Chairman / CEO
Letter

Milestones
Review / Outlook

Key
Figures

The World
of Peptides

Letter to
shareholders

Dear Shareholders,

Bachem’s positioning as a Pioneering Partner for Peptides underscores our aspiration to leverage our unique expertise and innovative prowess to be the partner of choice for successfully executing peptide projects of all kinds. Investments in additional state-of-the-art production facilities at our US site in Vista, California, and in a new research and development building at our headquarters in Switzerland enable us to further extend Bachem’s world-leading position in the peptides market. In addition to pursuing organic growth, we will also examine further ways to strengthen our position in our core business through targeted alliances or acquisitions.

Once again, Bachem reached its growth objectives both in revenue and profit for the fiscal year 2016 amid a persistently challenging market and competitive environment. Growth momentum in the US and European markets continued apace, resulting in sales growth of +13.4%. The market of active pharmaceutical ingredients again developed significantly. Sales of patented new chemical entities (NCEs), a business area crucial to Bachem’s future success, increased by around 54%. As expected, Bachem succeeded in substantially raising its earnings once again in 2016. The operating profit for 2016 increased 17.0% versus the previous year and the EBIT margin amounted to 19.1%.

We are pleased with Bachem’s stock performance in 2016. However, a rising stock price is not our primary goal; we see it as a corollary of our accomplishments. At the same time, it gives us a strong incentive to continue delivering top-quality products and services in the future through the hard work and dedication of our highly skilled employees. We consider it as essential to keep our feet firmly on the ground, to maintain strict cost discipline and to carefully plan and execute necessary investments.

We are confident that we will continually grow our sales in local currencies in the years to come by 6–10% per annum, in line with our long-term projections. However, earnings growth takes priority over sales growth. Our enduring aspiration is to further extend our leadership role in our core peptides business and to be a trailblazing partner for customers worldwide. In light of the results achieved, the forthcoming positive outlook and Bachem’s financial stability, the Board of Directors will propose at the Annual General Meeting a dividend increase from CHF 2.25 to CHF 2.50 per share.

Key
Figures

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  • > Chart view
Sales
(IN MCHF)
EBIT
(IN MCHF)
Net Income
(IN MCHF)
2014
183.9
2015
208.6
2016
236.5
2014
2015
2016
2014
35.9
2015
38.5
2016
45.1
2014
2015
2016
2014
29.1
2015
31.8
2016
41.2
2014
2015
2016
Changes in %
 
2016
2015
CHF
LC
SALES (IN MCHF)
236.5
208.6
+13.4
+11.8
EBITDA (IN MCHF)
64.8
56.8
+14.0
+10.4
EBITDA IN % OF SALES
27.4
27.2
 
 
EBIT (IN MCHF)
45.1
38.5
+17.0
+11.8
EBIT IN % OF SALES
19.1
18.5
 
 
NET INCOME (IN MCHF)
41.2
31.8
+29.4
 
NET INCOME IN % OF SALES
17.4
15.3
 
 
EARNINGS PER SHARE (EPS – IN CHF)
3.04
2.35
+29.3
 
CASH FLOW FROM OPERATING ACTIVITIES (IN MCHF)
40.4
61.4
-34.2
 
RETURN ON EQUITY (IN %)
11.5
9.1
 
 
NUMBER OF EMPLOYEES (IN FULL-TIME EQUIVALENTS)
979
859
 
 
SALES PER EMPLOYEE 1 (IN CHF)
267 000
277 000
 
 
1  
Basis: average full-time equivalents excluding apprentices.

MILESTONES

A clear focus on the core business of peptides and the sustainable growth of that business are the central elements of Bachem’s strategy. Bachem diligently worked toward furthering its market leadership in 2016. The company made investments to expand production capacity at all sites and continuously optimized organizational structures and processes.

PROGRESS REPORTS

INTEGRATION AND EXPANSION

The acquisition of American Peptide Company (APC) in March 2015 marked a major milestone in Bachem’s drive to extend its global leadership. The integration of APC into the Bachem Americas organization was quickly initiated and brought to a conclusion. In the ensuing initial stage of expansion, production systems and procedures were reviewed with reference to Bachem’s high quality standards and modified as necessary. Considerable investments were also made to create additional production capacity, which also entailed the installation of infrastructure, such as a central storage tank for solvents. The action taken thus far ensures the efficient and reliable operation of the production facilities, which will have a positive effect on overall plant quality and safety. After the temporary stoppage of production at Vista, California, during the expansion project, operations were ramped up again in the second half. Capacity at both locations in California was also increased significantly by recruiting additional personnel and further professionalizing the organization.

