Lonza boots out CEO as 2011 profit plunges

ZURICH Wed Jan 25, 2012 3:59am EST

ZURICH (Reuters) - Swiss drugs industry supplier Lonza (LONN.VX) (LONZ.SI) kicked out chief executive Stefan Borgas after profits for 2011 plunged by a third and said 2012 was set to pose further challenges because of the difficulties faced by pharmaceutical firms.

The Basel-based group, which is battling currency headwinds and volatile raw material prices, said the board took the decision to replace Borgas in the last 48 hours.

"CEOs have a responsibility to deliver on expectation and I think our company over the last few years has not fully lived up to the expectation," Lonza Chairman Rolf Soiron told a conference call on Wednesday.

Lonza makes high-margin pharmaceutical ingredients for drugmakers like GlaxoSmithKline (GSK.L) and Abbott (ABT.N), and has moved back into specialty chemicals as it seeks to shield itself from the volatile pharmaceutical industry.

Another customer, Novartis (NOVN.VX), said on Wednesday it was bracing for lower profitability this year as key products like top-selling blood pressure drug Diovan face competition from cheaper rivals.

Lonza, which bought U.S-based Arch Chemicals last year, said it wanted to focus on delivering expectations and improving its returns on capital invested, although the environment would remain tough.

"We feel the capital invested is not generating the returns our investors would expect," Soiron said.

Net profit dropped 33 percent in 2011 to 190 million Swiss francs ($204 million), excluding the Arch acquisition. Analysts in a Reuters poll had forecast net profit of 201 million.

By 3:23 a.m. ET shares in Lonza were down 9.7 percent, making it by far the worst performer in a 1.2 percent lower European healthcare sector index .SXDP.

SURPRISE

The timing of the board's decision caught analysts off guard.

"The surprise announcement, at least to us, is CEO Stefan Borgas' departure driven by the Board's decision to improve returns," Jefferies' analysts said in a note. "We understand the rationale but personally were impressed by Borgas' vision."

Soiron will head the management committee while the company considers external and internal candidates for the CEO role.

Vontobel analyst Carla Baenziger said the change of the guard showed the company was in a challenging situation.

"The Arch acquisition in our view will have a cosmetic effect on earnings growth short term but is likely to bring more volatility in Lonza's numbers," she said.

Lonza said it expected the $1.2 billion acquisition of U.S.-based Arch chemicals to boost earnings per share growth in 2012.

The company is seen to be well-placed to benefit from pharmaceutical companies' efforts to make their manufacturing processes more efficient as they face expiring patents on their top-selling drugs and rising price pressures.

Lonza suffered an 84 million negative impact from the strong Swiss franc, which hit multiple record highs against the dollar and euro last year.

Lonza said it would pay out 2.15 Swiss francs per share for 2011, the same as in the previous year.

($1 = 0.9299 Swiss francs)

(Editing by Jodie Ginsberg)