CDMO Focus And Vacaville Acquisition To Drive Operational Improvements By 2025

Key Takeaways

• Focus on CDMO business and Vacaville acquisition to drive revenue growth and boost sales.
  
• Strategic CHI exit and investment in growth to enhance margins and earnings.
  
• Dependency on mRNA revenue and currency fluctuations pose significant risks to Lonza's financial stability and long-term growth prospects.

Catalysts

Supplies various products and services for pharmaceutical, biotech, and nutrition markets in Europe, North and Central America, Latin America, Asia, Australia, New Zealand, and internationally.

• Lonza is focusing on its CDMO business, expecting revenue growth in the low teens as it adjusts for the high base in 2023, indicating a positive revenue trajectory.
  
• The Vacaville acquisition is anticipated to positively impact top-line sales, projected to contribute approximately CHF 0.5 billion in revenue in 2025, boosting overall revenue.
  
• The company plans to invest heavily in growth, with CapEx expected to be in the low teens as a percentage of sales, supporting capacity expansion and further revenue growth.
  
• Lonza's strategic exit from the CHI business is expected to refocus operations and enhance net margins by streamlining its portfolio.
  
• Lonza anticipates a substantial margin expansion for its core CDMO business, aiming for a CORE EBITDA margin of around 30%, enhancing overall earnings.

Lonza Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lonza Group's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 15.8% in 3 years time.
• Analysts expect earnings to reach CHF 1.5 billion (and earnings per share of CHF 21.57) by about February 2028, up from CHF 636.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CHF1.9 billion in earnings, and the most bearish expecting CHF1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.7x on those 2028 earnings, down from 66.1x today. This future PE is lower than the current PE for the GB Life Sciences industry at 36.4x.
• Analysts expect the number of shares outstanding to decline by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.25%, as per the Simply Wall St company report.

Lonza Group Future Earnings Per Share Growth

Risks

• Lonza's reliance on COVID-19 related mRNA revenues in 2023 set a high base, and the absence of this revenue in 2024 could contribute to a decline or slowdown in revenue growth, affecting overall sales performance.
  
• The decision to transform Lonza into a pure play CDMO by exiting the CHI business could pose risks if synergies do not materialize as expected, potentially impacting net profit margins.
  
• The intense capital expenditure required to maintain and grow operations, projected to be a mid-high single-digit percentage of sales, could stress cash flow and affect profitability if growth does not meet expectations.
  
• The potential for diminishing growth in Phase I and II pharmaceutical projects, which represent 30% of Lonza’s pipeline, could decrease future revenue and challenge long-term growth forecasts.
  
• Currency fluctuations, notably the appreciation of the Swiss franc against the US Dollar and Euro, have already impacted Lonza's top and bottom lines, continuing to pose financial risk to revenue and earnings stability.

Valuation

• The analysts have a consensus price target of CHF647.48 for Lonza Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF740.0, and the most bearish reporting a price target of just CHF550.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF9.6 billion, earnings will come to CHF1.5 billion, and it would be trading on a PE ratio of 33.7x, assuming you use a discount rate of 4.2%.
  
• Given the current share price of CHF582.0, the analyst's price target of CHF647.48 is 10.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.