UPDATE 2-Lonza to focus on pharma as benefits from outsourcing

Thu Jan 23, 2014 8:23am EST

* FY sales 3.58 bln Sfr vs 3.72 bln poll f'cast

* Net profit drops 44 pct to 87 mln Sfr

* Expects 2014 core EBIT to grow 10 pct

* Says pharma and biotech is No.1 target market

By Caroline Copley

ZURICH, Jan 23 (Reuters) - Swiss speciality chemicals maker and life sciences group Lonza said it plans to focus on the pharmaceutical and biotech market as it benefits from drugmakers increasingly outsourcing production.

The firm, faced with low-cost competition, a strong Swiss franc and higher raw material prices, has been undergoing a structural overhaul since Richard Ridinger took over as Chief Executive in May 2012.

Last year, it shut down plants, cut jobs and exited projects including a generic drugs venture with Israel's Teva to try and improve profitability and productivity.

Ridinger said on Thursday he had identified the pharma and biotech market as Lonza's "No.1 target market" after the company - which makes ingredients for drugmakers like GlaxoSmithKline and chemicals for fertilisers - posted lower-than-expected net profit and sales for 2013, hit by the restructuring measures and unfavourable exchange rates.

"We have been able to ride the wave of growing outsourcing trend in the industry and have landed substantial new contracts," he told reporters, without elaborating.

Lonza hopes to benefit from outsourcing as drugmakers seek to make their manufacturing processes more efficient in the face of patent expiries.

The CEO said Lonza was actively working on around 20 antibody-drug conjugate (ADC) projects although they remained in the clinical testing stage and would take some time before they come to market. ADCs are increasingly being used as targeted therapies for cancer.

The Basel-based company currently manufactures the ADC used in Roche's breast cancer drug Kadcyla, which is forecast to have annual sales of more than $4 billion by 2019, according to Thomson Reuters Cortellis.

Ridinger said focusing on its pharma and biotech unit - the smaller of its two market segments - could also create "synergies" with other businesses such as consumer care, part of its speciality ingredients segment. For example, chemicals produced by the unit could be used in skincare products.

As part of its overhaul, Lonza also wants to hive off some units to free up cash to help cut its 2.1 billion Swiss franc debt pile. It is considering all options for its wood treatment unit, including a joint-venture or sale, the CEO said.

PROFIT PLUNGE

The firm's full-year 2013 net profit fell 44 percent to 87 million Swiss francs ($95.6 million) compared with 156 million a year earlier. Analysts polled by Reuters had on average forecast 120 million Swiss francs.

Sales slipped 4 percent to 3.58 billion francs, also falling short of analyst forecasts, hurt by lower revenue in its recreational water business due to a slow start to the summer last year as well as unfavourable exchange rates.

Lonza forecast a 10 percent increase in core earnings before interest and tax (EBIT) for 2014, as well as revenue growth of 5 percent. It also confirmed its mid-term targets for 2015 of mid-single digit percentage growth in annual sales and an EBIT margin of at least 20 percent.

The pharma and biotech unit reported a 7.9 percent drop in 2013 sales to 1.43 billion Swiss francs ($1.57 billion), hit by lower revenues in the first half when there was a production stop at its Visp manufacturing site to increase capacity.

But the company said it had started manufacturing new products for long-term contracts in the second half and had raised its capacity utilisation to planned levels.

Lonza said it would pay a dividend of 2.15 francs per share, the same amount as last year.

Shares in the firm were trading up 2.7 percent at 95.50 Swiss francs at 1321 GMT, against a 0.2 percent rise in the European healthcare sector index.