ANNUAL REPORT 2006 ACTIVITY REPORT

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ANNUAL REPORT 2006

ACTIVITY REPORT

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Essential Figures at a Glance

Lonza Annual Report 2006

Aspergillus niger, enlarged 1400 times; application as reference strain in quality control.

< Lonza million CHF Sales total – Continuing operations – Discontinued operations

Result from operating activities (EBIT) – Continuing operations

– Discontinued operations Profit before income taxes Profit for the period

Cash flow before change in net working capital

Investments in property, plant and equipment and intangibles (at cost) incl. leasing

Total equity Net debt

Net debt-equity ratio

Basic earnings per share CHF

– Continuing operations CHF

– Discontinued operations CHF

Diluted earnings per share CHF

– Continuing operations CHF

– Discontinued operations CHF

Book value per share CHF

Dividend payout ratio %

Number of shares (par value CHF 1.00)

Share price (high / low) CHF

Market capitalization (31 December)

Lonza Group Ltd million CHF Profit for the year Shareholders’ equity

Shareholders’ equity as a percentage of total assets %

Dividends declared after the balance sheet date

Dividend per share CHF

2005 2 521 1 894 627 297 249 48 244 188 386 (272) 1 490 962 0.65 3.97 3.40 0.57 3.87 3.33 0.54 31.45 33 50 450 000 80.65/63.35 4 056 2005 159 1 386 65 61 1.30 2006 2 914 2 285 629 344 301 43 292 222 429 (371) 1 607 913 0.57 4.69 4.20 0.49 4.30 3.88 0.42 33.94 32 50 450 000 108.10/78.65 5 312 2006 85 1 409 69 71 1.50

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LONZA ANNUAL REPORT 2006

ACTIVITY REPORT

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67 INTRODUCTION

Foreword from the Chairman of the Board of Directors and

the Chief Executive Officer

STRATEGY

Lonza – the Leading Supplier to the Life-Science Industries

Interview with Stefan Borgas, CEO

LONZA TRADEMARKS

Registered Trademarks

VISION, CULTURE, COMPETENCIES

Vision, Culture, Competencies

The Lonza Brand

ORGANIZATION AND ACTIVITIES

Exclusive Synthesis

Major Acquisition Boosts Peptides Business

Biopharmaceuticals

A Successful Track Record

Organic Fine & Performance Chemicals

Lonza’s Presence in the Nutrition Market

Polymer Intermediates / Other; Acquired Bio-businesses

LONZA SITES

Lonza Worldwide

Lonza Global Map

Visp, Switzerland

A New Image for Training Opportunities (Visp)

Braine-l’Alleud, Belgium

Achieving Results via Effective Integration (Braine-l’Alleud)

Kouřim, Czech Republic

The Basis for Economic Prosperity (Kouřim)

Porriño, Spain

Integration Began in a Cordial Atmosphere (Porriño)

Slough, United Kingdom

A Successful Event in Every Sense (Slough)

Allendale NJ / Mapleton IL / Williamsport PA, USA

Cohasset MN / Conshohocken PA, USA

Portsmouth NH, USA

Company of the Year (Portsmouth)

China / Singapore

A Milestone in Lonza’s History (China)

ADDRESSES

AGENDA AND CONTACTS

ACTIVITY REPORT CONTENTS

The Lonza Annual Report 2006 consists of the following three parts:

Activity Report, Financial Report, Corporate Governance & Social and Environmental Report. These publications are accessible on the Internet at www.lonza.com. The Annual Report is also available in German. The English version prevails.

In this report “Lonza” and “the Group” refer to the whole group of Lonza companies, “Lonza Group Ltd” refers to Lonza Holding. The Annual Report of Lonza Group Ltd follows the guidelines issued by the OECD for multinational corporations.

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Dear Customers, Shareholders and Friends of Lonza,

It is our pleasure to present you with our Activity Report, a section of the Lonza 2006 Annual Report. This report provides a summary view of Lonza’s financial accounts, strategies, global business activities and international sites. It also gives an insight into our culture and vision.

Looking at our achievements in 2006, what makes us the most proud is the continued strength-ening of the relationships with many of our customers: trust in the people at Lonza contributed to the deepening of numerous long partnerships and a substantial increase in the number of joint projects.

In 2006, Lonza continued building on its track record by delivering an 18.1% increase in net in-come and a 15.8% increase in EBIT compared with the previous year. The primary driver behind these positive results was the continuing improvement in the performance of our biopharma-ceuticals activities. The Group’s operating income margin was maintained at 11.8%, while the return on net operating assets improved to 12.2% (from 10.9%). Net working capital in relation to sales declined from 31% to 26%.

In addition to the sound financial results, 2006 was a year characterized by transformation. Based upon our strategy of focusing on the life-science industries, we accelerated our shift into this sector by rigorous business portfolio realignment. In order to realize this transition, we divested non-core businesses (LOFO GmbH, Polynt S.p.A.) and acquired complementary busi-nesses in the life-science sector: Peptides (Belgium), mid-scale mammalian biopharmaceuti-cals capacity (Spain) and a mid-scale microbial biopharmaceutibiopharmaceuti-cals business (USA) as well as a biotech service business, now called Lonza Bioscience (this acquisition closed in February 2007). This transformation is expected to increase and sustain our profitability growth over many years.

Lonza Annual Report 2006 INTRODUCTION ACTIVITY REPORT

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ACTIVITY REPORT INTRODUCTION

Lonza’s talented, hard-working and passionate men and women around the world are dedi-cated to the continuous development and implementation of our strategy. Our growth strategy is based upon a plan that was created over two years ago. It has been executed systematically and effectively since its inception and is regularly updated and improved. This strategy encom-passes several critical areas including: operational, technical and leadership excellence, innova-tion leadership, distinctive commercial performance and fostering an entrepreneurial spirit.

We implement our strategy by focusing on vigorous internal organic growth and permanently adjusting our portfolio of chemical and biotechnology businesses. By delivering on the targets of our well-defined plan, we estimate that we will be able to achieve sales growth of 8% to 12% and profits in the mid to high teens each year. The visibility of existing contracts and projects, together with prevailing economic conditions, are the basis for projecting continuous growth until 2012.

Ultimately, our company is driven by our vision. At Lonza, our passion is to deliver sustainable value to our customers.

We wish to take this opportunity to express our sincere gratitude to our shareholders and our customers for the trust they have placed in us over the years. We also owe a particular word of thanks to all Lonza employees, old and new, for their outstanding efforts and vital contributions to the successful implementation of our growth strategy.

We thank you for your continued trust and confidence in our team. We are pleased that each of you is continuing to accompany us on our exciting journey.

