Lonza Restructures, Plans Cost Reductions

Lonza (Basel), the large contract manufacturer of small-molecule and biologic-based active pharmaceutical ingredients (APIs), announced last week 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, that 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 that result 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 small-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 presentation 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.