Lonza calls time on capsules as mAbs and CGT drive core CDMO strategy

Wolfgang Wienand took the reins at Lonza earlier this year and yesterday presented his strategy for future growth: out with Capsules & Health Ingredients (CHI) and all in on the Swiss firm’s core contract development and manufacturing organization (CDMO) business.

“Since I joined Lonza in July 2024, I have spent time reviewing the business with the leadership team and identifying areas with unique strengths as well as areas where we can optimize value,” he said in an investor update. “Today, we have shared the plans for our One Lonza strategy, propelled by the Lonza Engine, and a revised organizational structure which will support our ambition to create long-term value for our customers and our shareholders.”

Lonza has been in the CHI space – which incorporates delivery technologies for pharmaceuticals and nutraceuticals – for over 50 years, having launched its hard gelatin capsules Capsugel, Coni-Snap, Hard Gelatin Capsule in the 1970s. The unit has since grown both organically and through M&A (Lonza acquired encapsulating giant Capsugel for $5.5 billion in 2017, for example) and in 2023 it pulled in CHF 1.16 billion ($1.3 billion), representing 17% of Lonza’s total sales.

However, this represented an 8.3% drop on the previous year, attributed to lower post-pandemic nutraceutical demand and customer inventory destocking. The division has also suffered negative impacts from higher raw materials costs and exchange rates.

Details of the exit remain preloiminary, with Wienand telling investors they will be revealed “at the appropriate time and in the best interest of shareholders and stakeholders.”

However, the decision to exit the space reflects Lonza’s ambition to become “a pure-play CDMO business” supporting both small biotech and big pharma, he said. “This will allow us to achieve and maintain leadership across modalities with high therapeutic and commercial value, while pioneering the manufacturing technologies of the future.”

This includes an increased focus on the biologics and cell and gene therapy (CGT) sectors, which the firm sees coming back to full strength following several difficult years. “Of note, the company expects later-cycle modalities, such as monoclonal antibodies (mAbs), to return to mid-high single digit growth over the mid-term, while more novel technologies like cell and gene therapies and antibody drug conjugates (ADCs) should present strong double-digit growth vectors,” Jefferies analyst Tycho Peterson wrote on the back of the investor day.

Vendor dysphoria

Peterson also noted Lonza management is eying up opportunities in its net working capital management by improving supply chain process and governance, as well as looking to standardize its raw materials, particularly in the case of single-use technologies.

“Management seemed to be signaling this more as a phenomenon across customers (i.e., altering drug specs to drive more input overlap between Lonza contracts); however, we think vendor consolidation could also be implied,” he wrote.

Vendors have been implementing their core services over the past few years by adding CDMO services. Thermo Fisher’s acquisitions of Patheon and Brammer Bio, for example, has made the firm a titan in the life sciences space, with full biomanufacturing operations complemented by inhouse supply of equipment and consumables. Lonza could be on the precipice of doing similar, Peterson suggested.

“If single-sourcing were to become more prevalent, we think customers could tilt toward suppliers which were less aggressive on post-pandemic pricing, i.e., anecdotally Thermo > Sartorius, Millipore (Merck KGaA) and Cytiva (Danaher).”

Vacaville update

Management also gave an update on its $1.2 billion acquisition of Roche/Genentech’s large-scale biologics facility in Vacaville, California. The deal closed in October and brought bioreactor capacity of about 300,000 liters and 800 new colleagues into Lonza’s network.

According to the team, the site is fully operational under Lonza and a first CDMO contract from the site has been signed.

While the plant is unlikely to impact 2024 revenues, Lonza expects around half a billion CHF from the site and for it to be fully integrated within its global network over the next 12 months.