Lonza Earnings: Strong Commercial Demand Drives Growth and 2023 Outlook Maintained

Lonza LONN provided a first-quarter 2023 qualitative update indicating positive results, and the company is tracking our expectations. Management will release additional details when it reports its half-yearly results in July. The company has benefited from strong commercial demand across its biologics and small molecules businesses, and it has experienced softer demand for pre-clinical and phase 1 services in its cell and gene segment due to biotech funding constraints given macroeconomic headwinds. Lonza’s performance is in line with its full-year trajectory, so management reiterated its 2023 outlook. We maintain our fair value estimate of CHF 620 per share and view shares as moderately undervalued, currently trading in 3-star territory about 9% below our fair value estimate. We maintain our narrow economic moat rating and stable moat trend.

We forecast total sales growth in the high single digits in 2023, reaching CHF 6.7 billion, which reflects continued strong underlying business performance balanced with an expected reduction in COVID-19-related sales following its peak in 2022. In the medium term, we model strong revenue growth in the midteens for Lonza’s biologics and cell & gene segments, and we forecast high-single-digit growth in the small molecules business.

Lonza’s narrow moat rating is supported by the company’s sticky and long-lasting customer relationships. Drug companies tend to stay with trusted suppliers with good track records of regulatory compliance to avoid manufacturing delays. Lonza maintains an extensive network of partnerships with pharmaceutical and biotechnology firms, which leverage the company’s expertise and scale to benefit from access to flexible capacity and manufacturing improvements.