Letter to Shareholders
Dear Fellow Shareholders,
Last year’s record performance was not just a “one-off” result as it represented the fifth year in a row that we delivered improvements on all major financial performance indicators. Since we started our transformational journey in late 2012, we have shown steady and continued improvement in all our key performance indicators, which in turn has been reflected in significant improvements in our share price.
We are grateful to you, our shareholders, for the faith you have demonstrated in Lonza with your ownership. Your investment – but above all the hard work of our 10,000 employees to deliver on our strategies – has helped drive strong shareholder, customer and stakeholder value.
You can be assured that this performance only whetted our appetite to launch and pursue further strategic growth initiatives that are aimed at making Lonza the leading integrated solutions provider for the global pharmaceutical and consumer healthcare and nutrition markets.
Subject to the approval at the Annual General Meeting, our Board of Directors has suggested a dividend of CHF 2.75 per share for 2016, another vital way to reward your investment in us. With a solid balance sheet and strong cash flow, our dividend is secure; and we are able to invest in both organic growth and complementary acquisitions.
Our outstanding financial results were driven by particularly strong results from our Pharma&Biotech segment and by another solid performance in our Specialty Ingredients segment. Overall, sales grew by nearly 9% to CHF 4.13 billion, led by remarkable Pharma&Biotech sales growth of nearly 16% year-over-year. We also posted our highest-ever CORE EBIT (Earnings Before Interest and Taxes) of CHF 651 million, up by 24.2%. Another important measure of our financial health – our CORE RONOA (Return on Net Operating Assets) – substantially improved to 21.5%, compared with 16.4% last year. We can rightfully be proud of these achievements – the best in Lonza’s 120-year history.
It’s not a given that every year will be a record year. We have to make it happen by excelling at profitably serving our customers and by otherwise executing on all of our strategic growth plans. The 2016 results confirmed the value of our overall strategy, which is to excel at serving the entire healthcare continuum, spanning all of Pharma&Biotech and many of our Specialty Ingredients businesses.
Breakout Year for Pharma&Biotech
Our Pharma&Biotech segment delivered an outstanding performance, driven by commercial excellence, strong operational execution and continued cost discipline. The strong momentum in Mammalian Manufacturing was complemented by a significant upward trend in all other technologies and modalities. Our Mammalian business was able to further broaden its customer base with new contracts of significant length being signed. In addition, better-than-anticipated market uptake of our clients’ therapeutics resulted in extended contract volumes. Subsequently, the order-book visibility improved once more. Also our Chemical and Microbial Manufacturing business made considerable progress in 2016, further developing new business models and securing long-term commitments.
The main 2016 highlight for our Emerging Technologies business included the start of the construction of a new viral therapy facility near Houston, TX (USA). This new facility, which is planned to come online towards the end of 2017, will be able to develop and manufacture both viral gene therapies and virally modified cell therapies.
In 2016 we acquired Triangle Research Labs, an industry leader in human and animal hepatocytes and robust, multifunctional cell lines. Its offerings have further strengthened Bioscience Solutions.
Specialty Ingredients Posts Another Solid Year
The Specialty Ingredients segment posted sustained strong performance again last year. This good progress was driven by the positive results in the Wood Protection, Consumer Care and Water Treatment businesses, as well as by an improved product mix and portfolio optimization. The expected slowdown in Agro Ingredients caused by the lower agro market dynamics had some impact on the overall growth for Specialty Ingredients. Lonza will continue to conduct operational and value-chain improvements to further enhance profitability.
Last year’s acquisition of InterHealth Nutraceuticals also strengthened our offerings in the nutritional and consumer healthcare ingredients market, where we are now strongly positioned to capitalize on leading consumer and health trends.
