In July, Lonza announced a long-term relationship with Novartis (Basel, Switzerland) to develop and manufacture biopharmaceutical candidates in Novartis's pipeline. Under the agreement, Lonza will provide a broad range of services to Novartis, including:
LONZA'S RISK-MANAGEMENT STRATEGYFinancial terms of the deal were not disclosed, but Lonza CEO Stefan Borgas indicated that the relationship could last 10 years or more, considering the time required to develop, test, and launch candidates in the pipeline and build a commercial facility to manufacture them beyond launch.
The Novartis–Lonza deal is notable on several accounts, not the least of which is the fact that Novartis already has considerable expertise, experience, and manufacturing capacity in its Sandoz (Holzkirchen, Germany) generics unit. Sandoz was one of the first companies to launch a biosimilar product in the European market (the human growth hormone Omnitrope) and has been actively selling contract biomanufacturing capacity for many years. It's also notable because Novartis has not been viewed as being particularly active in outsourcing the manufacturing of its branded products.
It would appear, however, that Novartis has been attracted by the risk-mitigation aspects of the relationship. By looking to Lonza for manufacturing clinical supplies and commercial launch quantities, Novartis is avoiding one of the major risks in biopharmaceutical development, i.e., investing in enormously expensive biomanufacturing facilities that could become white elephants if their intended products don't achieve regulatory approval and commercial acceptance. The Lonza deal allows Novartis to wait until commercial product success is demonstrated before making the big capital investment.
In addition, the unusually close nature of the relationship (I hesitate to call it a true partnership because it's not clear how much risk and reward sharing there really is in the deal) also mitigates the risk that Novartis won't be able to find adequate capacity when its products are ready to launch.
Lonza is proving to be particularly adept at developing innovative, long-term relationships that mitigate risk for developers of biopharmaceuticals. In 2005, it announced a deal with UCB (Brussels, Belgium) to build two 15,000-L microbial fermenters to support the launch of Cimzia, which was recently approved in the US for treatment of rheumatoid arthritis. Lonza made the investment to build the facility, but the terms of the deal with UCB assured it of a return on the investment.
In 2006, Lonza and Genentech (South San Francisco, CA) announced a pact under which Lonza acquired a Lonza biomanufacturing facility in Spain and agreed to design and build an 80,000-L facility dedicated to Genentech in Singapore. Lonza secured financing for the Singapore facility from a government-backed investment firm, and gave Genentech an option to buy the facility at a later date. That deal gave Genentech immediate cash for the facility in Spain and guaranteed future capacity without it having to put up any upfront investment capital.
Borgas indicated that Lonza has at least five similar biomanufacturing deals in negotiation, and hopes to reach a point where as much as 60% of its volume is from such strategic relationships. Further, he noted that the Novartis announcement stimulated interest in similar arrangements from several clients of its exclusive synthesis (small molecule) business, although those talks have barely started.
Lonza is one of the few contract manufacturing organizations (CMOs) to recognize that strategic outsourcing relationships must be based on more than just capacity, and that risk management means more than just security of supply. Senior management has realized that it can and must bring other sources of value to the table, and it has redefined its core competencies to go beyond manufacturing knowhow. It has identified facility engineering and financial engineering as critical skill sets that can enable it to secure long-term strategic deals with the most attractive clients. Further, as Borgas noted, Lonza today has the business scale and financial strength to absorb the volatility and uncertainty of drug development and commercialization, to which the Novartis deal will expose it.
In a market where capacity has become a commodity (often in oversupply), CMO executives will do well to study Lonza's strategy carefully to learn what new direction they need to take with their own businesses.