Lonza H1: Biologics biz boosted by $130m Allakos cancellation fee

Capacity cancellations are both common and ‘integral’ in the CDMO space says Lonza, as it reports a $130 million termination fee as a one-time item in its first half 2022 financials.

For the first half 2022, contract development and manufacturing organization (CDMO) Lonza reported sales within its biologics division of CHF 1.63 billion ($1.68 billion), up 26% on the year prior.

The company attributed this to sustained demand across end markets, supported by capacity expansions ramp-ups, but the period was also supported by a large customer cancellation fee.

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“Such cancellation fees are integral to the CDMO business model,” Philippe Deecke, CFO, said on a conference call. “They provide compensation for lost time and allow us to time to reallocate capacity should a customer decide to stop a program.”

Lonza, when contacted, would not comment on the specific customer but confirmed to BioProcess Insider such fees “represent part of the CDMO business model […and] allow us to repurpose assets and manage any downside.”

However, the customer itself – Allakos – made the cancellation public in an SEC filing in February, which stated that under terms of the Termination Agreement it was to pay Lonza CHF 126 million ($130 million), 95% of which within 30 days.

Allakos first entered an agreement with Lonza in April 2020 for the production of lirentelimab (also known as antolimab, or AK002) for the treatment of eosinophil and mast cell related diseases.

However, in December 2021, Allakos reported the molecule had failed in two late-stage studies, leading to the company to abandon the program.

According to Deecke, while cancellation fees are common, the size of this one is newsworthy as it represents roughly an impact of 3% on Lonza’s sales with the respective EBITDA impact.

“The customer cancellation fee has also accelerated sales revenue that would otherwise have been spread across the entire year. As we do not expect to fill the release capacity within the year, the positive H1 impact will be neutralized for the year.”

CEO Pierre-Alain Ruffieux added on the call that Lonza’s business is to “resell capacity,” with the intent to resell the Allakos space within six to 18 months.

The full Allakos-Lonza Termination Agreement can be found here.