Letter to Stakeholders Audited

Richard Ridinger
Chief Executive Officer
Rolf Soiron
Chairperson of the Board of Directors

Dear Stakeholders,


The year 2017 was a good year for Lonza, indeed – not only because we achieved better results than anticipated, but also because we made important steps forward in our journey to become the partner of choice for our customers worldwide by more and more unique offerings of value for the pharmaceutical and consumer healthcare industries.

We are pleased that the company was capable of executing and integrating Capsugel – the largest acquisition in our history – successfully and according to plan. Lonza also grew organically by a healthy 10.4% versus prior year and exceeded our 2017 guidance standalone sales. The addition of Capsugel for approximately half a year led to sales of CHF 5.1 billion with a CORE EBITDA margin of 24.8%. Pharma&Biotech and Specialty Ingredients contributed to the record-breaking results, while Capsugel has confirmed its potential to add to Lonza's growth.

Yes, we think, Lonza has become stronger than ever. However, our leaders and staff will remain focused on optimizing further processes and structures to ensure that profitable growth continues well into the future. That is why our focus for 2018 will be on thorough execution and efficiency, particularly for Lonza's enabling functions – like IT, procurement and finance – which must continue to be modernized and optimized in order to support the company’s further prosperous growth.

The Healthcare Continuum as Lonza’s Framework


We want to strengthen Lonza’s leading role as a provider of valuable solutions for the global pharmaceutical and consumer healthcare markets, with a focus on patient health, consumer preventive health and healthy consumer environment. The “healthcare continuum” describes well how many markets offer growth and development potential for Lonza, and it also provides a common platform for our different technologies and capabilities. Markets within the healthcare continuum span all of our Pharma&Biotech and many of our Specialty Ingredients businesses – from prescription drugs to personal care and well-being.

Accelerating growth within the healthcare continuum was also at the roots of the decision to acquire Capsugel, the leading provider of innovative dosage forms for the biopharmaceutical and the consumer health and nutrition industries.

The healthcare continuum provides a strategic framework for what we do and what we stand for, and it will contribute to an even-better recognition of Lonza’s values and ambitions.

Integration Is Essential


Through the acquisition of Capsugel, Lonza added a trusted brand with a large breadth of technologies. With Capsugel we expanded the market reach of Lonza’s contract development and manufacturing organization (CDMO) and products businesses.

The integration has been progressing smoothly: Employees are already acting as one organization. But we are still only at the beginning of a long path of fully exploiting all the potential of our combined skills and strengths.

We are well positioned to benefit from the dynamics in our customers' industries and to address the most-interesting technology trends. However, we must continue to work on our goals of establishing an integrated portfolio of industry-leading technologies – from active pharmaceutical ingredients (APIs) through excipients to dosage forms and delivery technologies – and of building a leading integrated, value-added solutions provider in drug development, formulation, delivery technologies and manufacturing for the global pharma and consumer healthcare industries.

We should not overlook the fact that Lonza's family also grew in 2017 with smaller acquisitions: PharmaCell in the Netherlands, MicroMacinazione in Switzerland, HansaBiomed in Estonia and the Hayward, CA, site in the United States. Integration of all these interesting new units is progressing well.

We Foster Profitable Growth


As we already mentioned, Lonza grew organically, too. Growth will continue to be the watchword in 2018 and beyond. For that reason we have been investing in innovative business models and projects like Ibex® Solutions in Visp (CH), which, by the way, also demonstrates our commitment to strengthen Switzerland as an industrial hub. Continuous facility expansions and upgrades, driven by customer needs, such as the U.S. sites of Houston, TX; Portsmouth, NH; and Bend, OR, will also contribute to Lonza’s growth. Needless to say, we will continue to grow also by adding bolt-on technical acquisitions wherever we find convincing opportunities.

Lonza’s goal is to strengthen our global footprint, also by enforcing our positions outside the company’s already-strong home markets of Europe and the United States, with greater emphasis in South East Asia, South America, China, Japan, India, Oceania and South Africa.

We Believe in Industry Responsibility


Lonza not only operates sites worldwide, but also feels responsible for our impact on and relations with the local communities where we live and work. Yes, we also take responsibility for our industrial heritage, as demonstrated by our continued progress in Visp (CH) on remediating the mercury situation.

We want our sites to make further progress toward comprehensive environmental and health protection and safety at work, and we do not shy away from higher ambitions than merely complying with legal standards. Sustainability and corporate social responsibility continue to be high on our agenda going forward.

Our sites should become good ambassadors of the healthcare continuum!

How We See 2018 to 2022


Based on the foundation laid in the past, and with the new baseline including Capsugel, we already announced our outlook for 2018, i.e.:

  • Mid-single-digit sales growth on a comparable basis in line with Mid-Term Guidance 2022
  • 100 bps improvement in CORE EBITDA margin in line with Mid-Term Guidance 2022

Lonza’s activities within the healthcare continuum are expected to grow above average while optimizations in parts of the Lonza portfolio will continue.

Delivering on this outlook for 2018 will be a further step toward our Mid-Term Guidance 2022, disclosed in the half-year presentation in July 2017:

  • Sales CHF 7.5 billion
  • CORE EBITDA margin 30%
  • CORE RONOA 35%

Such an improvement of Lonza's performance will certainly be a welcome present for the company's 125th anniversary in 2022.

Measuring financial returns on Lonza’s investment will be more ambitious in 2018, as we intend to replace CORE RONOA (return on net operating assets) by the ROIC (return on invested capital) concept.

This outlook and guidance are based on the present business composition and current macro-economic conditions, visibility and constant exchange rates.
 

The Upcoming Annual General Meeting

 

The Board is proposing a stable dividend for shareholders of CHF 2.75 per share for 2017, despite the considerable 40.7% increase in share capital.

At the Annual General Meeting on 4 May 2018, the Board of Directors will also propose changes in the composition of the Board. As announced several times, we will also have a change in the Board’s Chairperson. We think that the passage of the baton is taking place in a moment in which the Lonza enjoys good health.

Our Thanks!

 
Finally, we would not like to miss this opportunity to sincerely thank all our employees for their outstanding efforts. They all created the successes of last year, and they made it possible to look from an even-higher level into the future.


We want to assure you, our owners, that the Board and the management of the company are determined to continue on our path of continuous value creation, growth and profitability. Lonza’s position in the healthcare continuum is strong – but new opportunities are endless.
 

Rolf Soiron
Chairperson of the Board of Directors

Richard Ridinger
Chief Executive Officer