Rolf Soiron Stefan Borgas

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Lonza – the Leading Supplier

to the Life-Science Industries

Realignment and growth in defined life-science markets are the primary objectives

of the Lonza strategy. The acquisitions, investments and divestures undertaken recently

emphasize this shift towards the life sciences.

Interview with Stefan Borgas, CEO

Besides improving results by over 15%, 2006 saw an accelerated pace of trans-formation at Lonza. What are the main elements of this strategic program?

There are two main pillars to the Lonza strategy. One is the strong and highly focused investment program in our own capacity within our core areas. The second pillar is the change in em-phasis of the portfolio towards the life-science markets: healthcare, hygiene, preservation, nutrition, agrochemicals and personal care.

“The newly acquired

Mi-crobial Biopharmaceuticals

business moves us forward

significantly as the world’s

leading custom

manufactur-er for Biopharmaceuticals.”

Lonza expanded its life-science portfo-lio early in 2006 by acquiring UCB’s Bio-products peptides manufacturing divi-sion in Braine-l’Alleud (Belgium). What was the experience you gained from the integration of this site into Lonza’s exist-ing Peptides business and into Lonza as a whole?

The Peptides acquisition was meant to boost the high-margin portion of the Exclusive Synthesis business and

complement the existing Lonza Pep-tides business, which was quite a bit smaller than the one we acquired. Our expectations in terms of sales, integra-tion speed and the enthusiasm of the involved people have been more than fulfilled. We still have some work to do in the production performance of the plant and on the improvement of prof-itability.

Do you mean that lessons can be learned for the integration of the new businesses you have recently acquired from Genentech and Cambrex?

The integration of Lonza Braine was certainly of great value as a learning

STRATEGY ACTIVITY REPORT

Lonza Annual Report 2006 6

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experience. With regard to systems in-tegration we know that we have to be even more aggressive in terms of tim-ing. A second lesson we have learned is that, despite all the enthusiasm and

energy that have gone into integration, we must not forget to keep the focus on the current business.

However, the Bioscience integration might be a little bit different, because Bioscience will be incorporated as a new division of Lonza, while Lonza Braine was integrated as part of an existing business sector.

Yes, that is true. There are some differ-ences, but there are a lot of similari-ties as well. First of all, Bioscience is a bigger business: we have seven sites to integrate, not merely one. From the perspective of the Finance and HR systems, the complexity is exactly the

same. And of course there are a lot of connections between Bioscience and other Lonza businesses in terms of product portfolio, sales channels and production plants. So the integration

of Bioscience will involve a lot of work.

How will this new activity complement Lonza’s existing biotechnology plat-forms?

Actually, in a variety of different ways. First, it will give us a new sales and distribution channel, for example with the research labs where we did not have access before. Secondly, Biosci-ence gives us backward integration, especially in the Biopharmaceuticals business. Some products we previous-ly bought from external suppliers can now be sourced internally. The third way this new business gives us a boost is through some of the technologies

and products provided by Bioscience. Potentially, this offers a new platform on which we can continue to grow with exactly the same customer base and very complementary, neighboring technologies.

“The fact that one of the

world’s leading biotech

companies, our customer

Genentech, trusts us to build

a second plant in Singapore

is quite a big compliment.”

You have also acquired the Microbial Biopharmaceuticals part of Cambrex. What is the rationale for this add-on ac-quisition in the context of the existing Microbial Biopharmaceuticals business unit in Visp?

The Visp-based Microbial Biopharma-ceuticals business is focused on large-scale production of commercial quan-tities for our customers. There is also a small pilot plant and a small Process De-velopment R&D group. What we were lacking was more muscle on process de-velopment and more mid-scale capacity so that we can better service our cus-tomers’ pre-clinical Phase I, Phase II and Phase III needs. This is now effectively what the newly acquired Microbial Bio-pharmaceuticals business brings us and thus moves us forward significantly as the world’s leading custom manufac-turer for biopharmaceuticals.

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Through the Biopharmaceuticals plant in Porriño (Spain), which Lonza recently acquired from Genentech, and the sec-ond large-scale biomanufacturing facil-ity Lonza is building in Singapore, the company is accelerating growth in the area of Mammalian Biopharmaceuticals operations. Are these expansion projects to be classified mainly as geographical initiatives or do they rather fit into a wider asset and/or service strategy?

The Porriño acquisition resulted from a make-or-buy decision process. Our biggest capacity constraint was in mid-scale mammalian capacities to serve Phase II and Phase III volumes for our customers. With this acquisition we can now fill the gap about three years earlier than we could have done through our own investment, but also at very competitive conditions. This helps us to expand the pipeline for the large-scale expansion we are undertak-ing in different parts of the world. The Singapore side of the agreement with Genentech gives us an opportunity to have engineering income from build-ing a second plant in Sbuild-ingapore for one of the leading biotech companies worldwide, our customer Genentech. The fact that they trust us to do this is quite a big compliment for us.

Beyond the above-mentioned acquisi-tions in the area of Biopharmaceuticals, Lonza is also investing in the expansion of its Exclusive Synthesis business in China. What is the main driving force behind this project?

The Exclusive Synthesis business is, in terms of market size of course, substan-tially bigger than the Biopharmaceuti-cals business. We fully intend to contin-ue to grow above the market average in Exclusive Synthesis and we will do this mainly by setting three priorities. First, we will continue to expand into very attractive market niches such as peptides. Secondly, we will expand into new technologies such as highly ac-tive pharmaceutical ingredients (HAPI). Thirdly, Lonza Exclusive Synthesis is ex-tending its reach into mature products in order to support our customers in managing the life-cycle of their drugs: the processes of products that are a few years away from patent expiration should be redesigned and the produc-tion put on a low-cost basis. This is the purpose of the China platform which has already been well-received by cus-tomers: the first phase of the plant is already almost sold out.

The focus on defined life-science markets also comprises the product line exten-sions in the field of Nutrition. DHA and larch arabinogalactan (LAG) are prod-ucts that have recently been acquired. Is Lonza going to become a multi-ingredi-ent provider?

What we want to do is become a pro-vider of scientifically based nutritional ingredients that are specific to certain health indications and based on tech-nologies that Lonza masters particular-ly well. Furthermore, these two smaller acquisitions brought highly-skilled

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Nutrition experts into our team and thus strengthened our knowledge base. This will further improve the specificity of our Nutrition strategy, which quite frankly, is not yet fully real-ized. Whether we will become a multi-ingredient provider is something that remains to be seen, but it is clear that if we want to defend our Nutrition business the way it is today, we have to do it through product innovation.

The ambitious strategic growth Lonza is aiming for is not only demanding in terms of financial resources, but also requires managerial skills. How are you addressing this important issue?

