Lonza first half reflects manufacturing slump

Related tags Cent Chief executive officer Capacity utilization

Pressure on pharma ingredient supplier Lonza has continued into the
first half of the year, with consistently low use of custom
manufacturing capacity and weak demand for biomanufacturing
contributing to a 37 per cent drop in operating income.

Sales at the Exclusive Synthesis and Biotechnology unit were down by 23.1 per cent over the previous year's first half to SF323 million (€210m) and operating margins dropped to 9.3 per cent from 20.2 per cent in 2003, reported the Swiss company yesterday.

Lonza​ attributed the sustained low capacity utilization and margin pressure to destocking and insourcing of existing products by pharma customers.

Increased manufacturing by drugmakers like Roche and Novartis has also been hitting sales at other leading European pharma ingredient suppliers, such as DSM, where sales of drug ingredients fell 21 per cent in 2003.

And times are not going to get much easier this year, according to a recent report​. Overcapacity of between 25 and 40 per cent will continue to affect the market for intermediates and active pharmaceutical ingredients (APIs) due to the substantial new capacity brought on-stream over the past five years, suggests the Urch Publishing report.

New chief executive officer Stefan Borgas, who took over from Marcus Gemuend on 1 June after the former CEO's resignation last year, reminded shareholders that 2004 is to be a 'rebasing year', pointing out that the group had achieved 80 per cent of the SF100 million in annual cost savings, planned at the beginning of last year's first half.

Lonza said it had lifted margins in its chemical synthesis activities by 2 per cent since the second half of 2003 as a result of restructuring and improvements in the product mix.

But its Biopharmaceuticals business, operating mammalian cell culture fermentation, is still suffering from last year's cancellation of projects affecting the 2,000L and 5,000L fermenters, which tend to be used in the early stages of a product's life cycle while sales are building.

The time necessary to acquire new business has been longer than estimated with the project pipeline for the 5000L capacity vessel looking more promising than for the 2000L facility, said the group.

One-time start-up expenses for the new 20 000L fermenters in the US also had an additional negative effect on profits.

Operating income in the division fell from SF85 million to SF30 million.

Other units saw small sales increases but the fine and performance chemicals businesses experienced shrinking margins, due to high raw material and energy costs as well as the chicken flu epidemic and competitive pressure in specific market segments.

Overall group sales decreased in the six-month period to SF1,088 million, down 6 per cent, and profits fell 15.7 per cent to SF70 million.

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