business. One is, of course, CapEx efficiency. You need to build the same cheaper. It is not that we are building less because we still need to generate the 10% - 13% growth. We still need to add assets every year, but the efficiency as to how much dollar you get out of every CapEx dollar needs to be bigger. I think there is a lot of work we do on this.
The next lever is for cash, obviously driving margin in general with more flowing down to cash. Working a lot on trade working capital, making sure that our inventories are optimized, our accounts receivables, payables, so the classical kind of trade working capital management. Here, I think our biggest lever is inventory. We have done continuous progress, but I think this is something that will never end. We are continuously working on better transparency, being able to pool demand and to pool inventory across the world. These are some of the levers that we are pulling to improve cash.
Okay. That is clear. Maybe on M&A. When management did the Capital Markets Day back in December 2024, clearly one of the message was M&A was going to probably become a bigger part of the strategy going forward. You have not really announced major acquisitions since. I guess, was it because you were focusing on carving out and executing on the Capsules business divestment? Was it because you were focusing on organic delivery, on macro policy? Or is there a scarcity of attractive assets at reasonable valuation over that period?
Yeah. I assume a lot of you are involved or have been or have seen M&A, right? This is something that you cannot just decide, "Oh, let us do M&A." I mean, you can do this. You probably will end up overpaying and buying the wrong assets. Making M&A part of our strategy or increasingly making part of our strategy does not mean that we become an M&A machine, and we will be basically overpaying. We will continue to be very diligent and disciplined in investing money and in buying. You need to find the right assets. You need to find the right assets at the right price. For us, to maybe explain what this means, first of all, we need to make sure that the assets we are buying benefit from what we call the Lonza Engine.
This special sauce, these special capabilities that Lonza has, how does this new asset benefit from these skills? Can we actually generate more value out of this asset than by being standalone? For Vacaville, as an example, which is an acquisition for us, it was very clear. It was an underutilized asset that we could turn into a very attractive CDMO asset, where we could then put our existing customers or use our commercial engine to actually introduce new customers that before that never had access to Vacaville. Here the value is very clear. You need to find the assets where there is something that we are bringing that will make this asset worth a lot more than what it was before. This is the first one.
The second one, I think, is financially, depending on what we buy, the added value will be different. Will come either immediately, will come over time. We also bought, maybe you didn't read everything, we bought two small technologies. These small technologies take time to come to fruition. They will generate royalties in the future, but these are small things that have a very different financial profile than something like Vacaville. All these different types of acquisitions that we can do need to be prepared. We need to think about them. We need to make sure that they are adding value, and we can have a strong case. Last but not least, assets are not easy to find.
I think usually, and the conference is organized by Morgan Stanley, many of the large banks are coming with names that we all have in our heads that are basically coming to the market soon. These are usually not things that are very attractive, too expensive, usually not something that we would do. You need to find the assets. You need to go and search for them. You need to be proactive. You need to go to pharma companies saying, "Hey, I could use this asset. Is there something we can do?" This takes time, and this is much more complicated than buying off the shelf.
Okay. That's very helpful. Maybe on the last couple of minutes we have, one of the recurrent question always from investors on this team industry is the balance of supply and demand. I think with a focus on mammalian capacity, in the long run, we see always this very large CapEx announcement from some of the players in the field. What visibility and confidence do you have that the balance of supply and demand remains attractive for CDMOs those next three years?
Yeah. This is obviously something that we are looking at very diligently again and again and again. We do this very extensively for mammalian, which is our biggest business. We do this also for the other modalities, where data sometimes is not as good as for mammalian. But the good thing is that supply is very clear because everybody's announcing everything that they're building. We know exactly the supply that's coming. On demand, we feel very confident. I think there is, if you look at the next several years now in the future, there's actually an overhang on demand. The market is rather getting tighter than moving towards overcapacity. The size of CDMO and the industry is very well utilized and will actually be increasingly utilized in the future. We don't see that risk.
We also don't see that risk given the announcement of many large pharma companies to build. I think we see these investments as shifts into the U.S., but not as globally more capacity. We don't foresee any such risk at this point.
Okay. Amazing. We're coming to the end of the time. Philippe, thank you so much for taking the time to be with us at the conference.
Thank you very much, Thibault. Thanks, everyone.