Interim Management Report

Economic and Sector Report

The sectors in which the Sartorius Group is active differ in their dependence on the economy. The Bioprocess Solutions Division operates in an environment that is largely independent of economic fluctuations. By contrast, the Lab Products & Services Division conducts its business activities in sectors in which development is more strongly affected by economic factors.

Coronavirus Pandemic with Strong Impact on the Global Economy Since the First Quarter

According to the most recent data of the OECD, the world economy considerably weakened in the first quarter of 2020, compared with the same period last year, due to the global impact of the coronavirus pandemic. The reasons behind this development have been the lockdowns imposed by governments to contain the spread of the pandemic. First introduced in China in January, these shelter-in-place rules were extended to many other countries by the end of the first quarter and directly or indirectly curtailed economic activities to a strong degree.

In the European core markets of Sartorius, this caused a significant decline in gross domestic product (GDP).While economic output in Germany decreased by an estimated 2.2% (2019: +0.5%), the French and Italian economies shrank by 5.3% (2019: +0.5% and +0.2%, respectively). Economic activity in the U.K. declined 2.2% (2019: +0.7%). On the whole, the GDP of the entire European Union dropped by 3.2% (2019: +0.6%). The USA, the world’s largest economy, saw economic output fall by 1.3% in the first quarter (2019: +0.8%) due to the delayed effects of the coronavirus pandemic. In the Asia | Pacific economic region, only India was able to report moderate economic growth of 0.7% (2019: +1.4%) while in China, the country first affected on a larger scale by restrictions due to coronavirus, the decline compared with the same quarter of the previous year was 9.8% (2019: +1.4%). Sartorius also generates significant shares of sales revenue in South Korea and Japan. While South Korean GDP was down 1.3% (2019: -0.3%), the decline in Japan was 0.6% (2019: +0.6%).

Sources: OECD: Quarterly National Accounts, June 2019.

Biopharmaceutical Market Growing Considerably

Sartorius’ key customer groups include the biopharmaceutical and pharmaceutical industries as well as public research institutions. In addition, the company counts quality assurance laboratories in the chemicals and food industries among its customers. Accordingly, the progress of the Group's business depends on developments in these industries.

In 2019, the period to which the most recent data available refer, analyses of various market observers showed that the global pharmaceutical market developed positively yet again, recording an increase of approximately 4% to 5%. Within this market, the segment for medications and vaccinations manufactured using biotech methods has grown faster than the rest of the pharmaceutical market for many years. The biopharmaceutical market was estimated at a volume of €235 billion, an increase of approximately 8% to 9% over 2018. The steadily growing significance and acceptance of biologics is reflected in the increasing share of sales revenue in the global pharmaceutical market and the development activities of the pharmaceutical industry. For example, biopharmaceutical compounds account for more than 40% of the R&D pipeline.

Growth of the biopharmaceutical market fundamentally depends more on medium- to long-term trends than on short-term economic developments. In the process, significant impetus is provided by the world’s rising demand for medications and the approval and market launch of innovative biopharmaceuticals. The expanded range of indications for approved medications and their further market penetration are also growth factors. Against this backdrop, significant impacts of the coronavirus pandemic on first-half market growth are not to be expected. Yet market watchers assume that in the current year, the pandemic will cause pharmaceutical companies to partially delay carrying out their clinical trials, which are prerequisite to new drug approvals. This could lead to delayed market approvals for some medical drugs.

Moderate Growth in the Lab Market; Indicators Point to a Slowdown

The global laboratory market reached a volume of around €54 billion in the past year and, according to the estimates of several market observers, has been growing annually by 3% to 4.5%. Market growth is related to the levels of research and development spending in the individual end markets, among other factors. Parts of the laboratory market are influenced by economic cycles. Macroeconomic indicators for the first half of 2020 suggest that growth is likely to have slowed down overall, compared with the same period a year earlier, in connection with the global economic consequences of the coronavirus pandemic.

