Lonza’s Corporate Overhaul
CEO Richard Ridinger Fine Tunes the Organization After Acquisition Phase
Strategic Maneuvers - When Richard Ridinger took over as CEO of Basel, Switzerland-based Lonza in May 2012, the 115-year old life science and chemical company with sales of just under 4 billion Swiss francs was ripe for a major overhaul. Not only had the latest economic crisis taken its toll on customers and countries. The appreciation of the Swiss franc against major currencies such as the euro and the dollar was threatening its financial resources, and a spate of recent acquisitions had weakened its focus.
Through the first decade of the new millennium, Lonza grew rapidly through acquisition, strengthening its life science position more than its specialty chemical activities. The takeover of U.S. biocides specialist Arch Chemicals in 2011 was a watershed as it added one-third to Lonza's size and shifted the focus back into a balance of the two very different segments. But while adding muscle and international presence, the company also gained unneeded bulk in some businesses not clearly aligned with its desired profile.
After settling into the chief executive's chair, the now 55-year-old German citizen who was executive vice president of the care chemicals segment and a member of the executive board at Cognis prior to its acquisition by BASF in 2011, quickly went to work analyzing Lonza's portfolio, its production structure and its approach to its markets to facilitate the needed reorganization. What he found was an unclear orientation, a complex operation with too many sites and a business philosophy driven perhaps too heavily by technology.
A Market-Driven Approach
Like many other players with a traditionally strong science base, Lonza's approach to the market was somewhat underdeveloped, Ridinger says. One thing was obvious: To survive in an intensely competitive environment, the venerable company that began life in 1897 at Gampel on the small river Lonza in the Swiss canton Valais not only would have to streamline its organization and consolidate assets, but change its approach from technology-driven to market-driven.
Along with strengthening the financial and organizatorial base, the goal of the efficiency scheme subsequently launched and slated to run until 2015 is to become more proactive in its approach to the markets. "Instead of developing a product and trying to find a market for it, in future we will first analyze the markets, decide which products we can supply or develop and offer the customer solutions," the CEO says.
Another of the foremost strategic objectives in the post-acquisition phase is to become more productive. Under its new leadership, the company's entire operational structure, including sites and support functions, is being examined. Another task will be to clearly define priorities. "If we want to get closer to the markets, we will have to decide which ones we want to be in," says Ridinger.
From his experience at Cognis, the manager understands that "it is possible to identify a target market and become a leader. This proactive approach is what I want to strengthen at Lonza. The company has an excellent basis from which we can improve our go-to-market skills. In some segments we are already doing this quite well. In others, we can do better."
After nearly a year of restructuring, tangible progress has been made. In Q1 2013, Lonza successfully priced a 300 million Swiss franc-denominated straight bond issue aimed at improving conditions. Core results for H1 2013 were better than expected, and the company is on track to realize cost savings of 100 million Swiss francs through efficiency improvements.
"Up to now, all the milestones have been met, and it is clear that we will get where we want to be," he says. To facilitate operational improvements, business teams are being directed to the target markets, and administrative functions have been grouped into regional business service centers.
In other crucial steps, the number of reporting segments has been pared to two - Pharma & Biotech and Specialty Ingredients. Industrial businesses are now under scrutiny to determine their compatibility with the new priorities. One non-core business has been shed, another carved out, a joint venture dissolved. A smaller European production site has been closed and restructuring of the company's biggest site is in progress.
At the end of 2012, the U.S. performance urethanes and organics subsidiary in Brandenburg, Kentucky, a legacy of the Arch acquisition, was sold to Monument Chemical. A carve-out process for the wood treatment activities has been initiated to facilitate a partnership or divestment. The latter was deemed not a core business for the future Lonza portfolio, Ridinger remarks.
The dissolution of the biosimilars joint venture with lsraeli generic drugmaker Teva will allow the company to concentrate on its core expertise in contract manufacturing and cell line development without having to invest in areas not as strategic, such as clinical development and end-product commercialization.
This would have required more capital than initially envisaged, Ridinger says. Another factor was the intensifying efforts of ethical pharmaceutical manufacturers to develop their own generic versions of drugs coming off patent. This would have placed the company in competition with its customers.
As part of a plan to reduce the number of worldwide locations from the current 50, Lonza's Swords, Ireland, site, which manufactured biocides for anti-fouling paints and metal-working fluids - another Arch legacy - was shuttered in this year's second quarter and production moved to the U.S. and China.
The new corporate stratgey also foresees phasing out some of the company's activities in Hopkinton, Massachusetts in the U.S .and transferring some microbial biologics manufacturing operations to Visp, where this business will be concentrated in future.The VispChallenge efficiency program, sharpening the focus of Lonza's largest site (begun in 2011), is being continued.
Position in Life Sciences Pivotal
Most of the realignment so far has affected the chemicals side of the business. Retaining Lonza's leading position in life sciences, particularly Pharma & Biotech - which focuses on supplying active ingredients to pharmaceutical producers and custom manufacturing of drugs - will be a pivotal point going forward.
From its leading berth in what Ridinger has identified as the backbone of Lonza's business, the company can leverage its strong technology base to enter new markets in consumer markets and agricultural applications, sometimes with "only minor" adjustments needed. For both industries, we have the knowhow to master a high technology level, whether it is recombining peptides, microbial fermentation, mammalian stem cells, or conjugation of biological and chemical molecules."
The Importance of Global Megatrends
For its future orientation, the medium-sized Swiss company -similar in size to Ridinger's former employer Cognis - has identified several global megatrends such as healthcare, hygiene, nutrition, water treatment and consumer products, where the CEO says "we can make a difference."
"This will not of necessity take into new directions," he stresses. While many companies now are striving to develop skills in fermentation and biotechnology, Lonza already has them and is physically present in the marketplace. In the specialty ingredients sector, "we are already number one in anti-microbials."
Alongside its strong position in fine chemicals and custom manufacture of pharmaceuticals, the company is also already an important player in water treatment. Currently the focus is on recreational water, such as swimming pools, but - mustering its expertise in anti-bacterial technologies - Lonza intends to move into public and industrial water treatment.
"We will deepen our footprint here within the next year," Ridinger says, "utilizing technology we already have in-house. Access to clean water will become crucially important to the emerging middle class in many countries." Personal care, where the new Lonza chief can contribute his expertise from Cognis, will also be a sharper focus.
The Challenge of the Swiss Franc
An obstacle more difficult to surmount, but still manageable nonetheless, Ridinger says, is operating from a country that has the world's hardest currency. But there are also advantages to being in Switzerland, he says. The economy is stable, the workforce highly qualified and loyal, the transportation infrastructure favorable and the relationship with local authorities amiable.
But "while this is a good place to be, all our sites need to be competitive," Ridinger says, explaining the need for efficiency improvement scheme at Visp, which initially raised concern among the company's unions.
When the ambitious company-wide realignment scheme is completed two years from now and the new strategy firmly in place, where will Lonza's growth come from? "We will continue moving up the value chain, and consider bolt-on acquisitions to add new technologies where needed," Ridinger says. One thing is certain, however. "We will not add more complexity."