LZAGY - Lonza: Positive News From Biogen

Summary

• No disclosure in Q3, but positive news ahead.
• Capacity constraint will positively impact Lonza's earnings.
• The CMDO industry almost totally offset raw material inflationary pressure, we reiterate our positive key takeaways, confirming our buy rating target.

Since 2018 , Lonza has no longer published its Q3 accounts ( LZAGY ). The next company's catalyst is the JP Morgan healthcare conference in early January and its FY result disclosure which is scheduled for the 25th of January. Taking advantage of the Q2 numbers, we initiated to cover the biochemical player, providing an outperforming rate based on the following reasons : 1) a strong pipeline of new products, supported by the Lonza R&D franchise, 2) no inflationary pressure from higher raw material costs, given the fact that inputs are provided by Lonza's clients, 3) no logistic costs (inputs again are delivered at clientele expenses), 4) lower exposure to COVID-19 revenues, 5) APAC growth opportunity and 6) a very diversified clients base.

Today, we would like to provide the latest positive updates:

1. Since our buy rating, Lonza has lost almost 7% of its market cap, the company is currently trading at more than 20% EV/EBITDA discount versus its CDMO competitors. On the other hand, Lonza trades at a 7% premium on a P/E ratio basis;
2. Here at the Lab, we are forecasting biologics revenue fee termination for the second part of the year; however, we are still confident that Lonza's growth rate is undervalued. The total fee termination was CHF 90 million, which accounts for 3% of the total company's revenue. Moreover, we are confident that Lonza might re-sell its spare capacity at a higher rate. In addition, after a supply constraint in H1, there will be a rebound in small molecule revenue growth;

3. Inflation pressure is very manageable. CDMO industry represents a unique cost pass-through basis, and if we also include Lonza's productivity improvements in the capsules business, we are very well protected versus the current environment. Here at the Lab, we believe this industry's characteristics are not well-priced by the market. For the above reason, Lonza is usually very cautious; however, the top management left the guidance unchanged for the year-end and reaffirmed the 2024 midterm outlook;

4. Biogen (BIIB), the American biotech multinational company, has recently received a positive green light from the FDA for its drug product called Aducanumab, the first Alzheimer's early-stage treatment. Dementia is a syndrome that provides a deterioration of cognitive function, affecting approximately 50 million people on a global basis. According to estimates, the new drug is forecasted to rapidly become a blockbuster with a significant weight in the global market worth almost $300 billion, probably reaching the size of today's largest drug in size: Humira, which has a turnover of $20 billion per year. This has positive implications for CDMO companies. In particular, for Lonza, the area of ??monoclonal antibodies was already nicely growing (with an estimated average annual growth rate of +7% in the period 2020-2024). Additional capacity building for Biogen's new drug is expected to widen the gap between supply and demand in the short term (2-3 years). According to Lonza, Biogen may need 400KL in addition to its 150KL plant. For this reason, we are estimating a mid-single-digit positive revision in Lonza's earnings per share.

Conclusion and Valuation

Compared to our Q2 results, Lonza is more discounted and we continue to like its growth potential, supported by the latest positive Biogen implication. Therefore, we decide to maintain our target price, valuing Lonza at CHF 650 per share.

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