Sources: IQVIA Institute: Global Medicine Spending and Usage Trends. Outlook to 2024, March 2020; Evaluate Vantage 2020 Preview, December 2019; BioPlan: 17th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production, April 2020; Daedal Research: Global Biologics Market: Size, Trends & Forecasts, December 2019; BioPlan: Covid 19: Impact on Bioprocessing and Outsourcing, May 2020

• Sales revenue, order intake and earnings with double-digit growth rates
• Strong performance of the Bioprocess Solutions Division (BPS); moderate growth in the Lab Products & Services Division (LPS)
• Growth and earnings forecast for the full year of 2020 raised
   

Strong First Half in 2020 for Sartorius; High Demand for Products of the BPS Division

Sartorius closed the first half of 2020 with significant double-digit growth in sales revenue and order intake. Based on constant currencies, Group sales revenue rose 17.9% to €1,056.8 million; the reported increase was 18.1%. Order intake surged 27.5% in constant currencies (reported: +27.8%) to €1,244.8 million. Growth was mainly driven by the very dynamic business performance of the Bioprocess Solutions Division. The Lab Products & Services Division developed moderately in an economic environment weakened by the coronavirus pandemic. As expected, close to 4 percentage points of sales growth were contributed by the most recent acquisitions, namely selected Danaher life science businesses, which have been consolidated since May 2020, as well as a majority stake purchased in the cell culture media specialist Biological Industries, consolidated since December 2019.

1 In constant currencies

All business regions of the Group increased their revenues by double digits. In EMEA, the region that contributed the highest share of sales of around 40%, revenue stood at €419.5 million, up 16.0% in constant currencies (reported: +15.9%). The Americas region, which accounted for some 35% of total consolidated sales, recorded the highest momentum, with business rising 19.7% in constant currencies (reported: 21.1%) to €373.1 million. The Asia | Pacific region, which generated around 25% of total Group sales, saw revenue rise by 18.4% in constant currencies (reported: +17.7%) to €264.2 million.

Overproportionate Increase in Underlying Earnings

The Sartorius Group uses underlying EBITDA (earnings before interest, taxes, depreciation and amortization and adjusted for extraordinary items) as the key profitability indicator.

In the first half of 2020, underlying EBITDA of the Sartorius Group rose overproportionately with respect to sales, by 23.5% year over year to €293.5 million. The corresponding Group margin increased from 26.6% to 27.8%. While the most recent acquisitions did not have any significant impact on earnings as expected, foreign currencies had a slightly negative impact of close to 0.5 percentage points.

Consolidated EBIT, including extraordinary items of -€26.1 million (H1 2019: -€10.6 million), depreciation and amortization, amounted to €188.3 million compared with €166.6 million in the previous year. Extraordinary items were primarily related to the integration of the company’s most recent acquisitions, as well as for expenses incurred for various cross-divisional projects, restructurings and refocusing of the company’s brand identity. The consolidated EBIT margin amounted to 17.8% (H1 2019: 18.6%).

The financial result was -€20.3 million for the first half of 2020, relative to -€9.9 million for the prior-year period. This change is essentially due to financing of the company’s most recent acquisitions.

Net profit for the first six months of 2020 rose by 2.8% to €117.6 million relative to €114.4 million a year ago. The Group’s net profit after non-controlling interest totaled €81.1 million compared to €82.3 million in the prioryear period, with non-controlling interest accounting for €36.5 million (H1 2019: €32.1 million). The expected tax rate of the Sartorius Group for fiscal 2020 will be around 30% (previous year: 27%). This increase by around 3 percentage points is essentially due to the accounting treatment of tax risks. The higher tax rate was already pplied to first-half accounting.

Relevant Net Profit Substantially Up Year over Year

The relevant net profit attributable to the shareholders of Sartorius AG rose by 22.4% from €101.5 million to €124.3 million. This profit figure is calculated by adjusting for extraordinary items and eliminating non-cash amortization, and is based on the normalized financial result as well as the corresponding tax effects for each of these items. Underlying earnings per ordinary share totaled €1.81 (H1 2019: €1.48) and €1.82 per preference share (H1 2019: €1.49).

