Outstourcing Insights Lonza Commits to Life Sciences Sector

At a time when many contract manufacturers of active pharmaceutical ingredients (API) are retrenching or exiting the business altogether, Switzerland-based Lonza Group has totally committed itself to the life sciences sector. Despite big pharma sourcing strategies and growing Asian competition, Lonza is betting that a combination of superior technical and business skills can yield strong returns in a difficult sector.

Jim Miller

Lonza has conducted a series of major transactions during the last 18 months and restructured its corporate portfolio to the point where 90% of its revenues will come from life sciences customers. Two of the largest and most far-reaching of those deals were finalized in the last quarter of 2006.

LONZA ACQUIRES GENENTECH'S SPANISH FACILITY

In November 2006, Lonza and Genentech announced that Lonza would acquire Genentech's cell culture factory in Porriño, Spain, and will build an 80,000-L facility in Singapore dedicated to Genentech's requirements. Lonza will purchase the Porriño facility for $150 million. The FDA-licensed facility has four 10,000-L mammalian cell culture bioreactors and manufactures Genentech's Avastin cancer therapy. Lonza will continue to supply Avastin to Genentech from Porriño under a short-term supply agreement.

Genentech also entered into a long-term agreement with Lonza for Avastin and other oncology products to be supplied from Lonza's new facility in Singapore. Genentech received an option to acquire the Singapore facility from Lonza at any time between 2007 and 2012, for $290 million, with an additional $70 million to be paid to Lonza if performance milestones are met. Based on the option and volume commitment from Genentech, Lonza will build a second 80,000-L cell culture facility in Singapore on the same site.

The deal appears to be a classic "win–win" transaction. Genentech secures its supply of API from a trusted vendor, while gaining additional Avastin manufacturing capacity one year earlier than if it were to build the facility itself. Moreover, Genentech gets cash from the sale of the Porriño facility, which can be used to buy the Singapore facility.

For its part, Lonza locks in a long-term deal with a strategic client by acquiring a mid-scale capacity two years earlier than it had expected. The deal has materialized at a good time because 2006 proved to be a significant year for Lonza's biomanufacturing business. The number of projects in its internal biomanufacturing pipeline grew by 40% to over 75 projects. Its bioreactor capacity utilization rose to nearly 95% from 75% at the beginning of the year. Contributing to Lonza's success for the year was the FDA approval for manufacture of Bristol Myers-Squibb's Orencia product, which is being made in the fourth 20,000-L bioreactor at Lonza's Portsmouth, NH, facility.

The Genentech deal highlights Lonza's distinctive skill in crafting creative deals that limit its risk exposure. In the Genentech deal, and in the 2005 deal with UCB Pharma, under which it is building two 15,000-L microbial fermentors in Visp, Switzerland, Lonza has secured long-term supply agreements in advance of building expensive biomanufacturing capacity. Lonza has arranged a significant investment from Bio*One Capital, a government-backed investment bank, to fund most of its capital costs for the two Singapore facilities.

The big capital investments required to build capacity caused several of Lonza's competitors, including DSM, Cardinal Health, Dowpharma, and Diosynth, to favor less risky strategies that focus on technology licensing and development services. By the way it has financed its biomanufacturing investments, Lonza has shown that business skills are just as important as technical skills in securing competitive advantage.

LONZA BAGS CAMBREX BIO BUSINESSES

Lonza's other big deal in 2006 was its agreement to buy the biology-based units of Cambrex for $460 million. The sale requires approval by Cambrex shareholders and is expected to close in early 2007. Cambrex's biomanufacturing and bioproducts business segments are included in the deal.

The biomanufacturing division provides contract manufacturing services for therapeutic proteins and monoclonal antibodies from sites in Baltimore and Hopkinton in the United States. Its capabilities and expertise are primarily in microbial fermentation, with fermentors up to 2,800-L scale. The acquisition will also provide a North American development location to complement Lonza's development operation in Slough, UK.

Cambrex's biomanufacturing business had revenues of $42 million in 2005, but has been plagued by product cancellations and operating problems. Cambrex recorded charges totaling $131 million in 2004 and 2005 to write off much of its investment in the business.

The Cambrex bioproducts business represents a major diversification for Lonza, because it involves selling products rather than services. It had revenues of $150 million in 2005, up 10% from the previous year. Also, its $25 million in operating profits was the biggest contributor to Cambrex's bottom line. Bioproducts includes four product lines:

• Research products supplies cell-based products used in research laboratories for cell and molecular biology and bioassays.

• Analytical systems and services sells consumables and instruments used for rapid microbial detection in laboratories and manufacturing environments.

• Biotherapeutic media and sera provides media used in cell culture, primarily in research settings.

• Cell therapy and bioservices includes contract manufacturing and testing capabilities for cell-based products like tissue replacement.

Acquiring the Cambrex bioproducts division is a gutsy move for Lonza because it involves complexities not present in its other acquisitions. The acquisition comprises four business segments that are very different from each other. All the segments require R&D expenditures to support new product development, as well as separately targeted sales and marketing efforts.

In addition, Lonza will have to compete with several large companies in these businesses. The competition includes Invitrogen, which has sales of $1.2 billion and a large catalogue of biology-based research products and custom media; Thermo Fisher, formed by the recent merger of Thermo Electron and Fisher Scientific, which has revenues of $9 billion and an even larger research products catalog; and Millipore, a $1.2 billion company that is a big player in the microbiology sector. All three have been aggressive acquirers and enjoy substantial economies of scale.

Despite these risks, Lonza CEO Stefan Borgas is confident that the Cambrex bioproducts acquisition is an appropriate component of Lonza's life sciences portfolio. "The Research Bioproducts acquisition is a natural development in our core focus area," he said in his announcement about the acquisition. "It extends our technology and value chain activities and gives us access to new high-growth complementary customer and product segments in the life sciences market. Together, these developments are transformational for Lonza."

Jim Miller is president of PharmSource Information Services, 703.383.4903, Jim.Miller@pharmsource.com