Why We Invest in the Healthcare Continuum …
In 2016 Lonza refined our overall strategy to accelerate growth and deliver value along the healthcare continuum by complementing our existing offerings and by opening up new market opportunities in the pharma and consumer healthcare and nutrition industries. Our technologies and manufacturing expertise make Lonza well positioned to be a leading supplier to these markets where medication, healthy food, hygiene, personal care and clean water are necessary to meet the needs of the world’s population.
All products and services across both the Pharma&Biotech and Specialty Ingredients segments have in common that the highest regulatory standards have to be observed and that quality, consistency and reputation play a major role. Recent moves – such as the investment in Drug Product Services (DPS), the acquisition of InterHealth Nutraceuticals and the proposed acquisition of Capsugel – make Lonza the partner of choice for our pharma and consumer healthcare and nutrition customers along the entire healthcare continuum.
Why Capsugel Is a Perfect Fit …
In late 2016 we reported that we intend to acquire Capsugel, a leading global provider of oral, nasal and other drug-delivery products and systems. This acquisition, which we expect to close during the second quarter of 2017, is fully in line with Lonza’s stated strategy to accelerate growth and deliver value along the healthcare continuum. Lonza’s existing offerings, combined with Capsugel’s complementary portfolio, will open up new market opportunities in the pharma and consumer healthcare and nutrition industries. With the acquisition of Capsugel, Lonza will add a trusted brand with a large breadth of technologies and will expand the market reach of our contract development and manufacturing organization and products businesses. It will also support Lonza’s strategic ambition of getting closer to the patient and end consumer.
This value-creating acquisition will transform our company. It will establish us as one of the world’s leading and most-trusted suppliers to the pharmaceutical, biotech and specialty ingredients markets. The acquisition is expected to be value accretive to our CORE earnings per share in the first full year after closing of the transaction. It is also important to point out that Capsugel’s strong cash flow is expected to help us in reducing debt in a timely manner.
Based on the sound foundation for the future that we laid in 2016, Lonza is announcing the following outlook for 2017, on a Lonza standalone basis:
- Sales growth of mid-single digit
- CORE EBITDA of CHF 1 billion
- Double-digit CORE EBIT growth
- CORE RONOA above the 21.5% achieved in 2016
This outlook is based on the present macroeconomic environment, current visibility and constant exchange rates for the most important currencies in which Lonza is trading. The mid-term guidance will be reviewed in the course of 2017. Depending on the timing of the potential Capsugel acquisition closing, Lonza intends to provide an update as part of the half-year results report on 26 July 2017 or latest by the third-quarter business update on 26 October 2017.
Changes to the Board of Directors
The Board of Directors is proposing to Lonza’s Annual General Meeting (AGM), to be held on 25 April 2017, the election of Albert M. Baehny (64) as a new member of the Board. Subject to his election, the Board will appoint Mr. Baehny as Vice Chairman of the Board, with the intention to propose him as the new Chairman at the AGM 2018. The Board is proposing the re-election of Rolf Soiron as the Chairman for one more year until the AGM 2018 in order to ensure continuity in the supervision of the Capsugel transaction and its successful integration. Thomas Ebeling has decided not to stand for re-election at the AGM this year. On behalf of the Board, we would like to thank him for his contributions during his three years of service on the Board and on the Nomination and Compensation Committee. The Board is further proposing to the AGM the re-election of all other Board members.
Why We Are Thankful …
Obviously, the Board of Directors and the Executive Committee did not achieve last year’s record results by ourselves. We want to thank you, Lonza’s shareholders, for your support and investment, which we take as a token of confidence in our ability to deliver. Also we would like to thank our customers, suppliers and other business partners for their trust in our products and services. And above all, our gratitude goes to our employees around the world. Their professionalism, productivity and commitment have made our progress possible and have helped to make Lonza "The Place to Go, Stay and Grow." We have proven that we are capable of achieving remarkable results, and now we are focused on the day-to-day work that will make 2017 another year to celebrate and savor.
With our best regards,
Chairman of the Board of Directors
Chief Executive Officer