1 Financial result excluding fair value adjustments of hedging instruments and currency effects relating to financing activities

2 Income tax considering the average group tax rate, based on the underlying profit before tax.

Operating Cash Flow Significantly Increased

In the first six months of the current fiscal year, the Sartorius Group significantly increased its cash flow from operating activities. This figure stood at €215.4 million, up from €165.1 million a year ago, which equates to a gain of 30.4%. The development essentially reflects the rise in earnings; in addition, the sale of trade receivables of approximately €88.7 million within the scope of a factoring program had a positive effect.

Cash flows from investing activities decreased in the reporting period by 19.5% to -€93.3 million. The ratio of capital expenditures (CAPEX) to sales in the first half of 2020 was 8.5% relative to 12.8% in the previous year.

Key Balance Sheet and Financial Indicators Remain Robust; Influenced by Acquisitions

The balance sheet total of the Sartorius Group stood at €3,850.4 million for the period ended June 30, 2020, and was thus €981.8 million higher than the figure of €2,868.5 million reported as of December 31, 2019. This increase is mainly attributable to the acquisition of life science businesses from Danaher, which have been consolidated since May 2020.

Equity of the Sartorius Group rose in the reporting period from €1,093.2 million as of December 31, 2019, to €1,157.4 million. The equity ratio of the Group continued to remain at a very robust level of 30.1%, even after the closing of the acquisitions (December 31, 2019: 38.1%).

In the reporting period, gross debt rose due to the company’s acquisitions from €1,068.5 million as of December 31, 2019, to €1,860.3 million as of June 30, 2020. Net debt stood at €1,669.6 million at the end of the reporting period, relative to €1,014.0 million as of December 31, 2019. The ratio of net debt to underlying EBITDA for the past 12 months increased as expected, from 2.0 at year-end 2019 to 2.8 for the period ended June 30, 2020.

Number of Employees Increases

As of June 30, 2020, the Sartorius Group employed a total of 9,729 people worldwide. Compared with December 31, 2019, head count thus rose by 693 or around 7.7%. The number of employees in EMEA increased in the reporting period by around 5.5% to 6,497. In the Americas, Sartorius employed 1,727 people as of the end of the reporting period (December 31, 2019: 1,554), equaling an increase of 11.1%. From a geographical perspective, the Asia | Pacific region reported the highest staff increase by 13.8% to 1,505 people.

Bioprocess Solutions Division Continues Very Dynamic Growth

Based on high demand across all product categories, the Bioprocess Solutions Division grew significantly in the first half of 2020 at a double-digit rate, by 21.3% in constant currencies (reported: +21.6%), to €809.3 million. Initial consolidation of the Danaher businesses and of Biological Industries accounted for a good 2 percentage points of growth.

First-half order intake in 2020 surged at an even slightly stronger rate, by 33.5% in constant currencies (reported: +33.9%), to €984.9 million. The coronavirus pandemic had a positive effect on growth and resulted in additional demand for Sartorius products used to manufacture vaccines and antiviral medications. Strong project business, particularly in the Asia | Pacific region, also contributed to substantial order intake.

Regionally, sales in the EMEA were up 17.9% year over year, and the Americas region again saw significant revenue growth, up 22.2% against a strong prior-year base. The Asia | Pacific region showed the highest momentum, with sales rising by 25.5%. (All rates of regional change in constant currencies).

1 In constant currencies

2 Acc. to customers' loaction

Underlying EBITDA of the division grew by 29.1% to €247.2 million and thus at a significantly overproportionate rate in relation to sales. Despite slight dilution by currency effects and the most recent acquisitions, the division’s margin was driven by economies of scale, rising to 30.5%.

Regarding the corresponding customer groups and to optimize the sales structure, two businesses were reallocated between the two divisions in the first quarter of 2020, leading to a slight adjustment in the divisions’ prior-year figures. There were no adjustments at the Group level.

