Expert's Opinion

A $500 Million Blunder?

By Andrew Badrot | February 8, 2012

Was the departure of Lonza's CEO too hasty?

(Expert Opinion posts reflect the views of their authors, and not the views of Contract Pharma. If you'd like to comment on Mr. Badrot's piece, log in and start a discussion in our new Comments section.)

Everyone knows the rule: Whether it's a football coach or a CEO, when the team underperforms, the boss is on the hot seat. It's fair game; this is why CEOs receive big compensation packages and why some are also provided with a golden parachute.

However, when Lonza announced the departure of CEO Stefan Borgas on January 25, 2012, everyone was taken by surprise. Had Lonza underperformed? Yes it did, against its stated objectives. But, by a closer look at the numbers1, Lonza stood on solid ground in 2011 despite one of the most challenging business environments ever witnessed in Switzerland:
  • The company achieved an EBIT of nearly $325 million (CHF 300 mio) or 12% margin and a reasonably solid cash flow. Objectively, this financial performance is not an all-time high for the company, but neither is it a disaster requiring a radical call-to-action.
  • Excluding external factors such as foreign exchange impact of the strong Swiss Franc (which nearly achieved parity against the Euro in August 2011), the company’s EBIT would have reached nearly $412 million (CHF 380 mio) or 15% margin at constant FX.
  • On the other hand, the company’s stock price tumbled in 2011 by -27% vs. -9% for the SMI. Sales declined -6.5% and EBIT -22% vs. 2010, although EBIT would have been flat at constant FX.

But let’s look at the two most important aspects of a CEO’s job:
  • Setting a strategy: As confirmed by the board following the announcement, the strategy set for Lonza will remain unchanged. No specific action was taken, whether a trim of the company’s workforce, a new cost-cutting exercise or a shake-up in its executive ranks. It is true the company is uniquely positioned with a breadth of services unequalled across the industry. Growth engines in biosimilars, cell therapy, generics, cytotoxics and conjugates will likely materialize in the coming three years. The announcement on February 8, 2012 around the build-up of the "Factory of Tomorrow" based on the microreactor technology research the company has been pursuing for many years is another long-term growth engine and may possibly be a game-changer in the industry.
  • Shareholder value creation: Under Mr. Borgas’ tenure2, Lonza’s stock achieved a + 34% growth over-performing the SMI by +24% (SMI: +10%). Novartis grew +25%, Roche grew +70%. Lonza’s direct competitors, in comparison, declined over the same period: Siegfried -27% and Bachem -32%.

Mistakes were made, that is a given. Every CEO makes mistakes. Whether the Arch acquisition, completed in October 2011, will be a success is still being debated in the industry. Overall, however, as long as the balance is trending positive and shareholder value outperforms leading indices, it’s in the green. One should not take issue with the firing of a chief executive. But I believe one should take issue when this is seemingly done in a rush, without a plan, generating havoc in the market leading to a subsequent -14% decline in the stock price on announcement. Worse, if the board is set on change, why not be consequent and drive meaningful change throughout the organization?

Putting it in perspective, this lack of judgment led to a loss nearing $500 million (CHF 450 mio) in market capitalization on announcement day — and counting . . .

Andrew Badrot is the founder and chief executive officer of CMS Pharma, an M&A advisory firm focused on the pharmaceutical custom manufacturing industry. He can be reached at

  1. Financials exclude the Arch acquisition, which was integrated in the last months of the year.
  2. From June 1, 2004 to January 24, 2012.

(Expert Opinion posts reflect the views of their authors, and not the views of Contract Pharma. If you'd like to comment on Mr. Badrot's piece, log in and start a discussion in our new Comments section.)