Lonza's Q1 Surge: A Catalyst for Long-Term Growth?

Lonza Group (SIX: LONN), a global leader in pharmaceutical manufacturing and biotechnology services, has delivered a compelling Q1 2025 update, showcasing robust financial performance, strategic progress, and a disciplined execution of its long-term growth strategy. With its Contract Development and Manufacturing Organization (CDMO) division driving sales growth approaching 20% (CER) and a core EBITDA margin nearing 30%, Lonza is positioning itself as a key beneficiary of the biopharma industry’s expansion. Let’s unpack the details to assess whether this momentum is sustainable and what it means for investors.

The CDMO Engine: Growth and Margin Expansion

The CDMO division, excluding the Capsules & Health Ingredients (CHI) segment, remains Lonza’s growth powerhouse. Q1 results confirm its 20%+ CER sales growth trajectory, fueled by strong demand across biologics, small molecules, and specialized modalities. Notably, the newly acquired Vacaville facility (from Roche) contributed approximately CHF 0.5 billion in sales, though at lower margins. Excluding Vacaville, organic CDMO sales are expected to grow at a low-teens CER rate, with margin improvements expected as operational efficiencies take hold.

The division’s margin target—approaching 30%—is underpinned by high utilization in early-stage services (e.g., Mammalian and Bioconjugates) and a focus on high-value contracts. Lonza’s “One Lonza” restructuring, which simplifies its operations into three business platforms (Integrated Biologics, Advanced Synthesis, and Specialized Modalities), aims to further streamline decision-making and enhance cross-divisional synergies.

CHI Division: Recovery Underway

The CHI segment, which had struggled with demand volatility, is showing signs of stabilization. Lonza expects low-to-mid-single-digit CER sales growth in 2025, alongside a mid-20% core EBITDA margin, as its pharmaceutical capsules and Dosage Form Solutions businesses recover. While nutraceutical capsule sales remain constrained by lower pricing, Lonza’s adoption of its new D90 capsule technology has improved operational efficiency, supporting margin expansion.

Importantly, Lonza is preparing to divest the CHI division entirely, having mandated external advisors in Q1 to advance carve-out measures. This strategic move aligns with Lonza’s focus on its core CDMO business and could unlock shareholder value once completed.

Operational Momentum and Capital Allocation

Lonza’s Q1 update emphasized progress on its $2.3 billion CapEx program (2022–2025), with key facilities advancing on schedule:
- Visp, Switzerland: The new highly potent API facility began ramp-up in Q1, while a large-scale Mammalian drug substance facility is set for initial GMP operations in H1 2025.
- Bioconjugation Facility: Construction is progressing, with operations expected between 2027–2028.
- Stein Facility: A commercial-scale aseptic drug product facility will now start in 2027, delayed slightly due to equipment timelines.

These investments position Lonza to capitalize on rising demand for complex biopharmaceuticals, such as gene therapies and antibody-drug conjugates. Additionally, Lonza’s Q1 share buyback program, which repurchased 4.24 million shares (CHF 2 billion) at an average price of CHF 471.73, signals confidence in its valuation and future cash flows.

Geopolitical Resilience and Financial Health

Lonza’s global footprint—spanning 12 countries and including a strong U.S. presence—buffers it from geopolitical risks like tariffs. The company stated it does not anticipate material financial impacts from potential pharmaceutical tariffs, a key advantage over peers with less diversified operations.

Financially, Lonza’s 2024 baseline (CHF 6.6 billion in sales, 29% core EBITDA margin) provides a solid foundation for 2025’s higher targets. With CHF 2 billion in free cash flow (2024) and a CHF 4.00 dividend per share proposed for 2025 (unchanged from 2024), Lonza balances growth investments with shareholder returns.

Conclusion: A Strong Foundation for Sustained Growth

Lonza’s Q1 results are a clear win for its strategy of focusing on high-margin CDMO services and strategic divestitures. The 20%+ sales growth, margin expansion, and disciplined capital allocation—backed by its $2.3 billion CapEx program—create a compelling case for long-term investors. Key data points:

• CDMO CER sales growth: Approaching 20%, with core margins nearing 30%.
• CHI recovery: Mid-20% EBITDA margins by 2025, with divestiture plans advancing.
• Operational capacity: New facilities in Visp and Stein will support demand through the late 2020s.
• Financial resilience: Strong free cash flow and a robust balance sheet.

While risks remain—such as execution delays in facility ramp-ups or slower-than-expected CHI divestiture—Lonza’s diversified portfolio and industry tailwinds (e.g., rising biopharma R&D spend) mitigate these concerns. For investors seeking exposure to the pharmaceutical manufacturing boom, Lonza’s Q1 performance underscores its status as a well-positioned, high-quality growth story.

In short, Lonza’s Q1 surge isn’t just a snapshot of strong execution—it’s a preview of sustained momentum.