Lab Products & Services with Moderate Growth

In the first half of 2020, the Lab Products & Services Division increased its revenue by 8.1% (reported: +8.1%) against a strong prior-year base to €247.5 million. While the softer economic environment that was negatively affected by the pandemic had a dampening effect on demand, primarily for laboratory instruments, the most recent acquisitions contributed close to 9 percentage points to sales growth.

Order intake also developed positively, rising by 8.9% in constant currencies (reported: + 8.9%) to €259.9 million.

1 In constant currencies

2 According to customers' location

Growth in the regions of EMEA and the Americas was 11.0% and 9.7%, respectively. The Asia | Pacific region was particularly hard hit economically by the timing of the coronavirus pandemic and increased its sales revenue by 2.5%. (All rates of regional change in constant currencies.)

Because of lower capacity utilization at the beginning of the year and a negative currency impact of a good 0.5 percentage points, underlying EBITDA of the Lab Products & Services Division after the first six months was at the prior-year level of €46.4 million (+0.4%). In the reporting period, initial consolidation of the Danaher businesses had an overall slightly positive effect. The division’s underlying EBITDA margin was 18.7%.

The opportunities and risk situation of the Sartorius Group has not materially changed since the publication of its 2019 Annual Report. For this reason, please refer to a detailed description of the opportunities and risks as well as the risk management system for the Sartorius Group on pages 57 et seq. and 65 et seq. of the 2019 Annual Report.

Global Economy Strongly Impacted by the Coronavirus Pandemic

With the global spread of coronavirus, economic development has substantially weakened worldwide, a trend that according to data provided by the International Monetary Fund (IMF) is likely to continue as the current year progresses. In its most recent forecast from June 2020, the research institute expects global economic output to decline by 4.9% (previous year: +2.9%), with the second quarter projected to be most impacted. In the opinion of experts, the global economy is likely to recover gradually by the end of 2021, with further outbreaks of the virus possibly leading to delays in this economic rebound. According to the IMF, the accuracy of forecasts on the whole has deteriorated due to economic and pandemic uncertainties. For example, both the further course of the pandemic and the effectiveness of fiscal stimulus packages are unclear.

Overall, the sharpest declines are forecasted for the European Economic Area. For instance, the IMF expects economic output in the European Monetary Union to drop by 10.2% in 2020 (2019: +1.3%). In the largest European economy, Germany, this decrease is projected to amount to 7.8% (2019: +0.6%) and in France, which was harder hit by the pandemic, economic output is forecasted to be an estimated 12.5% lower (2019: +1.5%). For the U.K., a minus of 10.2% is predicted (2019: +1.4 %).

In the world’s largest economy, the USA, GDP is projected to drop 8.0% year over year (2019: +2.3%).

The Asia | Pacific economic region is likely to contract by around 0.8% this year. Based on the IMF forecast of 1.0% (2019: +6.1%), China will be the only major economy to see positive growth in 2020. The economy in India,by contrast, is expected to decrease 4.5% (2019: +4.2%) and South Korea is projected to experience an economic decline of 3.6% (2019: +0.4%), while Japanese GDP is estimated to fall 5.8% (2019: +0.7%).

Sources: International Monetary Fund, World Economic Outlook Update, June 2020.

Further Growth of the Biopharmaceutical Market Expected

The trends affecting the development of the Sartorius Group that are described in its 2019 Annual Report on pages 67 to 68 remain in place, while the coronavirus pandemic and its economic repercussions are expected to lead to overall higher forecasting uncertainty.

Most recent estimates project that the global pharmaceutical market will expand at a compound annual growth rate of between 3% and 6% during the period up to 2024. Market analysts predict that the biopharma segment of the pharmaceutical market, against the backdrop of growing demand worldwide, will continue to outperform the market, with a compound annual growth rate between approximately 8% and 9% on average. Also fueling this growth are the higher market penetration of already approved biopharmaceuticals, the expansion of their areas of indication, and strong research and development pipelines. The global biopharmaceutical market as a whole is largely independent of fluctuations in the economy, and this is also likely to apply to the economic impact of the coronavirus pandemic. Nevertheless, experts anticipate that given the pandemic, market approval of some medical drugs could be delayed by a few quarters because clinical trials had to be postponed during the peak phase. By contrast, the areas of COVID-19 vaccines and therapeutics could create positive momentum.

