BUSINESS BASE CAMP Lonza is bolstering its presence in China through the ongoing expansion of its Nansha facility.
LONZA UPS THE ANTE After years of calculated but risky investments, Lonza finds the cards stacked in its favor LISA M. JARVIS, C&EN NORTHEAST NEWS BUREAU
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IMPLY SURVIVING IN THE FIERCELY
competitive business of custom pharmaceutical chemical manufacturing requires a willingness to ride out the inherent volatility of drug development, to resist walking away from the table in the midst of a losing streak. To actually thrive requires stomaching huge financial risk with the mere promise of high rewards down the line. Swiss custom manufacturer Lonza appears to be on the cusp of its next winning streak. At a time when many of the big players in business are at best holding steady and at worst plotting their exits, Lonza is seeing its hand improve. Profits were up 36% in 2005, while sales increased 16%, to $1.9 billion. Last year highlighted the successful implementation of a restructuring that was launched in 2003 and 2004 in parallel with an enormous investment program. "2005 was the first delivery year on those new investments," says Chief Executive Officer Stefan Borgas, who joined Lonza in May 2004 from rival BASF. Borgas is quick to point out that 2004 was a trough for the company and that sales have yet to return to the peak reached in 2002. "While we are happy with our prog-
ress, we are not yet happy with the performance," he adds. But the momentum that began in 2005 is expected to build: Lonza is forecasting double-digit annual profit growth and high single-digit sales growth for the next five years. In that same time frame, the company will invest more than $850 million in new capacity." We've made quite a big commitment to growth," Borgas says. The current health of Lonza's business is rooted, in part, in the firm's strategy of organic growth, according to Peter Pollak, a fine chemicals industry analyst and former Lonza executive. The company did not get swept up in the mergers-and-acquisitions mania that dominated the custom manufacturing industry from 1999 to 2001. That spate of M&A led to "heterogeneous, difficult-to-manage arrays of small production sites," Pollak notes. Several companies later were forced to take heavy financial charges in recognition of that fact. Lonza's staying power is also linked to its focus on the life sciences industry. The company can sink a large portion of its returns back into its business and make risky investments, even during tough times, because it is not part of a large, diversified chemical company like BASF, Dow Chemical, or De-
gussa and therefore does not have to fight for internal funds, Pollak says. Over the next two years, Lonza's custom manufacturing division, composed of biopharmaceutical and exclusive synthesis units, will be the driver for profit and sales growth. Those growth engines showed their strength in 2005, bringing in combined sales of $668 million, a 47% improvement over 2004. Operating income surged to $109 million from $40 million in the prior year. A healthier biopharmaceuticals unit, which accounted for 14% of Lonza's sales last year, was the major contributor to that improvement. Lonza is benefiting from a long-term commitment to biopharmaceuticals at a time when many contract manufacturers are rethinking their strategies in the area. DSM recently shuttered its biologies plant in Montreal; Dowpharma abandoned its manufacturing strategy in biopharmaceuticals to focus on services; and Cambrex is said to be mulling options for its biopharmaceuticals operations. "BIOPHARMACEUTICALS is not a business
in which you make quick and easy money You have to be prepared to make a significant investment completely based on your own risk," Borgas cautions. "Lonza invested 500 million Swiss francs"—some $390 million—"into this business before we got anything back." Indeed, although biopharmaceutical manufacturing is now a major engine for growth, "we suffered quite substantially between 2002 and 2004: Our stock price almost got cut in half," he says. During that time, several players, including Lonza, saw customer products fail to launch. A customer delay or failure is a challenge for a producer of active ingredients for smallmolecule drugs, but it can be devastating for biopharmaceutical manufacturers, whose capacity is often linked to just one or two drugs in development. Meanwhile, smaller players have struggled, in part because they need a contract in hand to justify an expansion, says Howard L. Levine, president of BioProcess Technology Consultants. Companies like Lonza, Boehringer Ingelheim, and Diosynth have the financial wherewithal to decide to build ahead of demand. "It's just a different atti-
Lonza is forecasting double-digit annual profit growth and high single-digit sales growth for the next five years. 22