BOOSTING PRODUCTIVITY

The competence center for research chemicals production is specialized in solid-phase peptide synthesis. The installation of new machines for automated synthesis has expanded existing capacities through the use of state-of-the-art technology and boosted site productivity. Bachem also strengthened human resources in quality control, built up new expertise and improved processes.

These measures enabled Bachem to attract new customers and projects in the customized synthesis business. Bachem also made use of its expertise in complex peptide synthesis to manufacture innovative new catalog peptides. The productivity boost from the modernization drive coupled with local currency in the wake of the Brexit decision has had a positive impact on Bachem’s position as a manufacturer of high-quality peptides for research and development purposes.

FLAGSHIP FOR INNOVATION

The new research and development building in Bubendorf, Switzerland, was ceremoniously inaugurated in September 2016. The commissioning of this new building marks a milestone in the spatial development of Bachem Group’s largest production site. It is a state-of-the-art facility encompassing some 6 000 m2 with optimal conditions for developing New Chemical Entities (NCEs) and for processing small production orders. During the construction planning stage, Bachem enforced the strictest of standards of health and safety for products and employees by designating special industrial hygiene and chemical handling areas. Upon conclusion of the first stage of construction, Bachem Group had already invested some 30 million CHF in its new flagship for innovation. Further construction stages will follow. These investments underscore management’s strong commitment to its Swiss operating base and will lay a foundation for further growth.

Milestones Review

PARTNER OF CHOICE

Bachem performed well amid persisting market challenges. As market leader with more than 45 years of experience in peptide synthesis and a steadfast focus on quality, Bachem serves its customers as a reliable and trusted partner.

HIGH DEMAND

Demand for peptide-based compounds continued to grow during the year under review and pushed both sales and the order backlog to record highs. Management consequently created more jobs and invested additional capital in production capacity.

EXPANDED PROJECT PIPELINE

Bachem slightly expanded its project portfolio last year. At yearend Group companies in Europe and North America were working on a total of 247 development projects for customers (previous year 241). Several projects, including some generic peptides, are on the verge of receiving regulatory approval.

QUALITY MATTERS

Bachem made specific investments in compliance and replacements to ensure unfailing compliance with the company’s high standards. Bachem’s commitment to quality and reliability in all dealings with customers is a key factor for its success.

PRODUCT APPROVALS

Two Bachem NCEs with potentially high sales volumes received regulatory approvals in the year under review. Approvals for generic products were also granted, and regional extensions for various commercially available medicines were approved. Assuming successful launch and acceptance of the medicinal products concerned, these regulatory approvals create an excellent springboard for further sales growth at Bachem Group.

PROVIDING HIGH PERFORMANCE

Bachem is an internationally unique team of experts who collaborate in an interdisciplinary manner to create sound and sustainable solutions.

With its claim of “Providing High Performance”, Bachem strengthened its professionalism and performance level in the areas of finance, IT and human resources during the past fiscal year. This also included preparations for a new groupwide Enterprise Resource Planning (ERP) system.

CAPACITY EXPANSION

The integration of American Peptide Company (APC) following its acquisition at the end of March 2015 proceeded as planned and was already completed in the previous fiscal year several months after the transaction closed. Selective investments were made to further optimize the company’s plant in Vista, California, and prepare for the planned projects and tasks. In Bubendorf, Switzerland, operations commenced at the Group’s most modern building for R&D projects and small lot production. Bachem also made other investments at virtually all of its sites worldwide and created more jobs. With a total headcount of 1 022, the company’s workforce passed the 1 000 mark for the first time in its history.

Milestones Outlook
AMBITIOUS GOALS

CAPITAL INVESTMENT AND GROWTH

In response to strong orders and rising demand, Bachem plans to invest in additional production capacities at all sites and create new jobs. Further increases in productivity and profitability will be supported by continuous organizational and process optimization. Close collaboration with customers is a crucial factor in determining Bachem Group’s success and is underpinned by a solid foundation of quality, innovation and partnership.

USA AND ASIA

Bachem plans to expand its operations at both US locations to make increased use of the available potential. In view of the large portfolio of current projects, additional investment in production capacities is planned. A second focus of Bachem’s growth strategy is on the Asian region. Asia is a uniquely dynamic market and already accounts for more than 10% of Group sales. Bachem plans to strengthen its presence and activities in this region.

OPERATIONAL EXCELLENCE

Bachem aims to continue increasing efficiency and cutting costs. Efforts will focus on integration and harmonization of internal processes, reduction of complexity, process automation and consistent application of best practices. An important first step in the coming year is the groupwide rollout of a new Enterprise Resource Planning (ERP) system.

CAPTIVE BUSINESS

As a peptide market leader with a global reputation, Bachem is uniquely placed to offer customers and partners pioneering solutions. In addition to quality, reliability, know-how and experience, the company also has the necessary mass to offer pharmaceutical companies its expertise in exploring possible alternatives to in-house active pharmaceutical ingredient production. Tapping into this captive market offers promising prospects for future growth.