Due to the economic impact of the coronavirus pandemic, expansion in the laboratory market will probably remain below the growth corridor of about 3% to 4.5% per year expected by market observers, at least in the short term. Overall, the greatest demand should continue to come from the pharmaceutical and biopharmaceutical industries, whereas industries whose development is more strongly influenced by economic factors are expected to show weaker demand dynamics.

Sources: IQVIA Institute: Global Medicine Spending and Usage Trends. Outlook to 2024, March 2020; Evaluate Vantage 2020 Preview, December 2019; BioPlan: 17th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production, April 2020; Daedal Research: Global Biologics Market: Size, Trends & Forecasts, December 2019; BioPlan: Covid 19: Impact on Bioprocessing and Outsourcing, May 2020

Forecast for the Full Year of 2020 Raised

Based on the strong performance of the Bioprocess Solutions Division in the first half of 2020 as well as on high demand also expected to continue for the rest of the current fiscal year, Sartorius raised its full-year sales and earnings guidance for this division and thus for the entire Group.

Group
Management now expects consolidated sales revenue to increase by 22% to 26% (previously 15% to 19%) and the Group’s underlying EBITDA margin to reach around 28.5% (previously about 27.5%). Compared with the previous forecast, a significant part of the additionally expected business is attributable to the current coronavirus pandemic as Sartorius products are used for development and manufacturing of both vaccines and antiviral medications. As projected so far, initial consolidation of Biological Industries is expected to contribute close to 1.5 percentage points and inclusion of the portfolio acquired from Danaher a good 5 percentage points to sales growth.

The ratio of capital expenditures (CAPEX) to sales revenue continues to be forecasted at around 10%, relative to 12.3% a year earlier. Net debt to underlying EBITDA is expected to be slightly below 2.75 by year end 2020 (previously around 2.75; 2019: 2.0%).

Divisions
For the Bioprocess Solutions Division, management now forecasts sales growth of 26% to 30% (previously 17% to 21%). As projected so far, consolidation of Biological Industries is expected to contribute around 1 percentage point and that of the Danaher portfolio around 3.5 percentage points. The division’s underlying EBITDA margin is projected to be approximately 31% (previously around 30%), which includes slightly dilutive effects due to consolidation of the acquisitions.

The outlook for Lab Products & Services remains unchanged, with sales revenue expected to grow by 10% to 14% at an underlying EBITDA margin of approximately 20%. Consolidation of Biological Industries continues to be forecasted to contribute 2.5 percentage points and that of the Danaher portfolio around 10 percentage points to growth. While consolidation of the Danaher portfolio is likely to increase the division’s margin by 1.5 percentage points, consolidation of Biological Industries is anticipated to result in slight dilution of the margin.

Due to the ongoing pandemic, this guidance is subject to greater uncertainty than usual. In particular, these updated projections are based on the assumptions that logistics chains will continue to be stable and production lines remain in operation. All forecasts are based on constant currencies, as in the past years.

Medium-Term Forecast Unchanged
Despite the currently increased demand, Sartorius does not see any need to adjust its medium-term forecast up to 2025 at the moment. The company continues to expect to achieve sales revenue of around €4 billion at an underlying EBITDA margin of about 28% in 2025. This is based on the fact that the medium-term fundamentals of the biopharmaceutical industry have remained unchanged. Therefore, it is currently not foreseeable whether the current additional demand for vaccines and antiviral drugs will lead to a sustained increase in demand in these areas. In addition, signs are becoming apparent that the market approval of some biopharmaceuticals could be delayed due to postponed clinical trials as a result of the pandemic. It is currently not possible to quantify the impact of these various effects concerning monetary amounts or timing.

No material events occurred after the reporting period ended on June 30, 2020.