Lonza's Strong H1 2025 Performance and Upgraded CDMO Outlook: A Strategic Buy Opportunity in the Biopharma CDMO Sector

The biopharmaceutical Contract Development and Manufacturing Organization (CDMO) sector has long been a fortress of margin resilience and structural growth, driven by the rising complexity of drug development and the industry's shift toward outsourcing. Lonza (LONN.SW), a global leader in this space, has cemented its position as a standout performer in H1 2025, delivering results that underscore its strategic agility and operational excellence. With a CDMO outlook upgraded to near 20% constant exchange rate (CER) sales growth and a core EBITDA margin approaching 30%, Lonza is not just keeping pace with the sector—it's accelerating ahead of it.

Resilient CDMO Business: A Magnet for Demand

Lonza's CDMO segment has become a powerhouse, fueled by robust commercial demand across its Biologics, Small Molecules, and Cell & Gene Therapy platforms. In Q1 2025 alone, the company secured a healthy pipeline of contract signings, including a third long-term customer agreement at its Vacaville, California, site—a facility acquired in 2023 to bolster its U.S. footprint. This site, while lower-margin, is a critical component of Lonza's strategy to meet the surging demand for highly potent APIs and complex biologics.

The Biologics division, in particular, has seen a surge in momentum, with strong execution in mammalian cell culture and bioconjugate technologies. These capabilities are now in high demand for antibody-drug conjugates (ADCs), a class of therapies projected to grow at a double-digit CAGR over the next decade. Lonza's early-stage services, which act as a funnel for long-term partnerships, are operating at near full utilization, a testament to its ability to lock in recurring revenue.

Margin Stability: A Structural Advantage

While many CDMO peers grapple with margin compression due to pricing pressures and supply chain volatility, Lonza's margin profile remains a standout. Its core EBITDA margin is on track to approach 30% in 2025, driven by disciplined cost management, scale-driven efficiencies, and a portfolio skewed toward high-margin, complex projects. Even when excluding the Vacaville site's drag, organic CER sales growth is expected to hit the low teens, with margins showing clear improvement.

The company's capital allocation discipline further reinforces this margin stability. Lonza recently concluded a share buyback program, repurchasing 4.24 million shares for CHF 2 billion at an average price of CHF 471.73. This move, combined with its focus on organic growth through new facilities (e.g., the Visp bioconjugation plant), positions the company to deliver compounding returns without overleveraging its balance sheet.

Structural Tailwinds: Why the CDMO Sector is a “Buy the Rumor” Play

The biopharma CDMO sector is not just cyclical—it's structural. Three megatrends are reshaping the industry:
1. Rising R&D Costs: Developing a new drug now costs over $2.6 billion, pushing pharma companies to outsource to specialized partners.
2. Regulatory Complexity: The demand for end-to-end CDMO solutions (from molecule to market) is growing as regulators demand higher standards for quality and traceability.
3. Geopolitical Diversification: Lonza's global footprint—spanning Switzerland, the U.S., and Asia—provides a natural hedge against trade policy risks. Its U.S. operations, in particular, are a strategic asset as tariffs and nearshoring trends drive pharma manufacturing back to North America.

Strategic Catalysts: Carve-Out of CHI and Operational Reorganization

Lonza's decision to streamline its operating model under the “One Lonza” strategy—replacing its old divisional structure with three CDMO platforms (Integrated Biologics, Advanced Synthesis, and Specialized Modalities)—is a game-changer. This reorganization simplifies decision-making, accelerates time-to-market for new projects, and enhances cross-platform collaboration.

Additionally, the potential carve-out of its Capsules & Health Ingredients (CHI) business is a near-term catalyst. While CHI is returning to growth (mid-single-digit CER sales and mid-20s EBITDA margins), its standalone potential could unlock significant shareholder value. Lonza has already engaged external advisors and is preparing for a 2025-2026 exit, which would allow the company to focus entirely on its high-margin CDMO core.

Investment Thesis: Buy for the Long Game

Lonza's H1 2025 results and full-year guidance present a compelling case for immediate investment. The company is operating at the intersection of three powerful forces:
- High-margin growth: A CDMO business with near 20% CER sales growth and a margin approaching 30%.
- Structural demand: A sector poised to grow at ~10% annually, driven by biologics, ADCs, and cell & gene therapies.
- Strategic clarity: A streamlined operating model, disciplined capital allocation, and a clear path to unlocking value through CHI's potential spin-off.

While the stock has traded at a premium to its peers (driven by its superior margin profile and visibility), the current valuation is justified by its long-term cash flow potential. Investors who act now can capitalize on a company that is not just surviving in the CDMO sector—it's redefining the rules.

Conclusion: A Fortress in a High-Margin Sector

Lonza's H1 2025 performance is a masterclass in strategic execution. By leveraging its technological edge, global footprint, and capital discipline, the company has positioned itself as a leader in a sector where moats are widening and margins are defensible. For investors seeking a long-term hold in a high-conviction name, Lonza offers a rare combination of growth, stability, and structural tailwinds—making it a must-own in the biopharma CDMO space.

Buy Lonza (LONN.SW) at current levels, with a target of CHF 550 (a 16% upside from CHF 472 as of April 2025).