“BACHEM – THE ATTRACTIVE EMPLOYER”
INTERVIEW WITH
STEPHAN SCHINDLER, CFO

How does Bachem plan to win the war of talents?

Stephan Schindler: By focusing on our core business and strengths, also in the job market. We very deliberately set ourselves apart from other companies and competitors by highlighting our uniqueness and special qualities as an employer.

Give us some specific examples here.

Stephan Schindler: As a peptides specialist operating in the chemicals/biotech/pharma markets, Bachem is also unique as an employer. From our early roots as an SME with a local focus, we have grown over the years into a multinational global leader with a network of interconnected disciplines. Despite that, the company is not too large and impersonal, the style is informal and the local roots are still very much present. With these attributes, the kind of specialists we attract are different from those who would be drawn to the mammoth corporations around Basel or to our competitors. We appeal to keen, highly motivated people who value an active role and want to make a difference, and we offer them a highly inspiring and dynamic working environment. With us, they can develop their talents, inspire others and enjoy success. The satisfaction that brings is viewed as both a reward and an incentive. That’s how I would define meaningful work.

What are the most important attributes newcomers should bring to the organization?

Stephan Schindler: Our successful core business is based on science, technology and productivity. For that reason, it is essential that newcomers come to us with a sound background in their specialist areas. They should also be willing and able to embrace ongoing personal and professional development. A service mentality and a strong team spirit are also required in our customer-centric environment.

Social skills, reliability, dedication and sensible pragmatism are extremely useful assets. All these qualities are conducive to smooth and effective collaboration with internal and external contacts that ultimately benefits everyone involved.

What makes Bachem an attractive employer?

Stephan Schindler: Given the size of our organization, it’s very easy to keep the entire value chain in sight. This creates transparency and deepens our understanding of our interconnectedness. We don’t just offer a job like any other, we offer positions of responsibility where employees can actively contribute to the company’s successful development. We don’t play hide-and-seek in our company. At Bachem, every single person makes a difference and is truly important for the company. And for that reason, every single employee has a stake in the company’s fortunes through an incentive program.

Thanks to a solid shareholder structure and a clear focus on sustainable corporate development, Bachem offers a stable as well as dynamic work environment. Those two qualities characterize our special workplace culture, where there is no room for a “hire and fire” mentality. As the market and technology leader in peptides, we employ the largest number of specialists of any company in the world and are the industry’s winning team.

The world
of Peptides

COSMETICS

Peptide-based agents are used in top-end personal care products, for example as ingredients in antiaging products that promise to reduce wrinkles.

NUTRITION PRODUCTS

The artificial sweetener aspartame is a dipeptide that is 200 times sweeter than table sugar. It is an important agent in diabetology.

CANCER THERAPIES

Peptides are useful in oncology both in diagnostic imaging procedures and for treatment purposes.

What are Peptides?

Peptides are chains of 2 to about 100 amino acids. Longer chains are called proteins. Peptides are organic compounds made up of natural amino acids in living organisms. Originally isolated from biological sources, they are synthesized chemically today. The biological properties of peptides depend on the number of amino acids involved and their position in the chain. The 20 natural α–amino acids are sufficient to form the basis for an unimaginably large number of peptides, each with their own distinctive physical, chemical and biological properties.

WHAT ARE PEPTIDES USED FOR?

Peptides are mainly used as highly active and highly specific drug substances. In keeping with the diversity of their biological functions, they are used in an extensive range of therapeutic areas. Oncology, diabetes and obesity are three prominent examples of therapeutic areas in which peptides generate billions of dollars in revenues. Peptides are much in demand in the treatment of cardiovascular and neurodegenerative diseases, renal failure, as antibiotics, in vaccines and in drugs for rare diseases (orphan drugs).

AVAILABLE DOSAGE FORMS

Peptides taken orally would undergo rapid breakdown in the digestive system and would therefore be unlikely to reach their target organs. Peptide-based drugs are usually administered by the parenteral route for that reason. In addition to conventional injections, implants with durations of action ranging from a matter of days to months and nasally delivered drugs are increasingly becoming available. Research and development activities are ongoing on sublingual and transdermal dosage forms and drug delivery using nanoparticles for transport.

BACHEM SPRING SYMPOSIUM 2016

This year’s Bachem Spring Symposium was centered around technical improvements in the dose delivery systems for peptide-based drugs. 61% of currently approved products are administered by injection. Patients are not fond of frequent injections, however. Improvements in drug delivery are an essential way to increase the acceptance of peptide-based drugs and ensure adherence to treatment regimens.