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MSDS Authoring Services tude toward the business, and Lonza is reaping the rewards now," Levine says. Lonza continues to plow significant resources into biopharmaceuticals in anticipation of future demand. Earlier this year, the company started construction on a $200 million mammalian cell culture plant in Singapore. Bio*One Capital, a venture capital fund of the government of Singapore, has a stake in the site, which is expected to be operational in late 2008. In 2005, the firm added a 20,000-L mammalian cell fermenter at its Portsmouth, N.H., facility, and just last month it started to install several 5,000-L reactors at the site. In microbial fermentation, Lonza has spent $180 million to expand capacity in Visp, Switzerland. The other piece of Lonza's custom manufacturing division is the exclusive synthesis of small-molecule intermediates and active pharmaceutical ingredients (APIs). The business, which contributed 21% of sales in 2005, is getting back on its feet after several challenging years. An empty drug industry pipeline, significant overcapacity, and heavy competition from Asia all contributed to a difficult operating environment. Several players, notably Rhodia and Avecia, have exited the business. Despite the hurdles, Lonza continues to cultivate the small-molecule business, and Borgas attributes the revival to the "very diligent and disciplined" investment in R&D that began three years ago. "I think there are too many extreme views in this market," he says. Talk in recent years of the "death" of small-molecule outsourcing is just as overblown as the hype that surrounded outsourcing in the late 1990s, Borgas maintains. Big pharma never turned awayfromoutsourcing, he says. Rather, outsourcing trends mimic that of the market for new drugs themselves, an erratic pattern that can fluctuate from shrinkage to double-digit growth. Borgas acknowledges that even in the good years, competition, particularly from Indian and Chinese producers, has become tougher. "We are not afraid of competition anywhere in the world, nor on the other hand are we taking it lightly," he says. Lonza has yet to lose a major project to an Indian producer because of price, Borgas claims. Yet he is also keenly aware of the need to adapt to the times. Lonza has long produced the bulk of the world's supply of niacinamide, or vitamin B-3, in Guangzhou City, China. And the company recently opened an R&D facility in China's Nansha Development Zone that is devoted to process development for intermediates and APIs. But Lonza's biggest push into China came
last month when Borgas unveiled plans to spend $200 million on manufacturing in Guangzhou over the next several years. The company will build a multipurpose complex for intermediates and APIs that will include both pilot- and commercialscale capabilities. The pilot plant is expected to be completed next year, and the API facility should open in early 2008. Guangzhou will largely be used to produce customers' mature pharmaceutical actives that are three to five years away from patent expiration. It will also serve as a cost-effective source for intermediates that can be fed into the company's U.S. and Swiss plants, Borgas says. WHILE LONZA invests to ensure the longterm sustainability of the exclusive synthesis business, the company is also laying the foundation for its future growth. The $145 million acquisition inJanuary of UCB-Bioproducts, the peptide drug manufacturing arm of Belgian drugmaker UCB, augments Lonza's homegrown position in afieldthat is ripe with opportunity. Peptides are high-tech products and enjoy higher profit margins than small molecules do, Borgas says, but they have a risk profile closer to that of biopharmaceuticals. Although peptides represent only a fraction of the drugs on the market, he adds, it is a rapidly growing fraction. According to Pollak, the UCB purchase makes Lonza the clear market leader in peptides. The company can offer the full range ofpeptide-manufacturing technologies: liquid-phase synthesis, solid-phase synthesis, and microbial fermentation. Though it has not made many splashy investments in its third key business, organic fine and performance chemicals, Lonza is working hard to get the unit back on a growth track. Sales in the division, which accounted for 36% of 2005 sales, were down 4.7% in 2005. Margins have been squeezed by high raw material costs, but Borgas says the company is now building a pipeline of new products that will help turn things around. Aided by purchases such as Nutrinova's business in docosahexaenoic acid, an omega-3 fatty acid, the division is expected to contribute to growth starting in 2008. At the end of the day, Borgas believes that Lonza will thrive because of its willingness to take risks to support its business and, most important, because ofits laserlike focus on fine chemicals. "We are not looking at clinical development and are not producing generics for our own sake," he says. "We are really a custom manufacturer and a custom process development company." •
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