If Lonza faces one risk, it is that of not being able to execute this significant number of projects without delay because of a lack of resources. At the same time, we have to be careful not to overstaff and incur a cost overrun in these projects. Perhaps the most ef-fective way of dealing with this is by identifying talented people as early as possible and giving them responsibil-ity, for example in these projects. That way, we will build up a pool of excellent talents. Furthermore, the new people who join the Lonza family via acquisi-tions will also strengthen our expertise, management and leadership power, once integrated.

Do you think that these new people will cover your needs, or will Lonza have to employ additional staff?

Lonza’s staff will grow from about 6 150 colleagues at the end of 2006 to over 8 000 by the end of 2009. Half of the new people are coming to us through the acquisition of the two Cambrex businesses in 2007. The other half comes from external recruiting. We cannot expect growth without adding any people. We have a lot of strong talents inside the company who are capable of executing these projects. But then we will need to backfill their positions from outside.

“The next months within

Lonza will be primarily a

period of implementation.

2007 will be focused on

delivery and making these

growth rates work.”

At first glance, the short-term quan-titative effect of the transformation strategy does not show significant sales growth. What is the step change result-ing from this accelerated shift?

If you include the portfolio change and compare like with like, there actu-ally is considerable sales growth. Sales growth will be sustainable between 8 to 12 % per year. The profit growth will be sustainable in the mid to high teens, by our estimates until 2012 at least. This is a considerable change compared to where we saw growth going one year ago. However, we have

to be aware that, due to the number of investment projects and the size of the recent acquisitions, growth rates will very likely not improve further, at least in the short term. The next months within Lonza will be a period of imple-mentation. 2007 will be focused on delivery and on making these growth rates work.

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Registered Trademarks

ACRAWAX

ALDO

ALDOSPERSE

AMPHOTERGE

AZOLAT

BARCHLOR

BARDAC

BARDAP

BARLENE

BARLOX

BARQUAT

BIO-GENTLE

BIO-SURF

BROMCHLOR

CARBOQUAT

CARBOSHIELD

CARNICHROME

CARNIFEED

CARNIKING

CARNIPASS

CARSOQUAT

CATAGARD

CELLMATE

CERAMID

CLEARTRAC

CYTAIR

DANTABROM

DANTOBROM

DANTOCHLOR

DANTOCOL

DANTOEST

DANTOGARD

DANTOIN

DANTOSERVE

DANTOSPERSE

EQUINOX

ETHOSPERSE

FIBERAID

FMB

GEOGARD

GLYCACIL

GLYCHLOR

GLYCO

GLYCOMUL

GLYCONOL

GLYCOLUBE

GLYCOSERVE

GLYCOSPERSE

GLYCOSTAT

GLYCOWAX

A

B

C

D

E

F

G

GLYCOX

GLYDANT

GLYDANT PLUS

GLYTEX

GS-SYSTEM

HMB

HYAMINE

ISOCIL

ISOPHAN

LARACARE

LARAFEED

LARA-PRINT

LAREX

L-CARNIPURE

LONZA

LONZA PRIMASET

LONZABAC

LONZACURE

LONZAINE

LONZAMON

LONZAPOL

LONZASERVE

LONZASET

LONZA-SOL

LONZASTAB

LONZEST

META SUPER

META THE MOLLUSCICIDE

NATRULON

NIAMAX

PEGOSPERSE

PEPZIN GI

POLYALDO

PRIMASET

Q META QUALITY

RESELUTE

SPECTRADYNE

TWIN CHAIN

UNAMINE

UNIHIB

UNIQUAT

XL-1000

Registered trademarks as of 31.12.2006

H

I

L

M

N

P

Q

R

S

T

U

X

Catalyst for gas-phase selective oxidation (fixed-bed technology); enlarged 82 000 times.

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Vision, Culture, Competencies

Each member of Lonza’s global team is guided by our defined vision giving us col-lective direction, focus and passion. Our unwavering commitment is to deliver sus-tainable value to our customers. All of our activities are driven by our vision, which makes us the premier biotechnological and chemical supplier to the life-science industries. The realization of our vision is achievable on the robust foundation of

our Lonza team members’ competencies. These competencies are the basis of our culture, which is centered around trust in each other and our people’s entrepreneur-ship.

In keeping with our commitment to ethi-cal, social and environmental responsibil-ity, all employees are bound by Lonza’s Code of Conduct.

VISION, CULTURE, COMPETENCIES ACTIVITY REPORT

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Lonza Annual Report 2006 VISION

Our passion is to deliver sustainable value to our customers.

STRATEGY

Strong profitable growth based upon chemical and biotechnological platforms for the life-science industries.

CULTURE

Our culture is centered around trust in each other and our people’s entrepreneur-ship.

COMPETENCIES

Drive, Decide, Develop, Deliver

STRATEGY VISION

CULTURE

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ACTIVITY REPORT VISION, CULTURE, COMPETENCIES

In order to support our vision, culture and long-term strategy, we recognize the ne-cessity of building leaders for our future. This year, a major initiative was imple-mented in order to focus on Lonza’s lead-ership development in 2006 and beyond. The newly evolved program is based upon our core competencies, identified as the “4 Ds: Drive, Decide, Develop and Deliver”.

The enhanced development programs are now structured around functional com-petencies, behavioral competencies and Lonza’s core values.

By building upon our competency frame-work, we can ensure that our future is fur-ther strengthened with talented, focused and passionate leaders.

Competencies

DRIVE DECIDE

Motivate others Master scope and timing of decisions Communicate Manage the context

Enthusiastic Customer-focused Kill bureaucracy Communicate clearly Understand the vision Monitor the environment Execute

DEVELOP DELIVER

Coach Direct

Create positive atmosphere Fast Build and lead teams Agile

Manage talent Manage performance

The Lonza Brand

The Lonza brand expresses our vision, culture and competencies. The three basic elements of our brand message are re-flected in our daily activities: Lonza is driv-ing innovation, the high level of quality is non-negotiable for Lonza and our custom-ers get access to leading-edge technolo-gies and receive world-class products and services by partnering with us. These core elements continuously upgrade the stan-dards within our entire industry.

Lonza’s competitive advantages are con-veyed by the following differentiating characteristics through the Lonza brand:

cutting-edge: Lonza employees are push-ing the boundaries every day.

agile: non-bureaucratic decision-making, flexibility and swift implementation. friendly: we are empathic and thrive on wholly understanding our partners’ situations.

–

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Exclusive Synthesis

ACTIVITY REPORT ORGANIZATION AND ACTIVITIES

Bacillus subtilis enlarged about 7 600 times; application in biosynthesis and – after genetic modification – in biocatalysis and as a reference strain in quality control.

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Exclusive Synthesis

The Exclusive Synthesis business sector specializes in chemical synthesis and mi-crobial fermentation and is the leading custom manufacturer of active chemi-cal ingredients for the pharmaceutichemi-cal industry.

Lonza’s track record in this area is impres-sive, with 25 years’ experience in the field of exclusive chemical synthesis under a stringent and constantly changing regula-tory regime. Cost-efficient production, in-novative development work and complex project management are the core capa-bilities with which we help our customers manage the life-cycles of their active phar-maceutical ingredients (APIs) efficiently and safely.

“Most of our customers come

back with new projects or

products after our first

collab-oration,” notes Uwe H. Böhlke,

Head of Exclusive Synthesis.

In important end-product applications, in-cluding indications such as cardiovascular diseases, oncology, neurology, endocrinol-ogy and infectious diseases, we work with 18 of the 20 largest pharmaceutical com-panies worldwide, as well as many mid-size and innovative small pharmaceuti-cal companies. Thanks to our specialists’ achievements in R&D, based on a wide technology platform and flexible multi-purpose plants where the performance of each individual product is continually improved, we elevate our good market reputation on a daily basis and further strengthen the long-standing relation-ships with our customers.

Teamwork is the core element of our cus-tom manufacturing concept. We assist our customers during the whole of the R&D and production processes. The coopera-tion may begin at any clinical phase, from small-scale production for pre-launch volumes to large-scale manufacture. We know our customers’ requirements

pre-cisely, enabling us to develop efficient, tailor-made chemical and biological pro-cesses for the individual ingredients and intermediates. This allows our custom-ers to concentrate on their main tasks of R&D and marketing new pharmaceuticals, while benefitting from globally competi-tive accompeti-tive substance costs.

In the last 20 years, the Exclusive Synthesis business sector has expanded continuous-ly. One of the latest significant additions is in the area of peptides. The expansion is in response to the increased demand for peptide APIs worldwide. With its produc-tion capacity in Visp and the acquisiproduc-tion of the peptide manufacturing site in Braine-l’Alleud (Belgium) in early 2006, Lonza is the world leader in the development and manufacture of tailor-made peptides.

Peptides consist of two or more amino acids. Lonza is the only leading producer to master all three technologies: microbi-al fermentation and chemicmicrobi-al synthesis in liquid- as well as in solid-phase reactions. Peptides are essential for the manufac-ture of a new category of pharmaceuticals prescribed in such indications as diabetes, HIV, cancer, hepatitis, Alzheimer’s disease, osteoporosis, obesity, infections and in-flammations, male and female sexual dysfunction, and even wrinkle and acne treatment.

Additional production capacity for APIs in Visp became operational in 2006. This in-vestment was in response to the growing demand for APIs produced exclusively for our worldwide customers.

The new R&D center equipped with state-of-the-art technology in Nansha Guang-zhou (China) became operational in 2006. The highly qualified scientific team in

Nansha will concentrate on research and development for active ingredients and intermediates in the area of custom syn-thesis.

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Results 2006

Exclusive Synthesis & Biopharmaceuticals million CHF

Sales

Change in %

Change due to

volume and prices Currency translation Scope of consolidation

Result from operating activities (EBIT)

Change in % Margin in % EBITDA Change in % Margin in % 2005* 803 142 17.7 229 28.5 2006 1 073 33.6 206 7 57 193 35.9 18.0 295 28.8 27.5

With sales of CHF 1 073 million, 33.6% above the previous year, the custom manufacturing activities (Exclusive Syn-thesis & Biopharmaceuticals) achieved an operating income of CHF 193 million, 35.9% higher than in 2005. Operating margin improved from 17.7% to 18.0%. These results are mainly due to the strong development of the Biopharmaceuticals business sector.

Exclusive Synthesis Sales of the Exclusive Synthesis business sector amounted to CHF 605 million (CHF 445 million in 2005). The growth was delivered mainly by a larg-er volume of active pharmaceutical ingre-dients (APIs) and regulated intermediates for cardiovascular and HIV indications, as well as the contributions of the acquired Lonza Braine peptides business.

Despite very high asset utilization at all sites, production issues at our site in Visp (Switzerland) very early in the year as well as at our facilities in Braine-l’Alleud (Bel-gium) and Conshohocken, PA (USA) in the second half had a negative impact on the business sector’s performance. After implementation of speciﬁ c corrective ac-tions, operations in Visp have been perfor-ming at or above budget levels. Similarly, aggressive action plans have been develo-ped for Braine and Conshohocken in order to resolve the operational challenges. Pro-cess and portfolio optimization concepts were further expanded in 2006; several

optimization projects were completed in the course of the year, delivering or excee-ding the expected results.

Overall market conditions in the area of chemical custom manufacturing re-mained difﬁ cult throughout 2006. Few new drug approvals, the patent expiration of mature products, persisting overcapa-city and competitive pressure from Asian producers were the main reasons for this situation. In 2006, a consolidation trend in the CMO (Custom Manufacturing Organi-zations) area became apparent. Gradual restructuring at the major pharmaceuti-cal companies, with shutdown or divesti-ture of their own production, might lead to increased outsourcing. The trend initi-ated by customers to ask for longer-term commitments for production capacity has become evident during the year.

In order to ensure future growth and offer our customers alternative production ca-pabilities, we undertook a series of capital investment projects in 2006.

Noteworthy developments include: – Additional capacity at the API plant in

Visp (Switzerland) has become operatio-nal, while a new HAPI line (highly active pharmaceutical ingredients) will come on stream in 2007.

– Construction of the new API facility and the small-scale plant (SSP) in Nansha Guangzhou (China) is progressing ac-cording to schedule.

– In Kouřim (Czech Republic), production modiﬁ cations for the fermentation of high-end enzymes are being implemen-ted.

– Integration of Lonza Braine SA (former-ly UCB Bioproducts), with its peptide activities, was completed in December 2006.

The R&D portfolio pipeline comprises a to-tal of 157 projects. The number has incre-ased thanks to the incorporation of Lonza Braine’s peptide activities and the full stafﬁ ng of the new R&D center in Nansha with 45 skilled scientists.

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Major Acquisition Boosts

Peptides Business

A major acquisition completed in 2006 propelled Lonza into a leading position in the

pharmaceutical Peptides manufacturing sector, thus complementing and broadening

the company’s offerings in custom synthesis for the life-science industry.

