Lonza surprises markets with first half profits warning

19 May 2003 22:11  [Source: ICIS news]

This year is getting tougher for fine and specialty chemical producers. The custom synthesis business is difficult to say the least, and even biological fermentation capacity is under-utilised. Companies are having to claw back costs and cut further. At least one is looking at a different custom manufacturing business model.

Lonza is the latest producer to warn of reduced profits. First half operating earnings will be 20% down on last year, it says now. Not surprisingly that has upset the markets and Lonza shares dropped sharply in value today. Only recently, Lonza was relatively upbeat about the ability of the biotechnology business to offset the overcapacity-driven downturn in chemicals custom synthesis.

The company remains confident in a second half improvement driven in large part by a refilled order book, some new projects and another round of restructuring. It also hopes for lower raw material prices for its fine chemicals and performance chemicals businesses. It is looking to improve the cost structure by as much as SF100m (Euro66.2m) a year by reducing overhead in all business sectors and service functions. As many as 500 jobs are to go mainly in the US and Europe, including 90 in Switzerland.

The job cuts and the revised outlook are based on the much changed market conditions in the fermentation synthesis business, Lonza Biologics. Small biotechnology companies don’t have much cash and are pursuing a reduced number of new products. Customers have seen products fail in late stage clinical trials. The impact is being felt at the top of the production chain at the same time as Lonza’s Biologics faces increased competition from new small- and medium-scale fermentation capacity.

Lonza is not alone in facing pressure in custom manufacturing. It says that so far this year customer’s new product approvals have not increased significantly as they would have had to have done to lift the market, and customer de-stocking has continued. Its exclusive synthesis product line is growing and capacity utilisation is increasing at the large reactors in Riverside, Pennsylvania in the US and at Visp in Switzerland.

Lonza Biologics clearly has not given the company the boost it expected so far this year. Fermenter capacity utilisation is lower than expected, but Lonza says take-or-pay contractual payments by customers will offset most of the profit shortfall in 2003. Targeted back-up products have faced delays in clinical trials, and efforts are being made to re-build the order book for 2004.

Given the circumstances, Lonza says it wants to re-design the business model for custom manufacturing. It is thinking about whether it should combine all early clinical development expertise (chemical, mammalian and microbial) into one global technology services business. As a consequence it might integrate all cGMP (current good manufacturing practice) production into a single custom manufacturing business. In that way it believes it can broaden its technology offering and give itself grater opportunities to fill its large reactors. It could lift operating efficiencies and realise an additional SF50m of savings by the end of 2004.

Lonza probably can squeeze more costs out of the business but it needs that leeway as insurance against continued capacity and cost difficulties in the second half. The company has surprised the markets and won’t be rewarded for that. Analysts and others will be waiting for the 23 July update when Lonza says it will give details of the new business model and the impact of expected changed market conditions on profits targets for 2005. Lonza’s earlier targets were for 2005 sales of SF2.7bn (sales were SF2.54bn in 2002), earnings per share growth of 15%, an operating margin of 22% and EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 30%.

By: Nigel Davis
+44 20 8652 3214

< previous article(ICIS Podcast: Chemical News Central 2 November 2009)

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly