Lonza Delivers Solid Business Performance in 2011 First Half

Further development of life-science-driven strategy results in acquisition offer for Arch, building a global leadership position in Microbial Control and balancing Lonza’s portfolio and currencies.

Jul 27 2011 --- Lonza delivered a solid business performance in the first half of 2011 with increased EBIT and revenue at constant exchange rates demonstrating a solid product pipeline combined with high capacity utilization in Custom Manufacturing and Life Science Ingredients. However, reported revenue and EBIT were substantially impacted by the strong Swiss franc. The currency impact on operating profits (EBIT) was CHF -44 million. In the short term, the impact of the strong Swiss franc is being mitigated in Visp and Basel by instituting longer working hours in cooperation with social partners, and mid- to long-term productivity improvements and portfolio upgrades are being introduced. Increases in raw material prices persisted and the unpredictability of regulatory authority approvals remained a challenge.

In Life Science Ingredients, demand was high but EBIT was significantly lower as most production in this sector is realized in Switzerland and was therefore affected by the strong Swiss franc. The Chemical and Biological Custom Manufacturing project pipelines were strengthened further and capacity utilization increased in both businesses. Lonza’s broad offering of expertise combined with new and highly demanding technologies continued to attract customers. Bioscience sales were on par with the first half of 2010 (+13.2% at constant exchange rates), with lower sales in media and molecular biology. Reduced spending by R&D at pharmaceutical companies, governmental agencies and academia has impacted the Bioscience business.

Growth projects are moving forward. The mammalian cell culture plant in Singapore started up on time and on budget. Additional growth projects remain on plan, including the agrochemical plant and market-driven expansion of cytotoxic manufacturing in Visp (CH), the L-carnitine/PMDA plant and new niacinamide plant (all in China), increased capacity and R&D in Slough (UK), and the expansion of Development Services in Singapore.

Stefan Borgas, CEO of Lonza said: “These results demonstrate the strength of our underlying business. Despite the heavy hit we have taken in our reported numbers as a result of the strong Swiss franc, I am pleased that the company has delivered 5% growth in underlying revenues and operating profits. Looking forward, our pipeline looks promising, our capacity utilization is improving and our growth projects are moving forward. I am particularly excited by the opportunities that our newly focused strategy will allow us to capitalize on, not least the offer for Arch which is proceeding to plan and we expect to complete later this year.”

Despite ongoing market volatility combined with macro-economic uncertainties, Lonza succeeded in showing underlying revenue and profit growth in constant exchange rates in the first half of 2011. The Group remains on track to deliver continued growth for the full year. Lonza’s leadership position in innovation and R&D, increased project pipelines and the broad offering of new, demanding technologies underpin our future long-term growth potential. New signed contracts and an outsourcing trend that remains intact validate Lonza’s life-science strategy. We will continue to generate new business, which will improve our return on assets and strengthen our cash flow. With the acquisition offer for Arch, Lonza has taken a strategic step toward expanding the Microbial Control business, thus strengthening the overall business and balancing the portfolio. We are confident of growing the traditional Lonza business in constant exchange rates.

Lonza’s Management Committee and Board of Directors have undertaken an in-depth strategic review to address a number of the challenges which were adversely impacting the Group’s operational and financial results. This review paid attention to the volatility in the pharmaceutical markets, new business opportunities in high growth markets, together with currency effects and raw materials price inflation. It also focused particularly on the need to capture more of the value chain. The review involved 150 business leaders from across the Group, resulting in the development of detailed business plans in each business unit which were subsequently filtered and refined into select well-defined growth projects.

Our sharpened 5-year strategy will see the Group remain firmly focused on life sciences with excellence in products and services which are complex, regulated and come in contact with the human body. Lonza will move further into nutrition and microbial control to balance volatility in the CMO business. Moving closer to the customer will allow the Group to capture more of the value chain and mitigate the impact of raw materials price increases – by moving active ingredients focus toward formulation and distribution. Lonza will continue to leverage its core strengths in innovation, technology and regulatory expertise while capturing cross-divisional synergies in manufacturing, research and sales. The Group will move decisively into the growth economies of emerging markets and better balance its currency exposure by improving its natural currency hedge. As part of this strategy, innovation partnerships and alliances with industry leaders are likely to increasingly occur. Financially, in addition to driving growth and reducing volatility, the strategy should result in lesser reliance on capex-driven growth, greater return on operating assets and stronger cash flow.

The Group’s offer for Arch is a perfect demonstration of this strategy – one that should deliver sustainable and profitable growth, building on the Group’s core strengths and taking advantage of new opportunities.