By Tom Mulligan, Editor, sp2_{Magazine, Horsham (UK)}

Peptides have been commercially im-portant compounds since the 1950s, when both peptide and amino acid products became available through the manufacture of short-sequence molecules using liquid-phase tech-nology. In the 1960s, the synthesis of longer sequences became possible through the application of newly-de-veloped solid-phase technology. Lonza has invested in both technologies for peptide synthesis, thus completing the company’s range of pharmaceutical chemical compound types.

“Peptides are a part of the biophar-maceutical industry that is of interest

to Lonza because of its sustainability: There are a lot of projects in the

pipe-line,” says Dirk Oehlers, Head of Sales and Business Development for Lonza’s Tides business unit. “First, there are

a lot of candidates in the worldwide market. Second, the pharmaceutical industry is developing more complex products, with longer sequences and more chemical modifications. And third, the market is growing in terms of production amounts (volume). Lonza is a company offering all three technolo-gies available today, namely: liquid-phase, solid-phase and recombinant DNA technology.

The most significant recent develop-ment in Lonza’s peptides business was the acquisition completed in March 2006 of UCB’s Bioproducts

manufactur-ing facility in Braine-l’Alleud (Belgium). This has boosted the company’s activi-ties in the sector through the addition of liquid- and solid-phase manufactur-ing capabilities and expertise.

“UCB Bioproducts started working in the pharmaceutical discovery and de-velopment areas and then rapidly moved into contract manufacturing as demand for these services grew in the 1970s,” explains Dr Alain Scarso, Head of R&D at Lonza Braine. “The

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pany’s know-how developed around the technology and the needs of the marketplace, that is, the needs of the customer to develop a drug candidate using different and complex ways of manufacturing drugs.”

Oehlers adds: “In 2002, Lonza’s Man-agement Committee decided that the company should be committed to R&D, QA / QC and sales in peptides, but that the company needed to grow its capa-bilities by acquiring liquid- and solid-phase synthesis expertise, increasing capacity, and expanding its product portfolio,” explains Oehlers.

The Lonza Braine facility occupies a

6-hectare site with plenty of room for expanding its development labora-tory and manufacturing facilities. The site has both liquid- and solid-phase manufacturing capabilities in a num-ber of manufacturing suites with steel reactors up to 2 500-liter for large-vol-ume products. Laboratory facilities in-clude process R&D, in-process control and analytical suites, and a dedicated technology development laboratory, all fully equipped with state-of-the-art equipment as well as high-perfor-mance analytical tools.

“Lonza has a lot to offer as a ‘one-stop-shop’ for peptide manufacture with its

expertise in route scouting, process de-velopment, process optimization, scale-up, validation and with its regulatory expertise such as the Chemistry and Manufacturing Controls section, all Drug Master Files and the filing of dos-siers supporting clinical developments in a large number of territories world-wide, not to mention its expertise in legal aspects such as patents etc.,” says Oehlers. “Offering a broad service makes people comfortable. People feel they are in good hands with Lonza.”

“Lonza now has the capability of more complex peptide synthesis and at an increased scale of manufacture,” says Scarso. “We need to maintain our

lead-ership through technology investment. There are technologies already exist-ing within Lonza for molecules other than peptides that can be adapted to peptides production at industrial scale. The emphasis is on cost-cutting through both process and productivity improvement.”

Oehlers adds: “In a life-science orient-ed company playing in a certain league, there are synergies across the board. That’s the beauty of it – we’re focused

on life sciences, and it was a conscious strategic decision by the management to have this focus.

“Ten years ago there weren’t many peptide manufacturing companies but nowadays CMOs (Custom Manufac-turing Organizations) are looking at peptides as a potentially lucrative area. Some of these are large companies and some are small, and it’s possible that some of the world’s largest chemical manufacturing companies may enter the marketplace. Indian and Chinese companies may also enter with generic products. However, our customers are very aware of the complexity of pep-tide manufacture, the very high capital investment required and the expertise needed. Therefore, even though there will be competition in the marketplace, we are highly confident that Lonza will

continue to be successful in peptides because of the company’s history in technology development, its manufac-turing expertise, its flexibility and its reputation in custom manufacturing,” Oehlers states.

Pictures from left to right

< Flask freeze-dryer

< Metrological controls monitoring in LPPS facility

< Quality Control Laboratory

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21

Biopharmaceuticals

CHO (Chinese Hamster Ovary) Cells, used for the manufacture of biopharmaceuticals; enlarged about 16 000 times.

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22

The Biopharmaceuticals business sector specializes in microbial fermentation and mammalian cell culture, starting from strain or cell line construction, through process development, to manufacture for clinical or commercial supply.

This business sector is expected to deliver strong growth in the years to come thanks to the increasing number of biopharma-ceuticals being launched, the constantly increasing project pipeline and Lonza’s leading position in this market. The busi-ness sector’s strategy is to grow in close alignment with its customers by balanc-ing its portfolio between process develop-ment, early-stage and commercial prod-ucts, as well as Biopharma Services.

“To be our customer’s partner

from product concept through

to commercial manufacture.”

That’s how Stephan Kutzer,

Head of Biopharmaceuticals,

characterizes the business

sector’s mission.

At our production site in Portsmouth, NH (USA), we now operate four 20 000-liter stirred bioreactors. Driven by strong cus-tomer demand we have also initiated the conversion of a mothballed 2 000-liter into a 5 000-liter production line. The expan-sion of the facility in Portsmouth and the acquisition of Genentech’s 4 x 10 000-liter mid-scale mammalian facility in Porriño (Spain) will provide Lonza with immedi-ate access to further mid-scale biomanu-facturing capacity three years earlier than planned. In addition to our 80 000-liter mammalian large-scale facility in Singa-pore we will build an identical second fa-cility for Genentech.

Biopharmaceuticals

Lonza has also strengthened our position in the microbial area. Supported by the partnership with UCB, Lonza has started to manufacture bulk actives based on PEG-ylated antibody fragments. Together we have built a commercial-scale biophar-maceutical manufacturing facility in Visp. Based on our growing pipeline, additional large-scale expansion in Visp (Switzerland) is in an advanced stage of preparation.

Our core competencies are process de-velopment, fast-track plant design and construction, regulatory support and mid-/large-scale commercial manufacturing. For over 20 years, Lonza has been a dedi-cated custom manufacturer of biophar-maceuticals, successfully meeting the needs of its customers. The setup and per-formance of project teams, with experts from Lonza and from customers working across company borders, is unmatched in the industry.

Our clients are the leading pharmaceutical and biotechnological companies. Lonza is developing biopharmaceuticals for appli-cation areas such as oncology and auto-immune diseases. Our facilities in Slough (UK) and Portsmouth have been licensed to produce five commercial products, includ-ing Genentech’s Rituxan®, Bristol-Myers Squibb’s Orencia® and Eli Lilly’s Xigris®.

