Shares in the global market leader for isolator technology will have been trading on the stock market for two years in October. Those who subscribed at the time of the IPO have done well – the current share price of CHF 80 is well above the initial allocation price of CHF 54. The company is growing strongly, is increasing its profit margin, and has fully met the expectations of investors. With this performance, SKAN Holding truly stands out from the stock market crowd. Schweizeraktien.net felt it was the right moment to quiz CEO Thomas Huber on a number of topical and relevant issues: What role do contract manufacturing companies play? What is “cryogenic storage”? What proportion of sales will the high-margin service business account for in a few years’ time? And what is SKAN doing to improve its environmental footprint?
Mr Huber, since our last interview in January 2022 SKAN stock has recorded a low of CHF 50 and a high of CHF 87.50. Overall, the share price is more or less unchanged from 19 months ago. But there have been all sorts of changes at operating level. The number of installed isolators has risen by 25% to around 1,000 since we last talked. How would you summarize the development of the company over the last year and a half?
SKAN Group has performed very well over this 18-month period. We have achieved our growth targets, and have maintained – and in some cases even expanded – our market position.
Chart: six-group.com
The rapid growth tempo continued in the first half of 2023: Sales rose by 15.6%, EBITDA by 74.1%, and headcount by 97 to 1,269. Growth looks to be accelerating in the second half of the year. What can shareholders expect for the full 2023 year?
As already announced, we are expecting to deliver on our guidance once again in 2023.
In contrast to the majority of companies, SKAN has not really been affected by the market turmoil of recent months. How have you managed that?
Above and beyond the fundamental growth of the biopharmaceutical industry, we are benefiting from the upward growth trend surrounding injectable drugs. Back in 2005, the 20 most important blockbuster medications were all sold in tablet form, whereas 60% are now administered by injection – and based on the development pipelines of our customers, we can expect that figure to reach 75% in a few years’ time. A further boost is coming from extraordinary developments such as the COVID pandemic of recent years, and now the re-shoring trend and GLP-1 medications.
In your presentation of the results, you said that market share at the high end was around 50-60%? What can you tell us about the current competitive situation?
Our competitors in this high-end segment have been the same for many years now. The entry barriers for new providers are very high, so virtually no new competitors have come on the scene.
You revealed that five licensed biopharmaceuticals are now being filled using the closed-vial technology of your 85%-owned Belgian subsidiary Aseptic Technologies, and that a further 400 products are in the licensing and development pipeline. Can you give us a bit more detail on this for our readers and translate this into concrete figures for shareholders?
With closed-vial technology we are selling primary packaging material, i.e. a form of packaging that has direct contact with the medication. For this reason, customers have to undergo stability tests for their medications in this packaging across the various clinical phases. Viewed on a purely statistical basis, very few products actually make the leap to commercial viability, and even then this process can take years. This makes it all the more important that we have many – at the moment around 400, as you say – products in the various clinical phases, thereby increasing our chances that some really do make this quantum leap at the end of the day. Every product that makes it to market increases the sale of vials and therefore the volume of our Services&Consumables business. And as things stand, there is a good chance that further products will come on to the market by the end of the year.
One of the growth drivers is the fact that some three-quarters of new biopharmaceuticals – such as hormone preparations, cancer drugs, as well as gene and cell therapies – need to be injected, are heat-sensitive, and therefore have to be produced, processed and packaged under aseptic or aseptic-toxic conditions. But on top of this, re-shoring has now emerged as a relatively new trend. What can you tell us about this phenomenon?
Re-shoring is ensuring that growth actually takes place in the West, i.e. in Western Europe and North America. We are the clear market leader in the West. In Asia we are only active in countries with a high standard of medical provision, such as Japan, South Korea and Singapore, whereas in the other countries of this region we only service the “tip of the iceberg” – i.e. pharma companies that want to export their products to the West.
SKAN has more than 1,000 active customers, a figure that includes the majority of large pharma and biotech companies. You have made it clear that you receive many follow-up orders that are in line with the standard of the initial orders, which should in turn result in economies of scale. What does this mean for your margins?
