Lonza plans cost reductions

Lonza (Switzerland) has announced a series of cost-cutting measures for the next 12¬–18 months. The company made the announcement with the release of its third-quarter 2009 financial results.

Lonza said that its third-quarter was characterized by an “accumulation of unexpected events” since the end of September 2009, which will reduce operational earnings before income and taxes by CHF 360–390 million ($350–370 million) for the full-year 2009, excluding one-time engineering costs.

It cited the following issues related to its custom-manufacturing and bioscience operations: cancellations and postponements in large-scale biopharmaceutical custom manufacturing; an 18-month delay of a lead customer project in cell therapy due to clinical disappointments; and continued low-order levels in its exclusive-synthesis business because of key customers reducing net working capital. Contract manufacturing (exclusive synthesis and biopharmaceuticals) accounted for approximately 55% or CHF 1.51 billion ($1.47 billion) of the company’s 2008 revenues of nearly CHF 2.94 billion ($2.86 billion). Lonza also reported continued reduced demand for nutrition ingredients and lower pricing as well as ongoing margin pressure in its microbial-control products and performance intermediates.

To address the revenue shortfalls from these problems, Lonza plans to implement the following operational improvement measures during the next 12–18 months:

• Reduce fixed costs by CHF 60–80 million ($58–78 million) during the next two years through consolidation of business units and divisions to simplify business processes and reduce overhead.
• Reduce its management committee from seven to six members, with Lonza Custom Manufacturing being led solely by Stephan Kutzer, and Uwe Boehike leading a consolidated division that includes corporate services and human resources.
• Adapt biopharmaceutical large-scale capacities to competitively fill large-scale plants with smaller-volume products (i.e., Phase II and III materials).
• Expand the project pipeline in custom manufacturing and longer-term customer collaborations.
• Increase resources in sales and business development and align the organization to customer projects.
• Reduce capital expenditures from an originally targeted amount of CHF 500 million ($487 million) to below CHF 400 million ($389 million) and to a similar amount in 2011.
• Further reduce net working capital to reach a target of 20–25% of sales by the end of 2010.

Lonza is also reducing the number of its business units from 15 to 9. The custom manufacturing APIs division will include: development services and biologics research and development, chemical manufacturing, and biological manufacturing. Its bioscience division will include cell therapy and media, testing solutions, and research solutions. The life-science ingredients division will include nutrition ingredients, microbial control, and performance intermediates.

In a to investors, Lonza CEO Stephan Borgas said the company’s acquisition strategy remains intact. This strategy includes strengthening its offerings in life-science research, including contract- research-organization (CRO) services and enhancing its contract- manufacturing-organization (CMO) value chain by entering finished dosage-form development and manufacturing. To that end, this week, Lonza announced that it had acquired Algonomics (Gent, Belgium), a CRO specializing in immunogenicity platforms. Last month Lonza withdrew its bid to acquire Patheon (Research Triangle Park, NC), a CMO providing contract formulation development and secondary manufacturing.

Lonza expects these operational measures will generate free-cash flow in 2010. It added that an asset review is also underway.