As the leading contract manufacturer of therapeutic monoclonal antibodies and recombinant proteins derived from mam-malian cell culture, Lonza has developed a highly efficient mammalian expression system – the GS Gene Expression Sys-tem™ (GS: glutamine synthetase) which is characterized by speed, safety and cost-efficiency. The GS-System® technology is being upgraded on a continuous basis and delivers exceptional, cutting-edge results.

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Results 2006

With sales of CHF 1 073 million, 33.6% above the previous year, the custom manufacturing activities (Exclusive Syn-thesis & Biopharmaceuticals) achieved an operating income of CHF 193 million, 35.9% higher than in 2005. Operating margin improved from 17.7% to 18.0%. These results are mainly due to the strong

development of the Biopharmaceuticals business sector.

Biopharmaceuticals The Biopharmaceuticals business sector generated sales of CHF 468 million in 2006 (CHF 358 million in 2005). The Biopharmaceuticals business

includ-ing Mammalian Operations, Microbial Op-erations and Biopharma Services delivered a significant performance improvement. High capacity utilization (small-, medium- and large-scale bioreactors), further im-proved batch success rates and the strong-ly increasing demand for our R&D services were the main drivers behind this positive development.

A major achievement during 2006 was the licensing by the US Food and Drug Admi-nistration (FDA), the European Medicines Agency (EMEA) and the Japanese Pharma-copoeia of the Portsmouth, NH (USA) lar-ge-scale mammalian cell culture facility for the production of Bristol-Myers Squibb’s Orencia® and Genentech’s Rituxan®.

Growing demand and a strong project pipeline supported a number of expansion projects and related transactions. The mi-lestones reached in 2006 include:

– The fourth 20 000-liter bioreactor in Portsmouth, NH (US) was started ahead of schedule in May 2006.

– The ﬁ rst (of two) 15 000-liter microbial bioreactor was started on schedule in Visp, in cooperation with UCB.

– Expansion of the laboratory space and development capacity in Slough (UK) was completed.

– Construction of a large-scale mammali-an mmammali-anufacturing facility was initiated in Singapore, a pioneering project in the south-east Asia region. Genentech has an exclusive option to buy this plant. – Lonza will build a second 80 000-liter

mammalian cell culture manufacturing facility in Singapore.

– Acquisition of Genentech’s 4 x 10 000-liter mammalian cell culture facility in Porriño (Spain), which is dedicated in the short term to the production of Genentech’s Avastin® (bevacizumab) bulk drug substance, was completed.

– The acquisition of Cambrex’s Microbial Biopharmaceuticals business was an-nounced; this will further strengthen our microbial small-/mid-scale production capabilities and the project development pipeline. We anticipate closing during the ﬁ rst quarter of 2007.

Exclusive Synthesis & Biopharmaceuticals million CHF

Sales

Change in %

Change due to

* The prior year was restated due to reclassiﬁ cation of the agrochemicals business from the “Exclusive Synthesis & Biopharmaceutical” segment to the “Organic Fine & Per-formance Chemicals” segment as a result of the change in management structure.

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A Successful Track Record

In developing and manufacturing mammalian biopharmaceuticals, Lonza is able to start

working with customers at a number of stages. The scientific and customer project

management teams based in Lonza’s R&D center in Slough (UK) work closely together with

customers to design work programs that meet each customer’s requirements. This

coopera-tion ensures that the customers are kept up to date with what is happening at all stages of

the project and enables them to make informed decisions.

By Robert Winder, Industry Journalist, London (UK)

Lonza continued to enhance its mam-malian biopharmaceutical manufac-turing capabilities through acquisition and expansion in 2006. In addition, the research and development center in Slough (UK), which is key to maintaining a strong manufacturing pipeline, enjoys high demand and ongoing expansion.

When a drug discovery company is looking for a manufacturer for its prod-uct, it faces a number of issues such as whether mammalian or microbial fer-mentation will be used for manufac-turing, whether the starting point is a DNA sequence, or a partially developed process, and the scale of capacity that

will be required.

According to Allison Vernon, Head of Mammalian R&D Services, there are three key reasons why a customer should choose Lonza as their manu-facturing partner: flexibility, teamwork and the process. “Lonza can provide customers with all the tools required to get their product made, whatever options are required,” she says.

Lonza has a successful track record in process development and manufac-turing of biopharmaceuticals using mammalian cell culture. “We have taken products – both antibodies and

recombinant proteins – from R&D to the market,” says Vernon. “The cus-tomer can reduce their risk by working with an experienced company, such as Lonza.” Lonza’s customers range from almost virtual biotech companies to major pharmaceutical companies.

Lonza has developed a standard pro-cess pathway to deliver high-titer GMP production so that the customer is able to move through toxicology stud-ies and into clinical trials as quickly as possible. “The process is not a simple handle-turning exercise,” says Vernon, “it is tailored to the specific needs of

each project for each customer.”

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For Lonza, the key to maintaining a strong pipeline of projects is commu-nication with its customers. A multidis-ciplinary customer-facing project team coordinates each project. “We have an interactive communication process with the customer to ensure they un-derstand what is happening at all stag-es of the project and to allow them to make informed decisions,” says Vernon. The project manager is the key to the relationship with the customer and is supported by a team made up of scien-tific, quality, regulatory and

manufac-turing representatives based in Slough. “It is important to manage the com-munication so the relevant experts at Lonza talk to the right people at the customer’s end,” adds Vernon.

In parallel with cell line development, Lonza also creates product assays, to ensure the development and manufac-turing processes can be monitored and the final product analyzed. In addition, the purification process is developed to ensure that the product will meet the exact purity standards required for therapeutic applications.

“Ultimately, when the process is handed

to the pilot plant, they have all the in-formation about what to expect from a process in terms of fermentation, purification and assays,” says Vernon. The pilot plant is used to scale up the process for GMP manufacture. Product from the pilot plant is often used by customers in toxicology studies, which are on the critical drug development pathway.

Lonza’s standard process is built around its Glutamine Synthetase (GS) Gene Ex-pression System™ and its suspension

variant Chinese hamster ovary (CHO) cell line (CHOK1SV), which is adapted for use in a protein-free suspension culture system. Both the expression system and the cell line are widely used in the biopharmaceutical sector and are familiar to the regulatory authori-ties. “We also see many conference presentations that use the GS Gene Expression System™, which is a strong scientific endorsement of the technol-ogy,” says Vernon.

