A hoped-for recovery in the second half of 2003 failed to materialise at Lonza, causing the chemicals and custom manufacturing firm to post steep declines in sales and profits for the full-year.
Chief executive Markus Gemuend has tendered his resignation, saying a new leader is needed to navigate the company through what promises to be a difficult 2004. And while Lonza's interim 2003 results had pointed to the difficulties at the company, analysts said the full-year figures were worse than expected, sparking a 12 per cent drop in its shares to SF 62.90, just above its 52-week low.
Group sales slipped 11.6 per cent year-on-year to SF 2.24 billion (€1.43bn), affected by overcapacity in its custom manufacturing businesses. Meanwhile, operating income fell by 27.9 per cent to SF 302 million and margins were also squeezed, at 13.5 per cent versus 16.5 per cent in 2002.
Analysts expressed disappointment that Lonza had incurred additional, unexpected restructuring costs - namely a SF100 million charge taken to decommission some fine chemicals production capacity - which contributed to a 58.8 per cent decline in net income to SF91 million.
Sales were affected by a decline in the number of new products coming through to market, overcapacity in the biotechnology business and a number of product failures in late-stage clinical trials. Overall, custom manufacturing sales were SF835 million, 14.6 per cent below the previous year's level.
Biotechnology - and particularly drugs made in mammalian cell culture (Lonza Biologics) - has been one of Lonza's big investment projects over the last few years, perhaps unsurprisingly as Gemuend was made CEO after doing a good job at this division. But in 2003 a lack of demand hit hard at Lonza's smaller-scale (2,000L and 5,000L) reactors, which tend to be used in the early stages of a product's life cycle while sales are building.
The group recently added 60,000L of large-scale capacity at its facilities in Portsmouth, US, but says it has been able to find customers for the three 20,000L units, due to go on-stream in July. Lonza will make the active ingredient for Genentech's cancer drug Rituxan (rituximab) at this site, and last year also signed another long-term supply agreement with a top 10 pharma company. It expects the capacity to be nearly filled in 2005.
Turning to microbial cell culture (Lonza Biotec), the group noted that the slump in turnover in 2003 has forced it to scale back investment in new facilities, including its microbial fermentation plant in Visp. However, a small-scale plant will come on-stream as planned in the second quarter.
Sales at all Lonza's other divisions were also down. The Organic Fine & Performance Chemicals unit reported a turnover of SF 826 million, down 13.7 per cent compared to 2002, negatively impacted by high prices for raw materials and energy and reduced demand for some of its major products. For similar reasons Polymer Intermediates' turnover shrank 3.3 per cent to SF 578 million.
Looking ahead to 2004, Lonza expects the difficulties in the custom manufacturing to continue, especially for Exclusive Synthesis, although this will be offset by improvements in capacity usage in Biotechnology. These will trim operating profits back still further to around SF225 million for the full-year, it said.
The group has also backed away from plans to sell its Polymer Intermediates business, which is now one of the better performing units at the group in terms of profits, for fear this would negatively affect future earnings.