There has been plenty of innovation in this area recently. Up to 9% of peptide drugs can now be taken orally. The downside is that much larger volumes are usually necessary due to low bioavailability. Thanks to Bachem’s efficient developments in large-scale synthesis, peptides can be produced cost-effectively and in large volumes to support oral delivery platforms.

Other possible dosage forms include delivery through the skin, intestinal tract, lung and nose. Increasingly sophisticated pumps are available that use sensors to detect the drug requirement and deliver the optimum dose. Specialists are working on ways to use these methods to optimize diabetes treatment, to give one example.

At the symposium, leaders from universities and industry talked about the latest developments in dose delivery systems. Bachem experts were among the speakers. Their contributions showed the perspective of a producer for active pharmaceutical ingredients (API). The greatest challenges for API producers are the increasing product complexity as well as strong cost management.

One reason for the increasing product complexity is that more and more complex diseases are being targeted. In the future, drugs will have to cross the blood-brain barrier to treat Alzheimer’s and other kinds of dementia.

Researchers are also attempting to introduce peptides into specific cells to control or prevent protein interactions inside the cells. Using special peptides, it is even possible to introduce genetic material into cells to replace defective genes. These peptides often have structural modifications which can support these properties.

Another subject raised for discussion was peptide glycosylation. Various chemically synthesized glycopeptides have found their way into clinical research since Bachem established a partnership with GlyTech. These peptides are often improved versions of existing drug products. Researchers have already succeeded in making long peptides more efficient and cost-effective in the production process. Chemical synthesis now competes favorably with recombinant DNA technology.

Conference attendees agreed that peptide research will continue to produce effective new medicines to treat diseases for many decades. The convergence of multiple disciplines increases the appeal of peptides as drugs. In addition, peptide development and production is getting more and more cost-effective.

The world
of Peptides

SPRING SYMPOSIUM TOPICS THROUGH THE YEARS

2011 PEPTIDES, FROM BASICS TO LEADS TO DRUGS

2012 GLPS – THE GOOD AND LUCKY PEPTIDES

2013 MULTI-PEPTIDE VACCINES, A NEW CLASS OF IMMUNOTHERAPEUTICS

2014 MACROCYCLES & CONSTRAINED PEPTIDES – MANUFACTURING & THERAPEUTIC APPLICATIONS

2015 DESIGNED FOR SUCCESS: MODIFIED PEPTIDES

BACHEM’S
360° BUSINESS MODEL

PEPTIDE DRUGS

Assuring commercial supply
Managing logistics
Adhering to regulations
Meeting customer expectations

BIOTECH COMPANIES
PHARMACEUTICAL COMPANIES

RESEARCH

Over 6 400 products
Made in-house
Available from stock
Ordered through webshop

UNIVERSITIES
RESEARCH CENTERS
INDUSTRY

CLINICAL DEVELOPMENT

Optimization of processes and analytics
Development of formulations
Scale-up, validation and fill finish
Project management through partnership

BIOTECH COMPANIES
PHARMACEUTICAL COMPANIES

PRECLINICAL DEVELOPMENT

Custom synthesis services
Assistance in drug discovery
Characterization of by-products
Conducting stability studies

BIOTECH COMPANIES
PHARMACEUTICAL COMPANIES

Bachem’s 360° business model is the expression of a business philosophy that is totally focused on client needs. Through vertical integration and full utilization of synergies, Bachem is best able to offer its unique expertise and experience in peptide chemistry to benefit client projects in all stages of development. Bachem. Pioneering Partner for Peptides

RESEARCH

Bachem offers the world’s largest collection of amino acid derivatives which are used by customers interested in manufacturing peptides. Also solid phase supports for peptide synthesis are available. Other essential product lines are bioactive peptides, enzyme substrates and inhibitors as well as some organic molecules. New products are added to maintain an innovative touch. Strong emphasis is placed on quality.

PRECLINICAL DEVELOPMENT

During preclinical development, lead finding and lead optimization require large panels of peptides. These are generated as custom synthesized molecules for customers around the world. Frequent consultation with Bachem experts allows further refining of target compounds. As such, a clear partnering aspect is required to come up with pioneering concepts and molecules to bring into clinical development.

CLINICAL DEVELOPMENT

When clients have selected their lead compound, they commence clinical trials. It is a decade-long process to approval of the drug. During this time, there is a close collaboration to learn more about the product. Each production step is scrutinized and manufacturing reproducibility strived for. Scale-up and full control of the process is targeted. Validation and control of the process is the end result of an intense partnership.

PEPTIDE DRUGS

The responsibility to manufacture sufficient drug substance rests on the shoulders of the Contract Manufacturing Organization. This can only be done by being extremely reliable and also by coordinating activities closely with our partners. Forecasting the quantity needed is extremely difficult, especially for new drugs where the commercial success has not been proven. Hence, responsiveness to customer needs becomes paramount.