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Lonza fires Borgas as weak results announced

Lonza sacked its CEO of eight years Stefan Borgas shortly before issuing its results for 2011

SWITZERLAND

Lonza sacked its CEO of eight years Stefan Borgas on 26 January shortly before issuing its results for 2011. These followed two profit warnings and showed that profits fell by nearly half on 2010, with warnings being made of further challenges ahead because of the strong Swiss franc and the enduring problems within the pharmaceuticals sector

"The board is the coach on the sidelines. After a certain point we say the performance is no longer good enough and we have to change the captain," said company chairman Rolf Soiron, who added that the decision had been taken within the two days immediately before the results were published. He himself will head the management committee as the board seeks a successor.

Soiron indicated that Lonza will first look internally. "During the past two or three years Lonza has failed to live up to expectations. We have come to the conclusion that we want to focus more on delivery of expectations, especially in these challenging times, and that is why we have started the search for a new CEO."

Borgas was named CEO in June 2004, five months after his predecessor Markus Gemuend stepped down during a previous downturn in the pharmaceutical outsourcing market. He had previously worked in various functions for BASF over the course of 14 years, rising to be group VP of the Fine Chemicals business units of the EMEA region and then in North America.

Borgas paid the price for poor results in 2011

Last year, Borgas pulled off by far the most significant change during this tenure, by acquiring Arch Chemicals for $1.2 billion. This swung Lonza back from being essentially a supplier of pharmaceutical services to participating in speciality chemicals again, by becoming a giant in the field of microbial control.

In 2011, with Arch excluded, Lonza's revenues were basically flat at €2,076 million, though 5.6% up in constant exchange rates. EBITDA margins fell from 24.0% to 22.3%. Because of the Arch acquisition, gearing shot up from 46% to 112%.

More significantly, Lonza felt a €70 million negative exchange rate impact, thanks to the high Swiss franc, higher and more volatile raw material prices, especially in the China-based Life Science Ingredients division, and an FDA warning letter at the Hopkinton sit. EBIT was consequently down to €242 million, while net profit fell by 46% to €128 million.

The Custom Manufacturing division saw high demand from pharmaceutical and biotechnology companies, especially in biologicals, where utilisation rates were above 85%, excluding the new plant in Singapore. Some important new contracts were signed. However, from Q3 onwards, the Microbial Control division experienced a slowdown in established markets, partially offset by other markets.

According to the Wall Street Journal, recent weak performances and a 20% fall in the share price over the past year had led to discontent among investors, who include Manning & Napier Advisors, Franklin Resources, Bank of New York Mellon and BlackRock. Many observers, however, were surprised at Borgas's sudden departure.

Soiron said that the company would revise its long-term targets. It aims to improve its return on invested capital and shareholder returns through high free cash flow generation. The 2011 dividend was unchanged.

The company stated in its annual results that it expects 2012 to be "again a challenging year". However, it added, "the acquisition of Arch allows to expect overall earnings growth which will translate into significant growth of earnings per share as well", enhanced by synergies from the deal, ongoing productivity measures in Switzerland and projects in such growth areas as biosimilars, antibody drug conjugates and cell therapy.

Subsquently, Lonza announced an unspecified investment into a new "manufacturing concept" at its main site in Visp. The so-called 'Factory of Tomorrow' will use continuous flow and microreactor technologies, notably the company's own FlowPlate microreactors, in the development and manufacture of APIs. It will be ready for full operation in June.

The company said that the 'Factory of Tomorrow' "will offer expedited development and technical transfer in a cGMP environment and expanded capabilities for multiple chemical reactions in extreme conditions". It will offer multi-tonne productions of intermediates and/or APIs, where Lonza currently operates at scales of several kilos to several tonnes of small molecules.

From Online Issue: February 2012