To stay ahead of the game Lonza is working to further enhance the GS Gene Expression System™ by improv-ing product titers and reducimprov-ing the

time taken for cell line creation, and improving the reproducibility and ro-bustness of processes. There has been considerable success in improving ti-ters in recent years and monoclonal antibody titers of 2 to 5 grams per liter are commonly seen.

The GS Gene Expression System™ is at the center of a whole family of services and products offered by Lonza so that customers have the tools to bring their products to the market. Lonza contin-ues to innovate in all areas to support

GS fermentation processes, to enhance services, to develop new services and to develop technologies that are new licensing opportunities. However, be-yond the GS Gene Expression System™, Lonza has the flexibility, expertise and capabilities to work with customer’s own processes.

< Separation of DNA on agarose gel

< Removal of stack of cryopreserved cell lines from liquid nitrogen dewar

< Plasmid purification

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27

Organic Fine & Performance Chemicals

Acetoacetanilide – here enlarged 2 700 times – is an intermedi-ate for the manufacture of organic pigments and dyestuffs.

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Organic Fine & Performance Chemicals of-fers a broad range of products for applica-tions in nutrition, hygiene, personal care, water treatment and wood preservation, and selected industrial markets. Its pro-duction plants are located in Switzerland, the USA and China. Backward integration to an in-house naphtha cracker provides fundamental starting materials. Ongo-ing process optimization, the switch to new raw materials and application of in-novative technologies lead to continuous expansion of our product portfolio. With production based on naturally derived al-cohols, Lonza is one of a small number of leading suppliers of biocides. A process of continuous innovation in the chemistry underlying these materials enables the development of new intermediates and active substances, also increasingly in Asia.

“Besides our credo of ‘value

for money’, we are focusing

strongly on novel application

and product development.

We offer our customers

first-class products and application

solutions as well as reliable

service,” explains Lukas Utiger,

Head of Organic Fine &

Per-formance Chemicals.

Nutrition Lonza’s main nutrition products are nicotinates, L-Carnipure®, Carniking®, DHA (docosahexaenoic acid), LAG (larch arabinogalactan) and advanced interme-diates for the production of essential vita-mins.

L-Carnipure® is a special grade of L-car-nitine, manufactured for food and phar-maceutical applications. L-Carnipure® is of vital importance in supplying energy to, and ensuring the functioning of many

Organic Fine & Performance Chemicals

organs in the body. Lonza developed and patented the biological L-Carnipure® pro-duction process for 100% pure L-carnitine. Carniking® is recommended for the manu-facture of dry-feed formulations, premixes and base mixes. The Organic Fine & Per-formance Chemicals division sells L-Car-nipure® and Carniking®. These L-carnitine products are fermented under contract by Lonza Exclusive Synthesis in Kouřim (Czech Republic) based on raw materials manu-factured in organic chemical plants.

Lonza is the leading producer of niacin and niacinamide. Apart from its pharmaceuti-cal applications, this B3 vitamin is added to a large number of foods and used to en-rich feedstuffs for production animals and pets as well as in aquaculture.

The DHA (docosahexaenoic acid) prod-uct, one of the most important omega-3 polyunsaturated fatty acids, is an ideal fit with our Niacin USP and L-Carnipure®. The main areas of application are in functional food and dietary supplements as well as in the pharmaceutical industry.

The latest product in our nutrition portfo-lio is larch arabinogalactan (LAG). LAG is a natural, soluble fiber. It offers many signif-icant benefits, the most important ones being in the fields of immune enhance-ment and digestive health.

Meta® Metaldehyde is a specific anti-slug active ingredient that works in all weather conditions.

Hygiene / Personal Care / Preservation Our Hygiene product offering includes raw ma-terials for antimicrobial active ingredients, specialty surfactants and preservatives, which are used to formulate disinfectant and sanitizer products, as well as institu-tional and household cleaning products.

In the area of Personal Care, we provide a wide range of preservative and specialty additive technologies for applications such as skin and hair care or sun

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tion. Lonza’s newly introduced proprietary technology, Natrulon® HT (hydrothera-py), protects the skin from drying effects.

In recreational water treatment, we offer a proprietary bromine disinfection technol-ogy, along with quaternary algaecides for pools and spas. In industrial and paper ap-plications, we have developed proprietary microbiocides for the prevention and con-trol of microorganisms. Our quaternary biocides are also used in oil-field applica-tions to prevent microbiological contami-nation of water injection wells for second-ary oil recovery.

Our Wood Protection business provides chemical solutions to preserve and im-prove dimensional lumber and engineered wood products. Carboquat®, a chloride-free, non-corrosive biocide, is Lonza’s latest patented and EPA-registered wood preser-vative (EPA: US Environmental Protection Agency).

Industrial Specialties HCN intermediates are used for the manufacture of agro-chemicals, dyestuffs, optical brighteners, adhesives, cosmetics and pharmaceuti-cals. One example is our malononitrile (MDN). It is extensively used as a building block for various syntheses. Our chlorosul-fonyl isocyanate (CSI) is another example of an important building block in the field of antibiotics.

Diketene derivatives are utilized in vita-mins, fragrances, agrochemicals, pigments and pharmaceuticals.

Lonza’s high-performance materials are used in the electronics, space, aerospace and automotive industries as well as in coatings. They provide outstanding per-formance characteristics such as high glass temperatures, low dielectric proper-ties, easy processing, low weight in com-posites, high crosslink density and can be tailored to the customer’s needs.

CarboShield®, a novel and very effective corrosion inhibitor for a broad range of in-dustrial metals was successfully launched in 2006.

Especially in the area of agrochemical ac-tive substances, Organic Fine & Perfor-mance Chemicals is concentrating on new complex advanced exclusive products. A clear understanding of the needs of our customers, an excellent contamination prevention system, the ability to scale up new processes very quickly and our excel-lent track record with our customers are some of our key differentiating factors.

Organic Fine & Performance Chemicals has highly flexible ISO-regulated produc-tion facilities where we manufacture in-termediates and active substances for the agrochemical and other industries.

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Lonza Annual Report 2006 ORGANIZATION AND ACTIVITIES ACTIVITY REPORT

The division’s sales reached CHF 1 075 million (CHF 973 million in 2005) and ex-ceeded the previous year’s sales ﬁ gure by 10.5%. This increase mainly reﬂ ects price adjustments in response to high raw ma-terial and energy costs. Operating income remained at CHF 130 million, while the operating margin fell to 12.1% (13.4% in 2005). The time lag between the increas-es in raw material and salincreas-es pricincreas-es had a negative impact on the division’s margin development.

Nutrition The demand for nicotinates (vitamin B3) for food and pharmaceutical applications remained strong throughout the year, sustained by the positive price development. Sales volumes of feed grade nicotinates exceeded last year’s levels, with improvements in product prices.