Aseptic filling processes are still very specific at the moment, which means there is considerable difference between isolator units. That’s true of follow-up orders too. So follow-up orders actually have a similar margin profile to initial orders.
But in the Services&Consumables segment the margins are much higher than they are for the isolator systems, while at the same time the customer base grows with every newly installed isolator. How do you envisage the share of sales accounted for by this business – which currently stands at 25% – developing over the next five years, and what will the repercussions of this have for SKAN’s margins?
We are strongly focused on the strategy of further increasing the share of Services&Consumables, and not just through growth of our installed base, but also in particular through new initiatives such as Pre-Approved Services. In the longer term – so not in the next five years – the Services&Consumables business should achieve a sales proportion of 50%. It goes without saying that this will also boost SKAN’s margins.
You are forecasting an annual growth rate for aseptic production of 11.3% to a level of EUR 2.3 billion by 2026, of which EUR 1.5 billion should relate to the high-end business. We’ve already discussed a number of growth drivers. What role do contract manufacturing companies such as Lonza, Siegfried and Catalent play in this field?
Contract manufacturing companies or so-called “toll manufacturers” now account for around half of all our projects. This is attributable to the trend of major pharma companies increasingly outsourcing production to toll manufacturers, even for high-end products.
In your presentation you made it clear that 86% of all business volume over the last nine years has come from your top 50 customers. Although there have been no unhealthy concentrations to date, might this not change with the new diabetes and obesity therapies of your customers Novo-Nordisk, Eli Lilly and Roche?
We’re not expecting that to be a problem. A number of other companies also have GLP-1 products in various clinical phases at the moment. So going forward, many of our customers are likely to be involved in these products too.
Let’s touch for a moment on a fascinating area, namely the “cryogenic storage” of aseptically-filled biopharmaceuticals. Put simply, this should be a boon for patients and a further imposing obstacle for the competition, shouldn’t it?
Cryogenic storage involves the deep-freezing of substances in liquid nitrogen at a temperature of minus 196 degrees Celsius. This is required for some drugs where it is absolutely crucial that living cells are preserved. Our closed-vial technology is particularly well-suited to this process, as it remains robust even under these extreme conditions, without breaking.
What do the guardians of commercial competition, i.e. anti-trust and monopoly authorities, have to say about SKAN’s dominant market position?
We have achieved our market positioning under our own steam, so without taking over our competitors, and our technological leadership is based first and foremost on expertise, and less on patent protection. I don’t see how competition authorities could have any problem with this state of affairs. But in any case, they have never come knocking on our door.
What can you tell us – or perhaps I should say, what are you allowed to tell us – about the affair involving the Office of the Attorney General of Switzerland and its investigations?
The investigations of the Office of the Attorney General are still ongoing. Obviously SKAN will provide information on this matter as soon as any findings emerge. But let’s be clear about one thing: This investigation affects only private individuals, not the SKAN Group, and has no impact on our business.
In the first half of 2023 the EBITDA margin came in at a record level of 14.5%. What are your medium-term targets? What should shareholders expect?
Our communicated medium-term target is an EBITDA margin in the upper teens. Beyond the medium-term horizon we see potential for a further increase. The drivers of this include a higher degree of standardization of our systems, higher sales volumes of consumables such as closed vials, our Pre-Approved Services business, which will be delivering sales revenues and an attractive margin from 2026 onwards, and the generally greater weighting of the Services&Consumables segment.
How would you summarize your efforts and indeed your progress overall in the area of decarbonization and sustainability since the IPO?
Decarbonization and sustainability are important issues for SKAN. Our products make it possible to fill potentially life-saving medications safely. Our isolators consume between 10 and 20 times less energy than conventional cleanrooms, thereby making a clear contribution to decarbonization. At the same time, the SKAN Group acts sustainably itself by minimizing the negative repercussions of its business activity for the environment and fulfilling its responsibilities to employees. For example, we have succeeded in reducing energy consumption at our headquarters by some 20% year-on-year, and are investing a great deal in decentralization, including through the implementation of augmented reality solutions to minimize air travel. For us, diversity also means employing people with disabilities. These employees make an important contribution to the diverse working culture at SKAN.
Many thanks for these informative responses, Mr Huber.
