Lonza losing out to Asian competition

By Kirsty Barnes

- Last updated on GMT

Related tags Lonza Profit

While Lonza's biopharmaceutical business has taken off, tough
competition from cheap Asian competitors is eating away at its
exclusive synthesis business - meanwhile, the whole business is
being hit by rising raw material and energy costs.

The contract manufacturer reported a 15.5 per cent increase in overall sales to CHF 1415m (€899m) in its half-yearly results, however, over half of this was attributed to higher selling prices due to an increase in raw material and energy prices that are affecting the entire industry.

Two out of three of the company's segments painted this picture - Organic Fine and Performance Chemicals saw sales rise 15.7 per cent, while operating margin decreased from 15.2 to 13.7 per cent; Polymer Intermediates sales increased 18.3 per cent but operating margin fell to 6.6 to 6.1 per cent.

On the other hand, Lonza's Exclusive Synthesis and Biopharmaceuticals business helped to offset the drag from these segments, reporting a 14.1 per cent sales rise, a 36 per cent jump in operating profit and managing to raise its operating margin from 13.3 to 16 per cent, driven by the success of the Biopharmaceuticals business.

As a result, Lonza's overall operating profit rose 17 per cent, although the company's profit margin remained still.

The biopharmaceutical sector overall is certainly booming, with approximately one-fourth of new drugs coming on the market being biopharmaceuticals and generating in excess of $35bn in 2004, with annual sales projected to surpass $52bn by 2010.

Several specific factors were cited by the firm as contributing to the success of its Biopharmaceuticals business, including a high asset utilisation of around 90 per cent, and its Biopharma Services business performing above expectations.

In addition, the firm said it completed the start-up of its fourth 20,000L bioreactor in Portsmouth, New Hampshire, US, ahead of schedule, and also completed the first out of two large-scale microbial lines in Visp, Switzerland.

In May, Lonza was also authorised by the US Food and Drug Administration (FDA) to produce Bristol-Myers Squibb's biologic arthritis drug Orencia (abatacept), in what is shaping up to be a major manufacturing deal for the Swiss company.

Looking forward, Lonza has now entered into a joint venture with investment management company Bio*One Capital to built a $250m large-scale mammalian cell culture plant in Singapore, underlying its confidence that demand for the contract manufacturing of commercial biopharmaceuticals will continue to grow.

The facility, expected to be completed by the end of 2009, will be Lonza's second large-scale mammalian manufacturing plant after its Biologics facility in Portsmouth.

Lonza said it expects the Singapore plant to contribute about a quarter of its overall biopharmaceutical business and allow it to expand its customer base in Asia.

And Asia is a particular area of focus for the firm right now, as fierce low-cost competition from companies in the region dragged down the profitability of the other half of this segment - Exclusive Synthesis.

Fighting back, Lonza has vowed to spend $200m over the next few years to expand in southern China, further limiting its dependence on external suppliers of intermediates and active pharmaceutical ingredients (APIs).

The Swiss contract manufacturer already has a ten-year presence in the region, with manufacturing facilities in Guangzhou and Liyang, but China's low operating costs and expertise in raw materials for the pharmaceutical industry are proving more and more attractive for Lonza.

The company has now signed a letter of intent with authorities in Guangzhou Nansha to build, over a three to five year period, a multipurpose API and International Standards Organization (ISO) regulated intermediate plant complex which delivers large scale and pilot scale production capabilities.

"Numerous customers have shown strong interest in our new API facility in China, with start of production estimated to be the second half of 2008," said the company.

Lonza also has an R&D Centre located in the Nansha Development Zone, which participates in developmental activities for intermediates and APIs for the pharmaceutical and fine chemical industries globally.

"Our R&D Centre in China is currently fully staffed and a small-scale plant construction is well underway," the firm said.

In addition to erosion from Asia, Lonza's Exclusive Synthesis business also experienced operational difficulties early in the first half of the quarter, with its Visp plant making several faulty production batches that couldn't immediately be reproduced because the plant was already working at full capacity.

"Despite high capacity utilisation in the first half of 2006, profitability remained below expectations," said the firm.

Looking forward, Lonza is in the throes of an "ambitious growth strategy," and has been increasing capital expenditure in order to drive this - from CHF 89m in 2005 to CHF 211m in 2006 - and adding four hundred new staff members in the process.

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