October 28, 2011 / 7:36 AM / 8 years ago

UPDATE 2-Lonza sees growth on pharma outsourcing

* Strong franc, raw materials weighed on margins

* Margin pressure set to continue

* Sees franc shaving 80-90 mln Sfr from operating profit

* Lonza shares rise 2.3 pct, outperform sector index

By Katie Reid

ZURICH, Oct 28 (Reuters) - Swiss drugs industry supplier Lonza is set to grow underlying sales and operating profit this year despite the strong Swiss franc as it benefits from robust demand from pharmaceutical groups, particularly at a plant in China.

But the group said in its third quarter business update that the franc and high raw material prices had weighed on its margins, particularly at its life sciences ingredients unit, and that this was unlikely to change any time soon.

Like many other Swiss companies, Lonza is battling with headwinds from the franc, which hit a series of record highs against the dollar and the euro earlier this year.

Lonza now expects the franc to have an impact of 80 to 90 million francs on its operating profit, up from a previous forecast of 70 million francs ($81 million).

Lonza Chief Executive Stefan Borgas said, however, the Swiss National Bank’s move to cap the franc against the euro last month had reduced volatility.

Lonza has just wrapped up its $1.2 billion buy of U.S.-based Arch Chemicals , a move that will make the group less vulnerable to currency movements and boost its presence in fast-growing emerging markets.

“Looking ahead to the remainder of the year we expect further solid progress based on our current order pipeline,” Lonza said in a statement.

At 0712 GMT, Lonza shares were trading 2.6 percent firmer, outperforming a near flat European healthcare sector index .

OUTSOURCING TRENDS

“The long-term prospects for Lonza should still be intact, as the trend for outsourcing for cost reasons is set to continue and life science products are likely to become more significant,” analysts at Wegelin said.

Lonza is 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.

Swiss drugmaker Novartis said on Tuesday it planned to cut 2,000 jobs in Switzerland and the United States to help it deal with the tough pricing environment.

“This announcement by Novartis is just another example that the pharma companies are serious about streamlining their networks and that means that Lonza as a partner for them is much more viable in these kinds of changes,” Borgas said.

“For the next one, two, three, years ... I would expect Lonza to maybe profit from this trend,” Borgas told journalists on a conference call, adding, however, he did not expect Lonza to benefit directly from Novartis’ cuts.

Analysts expect higher demand for biosimilars, or copies of complex drugs, to boost Lonza as drugmakers invest in biologics, which are used to treat more complex diseases like cancer and rheumatoid arthritis.

The group is working with Israel’s Teva to develop a generic version of Roche’s blockbuster antibody drug Rituxan, also known as MabThera.

Lonza, which is now also listed in Singapore, is also banking on rising demand for pharmaceuticals in China to spur growth in Asia and expects its dual-listing in Singapore to help raise funds in the future.

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