The L-carnitine product lines enjoyed a good year. L-Carnipure® (food/pharma-ceutical grade L-carnitine) sales improved, mainly due to sizeable demand in the USA. Carniking® (feed grade L-carnitine) perfor-med well, especially in the pet food seg-ment.

The DHA (docosahexaenoic acid) business, acquired at the end of 2005, was fully in-tegrated into the Nutrition business unit. Market development in the USA was ham-pered by intellectual property issues.

Larch arabinogalactan (LAG) sales for food and dietary supplements were slightly above expectations due to volume incre-ases.

Sales of Meta® Metaldehyde, a speciﬁ c anti-slug active ingredient, exceeded last year’s levels despite growing

competiti-on from China and alternative biological products. Development continued on new liquid formulations, mainly for the Asian market, with product registration appro-vals still pending.

Hygiene / Personal Care / Preservation De-mand for our hygiene product range, in-cluding raw materials for antimicrobial ac-tive ingredients, specialty surfactants and preservatives, was satisfactory. However, margins did not meet expectations due to delayed price increases and intense com-petition, mainly in Europe.

In the personal care area, lower sales vo-lumes were offset by higher margins.

In the water protection segment, stron-ger sales of patented technologies such as Equinox®, combined with the impact of reduced sales of some older products, resulted in an overall increase in proﬁ ta-bility. Strong competition from Chinese halohydantoin producers led to decreased volumes.

The wood protection business saw mode-rate performance from Carboquat®, a pro-duct for pressure treatment of wood.

Industrial Specialties Diketene deriva-tives faced strong competition from Chinese manufacturers, coupled with lower demand. Production capacity was

Results 2006

Organic Fine & Performance Chemicals

million CHF Sales

Change in %

Change due to

* The prior year was restated due to reclassiﬁ cation of the agrochemicals business from the “Exclusive Synthesis & Biopharmaceuticals” segment to the “Organic Fine & Per-formance Chemicals” segment as a result of the change in management structure.

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well-utilized overall. However, margins came under pressure as raw material prices for a series of products increased. Demand for vitamin intermediates was at expected levels.

In the HCN derivatives business, product deliveries to new customers ensured good sales volumes; but here too, compe-tition from China had a negative impact on margins.

Sales in the agrochemicals niche market developed well.

In the high-performance materials busi-ness, volume increases and an improved portfolio mix led to higher proﬁ tability. The growth was driven particularly by

de-mand from the electronics industry,

whe-reas sales to the aerospace sector develo-ped more slowly than expected. Several promising new products in the pipeline will contribute to the rejuvenation of the portfolio.

Research & Development There are cur-rently 34 projects in the R&D pipeline in Organic Fine & Performance Chemicals. These include chemicals for

pharmaceuti-cals, agrochemicals applications, polymers, nutrition, wood/water protection, hygiene and personal care. In order to strengthen the R&D pipeline, new chemical R&D laboratories were installed at the Nansha Guangzhou site (China). Recruitment has started and later in 2007 a dedicated team of up to 25 scientists will commence work on selected projects.

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Lonza’s Presence in the

Nutrition Market

Lonza has been present in nutrition for many years. Recently, Lonza has acquired

Nutrinova’s docosahexaenoic acid (DHA) business and the larch arabinogalactan (LAG)

business of Larex.

By Dr Andrew Warmington, Editor, Speciality Chemicals Magazine, Redhill (UK)

As the developed world’s age pyra-mid grows increasingly top heavy and healthcare costs escalate, people in many countries are becoming ever more health-conscious. Put simply, they want to prevent rather than just treat medical conditions. And the sci-entific evidence to support the ben-eficial effects of certain health ingre-dients is making its way into public consciousness. Trends like this make the nutrition market an increasingly attractive one.

Lonza, of course, has been strongly present in nutrition for many years and intends to stay there. “Growing the

Nu-trition business and further strength-ening our global position as a supplier of evidence-based, high-margin health ingredients is one of the essential ele-ments of the Organic Fine & Perfor-mance Chemicals division’s growth strategy,” says Dr Thomas Kiy, Global Head of Strategic Business Develop-ment for the business unit Nutrition, headed by Roman Quinter. There are two parallel approaches, both of which have been exemplified in the compa-ny’s recent activity: further developing the existing businesses (mainly by ex-panding into new geographical mar-kets and/or applications) and making acquisitions.

Lonza is by far the world’s largest man-ufacturer of Vitamin B3 in the form of niacin and niacinamide. These vita-mins are used in dietary supplements, food fortification and animal nutrition. Lonza is also the leading provider of the pharmaceutical-grade quality of niacin used in prescription remedies to maintain healthy cholesterol levels.

Under the L-Carnipure® brand, Lonza is also the world’s largest supplier of L-carnitine, an important nutrient that helps the body to metabolize fat and produce energy, thus ensuring that its most important organs function properly. As such, L-carnitine is vital to

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maintaining our health and fitness.

In December 2005, Lonza acquired Nutrinova’s docosahexaenoic acid (DHA) business. DHA is produced by fermentation from microalgae; thus, as well as its positive health effects for the heart and brain, it has superior sensory properties to the fish oils from which this important omega-3 PUFA is normally sourced and has the bonus of being vegetarian in source.

Then in June 2006, Lonza also ac-quired the larch arabinogalactan (LAG) business of Larex in the USA.

LAG is a natural prebiotic fiber that is extracted from larch trees via an eco-friendly, solvent-free process. Market-ed under the brand name FiberAid®, it promotes gastrointestinal health at low dosages. Both acquisitions were highly synergistic with the existing product range.

Deals like this benefit Lonza in two key ways, Kiy observes. Firstly, they have diversified the company’s posi-tion in the food and beverage market by adding new health ingredients for functional foods to the portfolio – the nicotinates and L-carnitine, by contrast, are mainly used in dietary supplements.

Secondly, they follow Lonza’s strategy of addressing top areas of health con-cern in the general population, notably heart health, intestinal disorders, the immune system, mental health and weight management. Finally, as cus-tomers come increasingly under pres-sure from discount labels, so they look to Lonza for innovations that will make their brand stand out.

Kiy observes: “Lonza’s aim is to be the technology leader for speciality prod-ucts like these. This brings us into a po-sition not just to control costs and en-joy cost leadership but also to supply

unique quality grades to customers.”

The group Kiy heads was created in early 2006 in response to demand from the nutrition market and other markets for more support. “In former times, it was enough just to supply them with the ingredients. Now cus-tomers want help with regulatory matters, labelling issues, health claims, intellectual property, application and formulation support, too,” he says. The group offers these services internally, but also to external customers in this market and others. “This creates val-ue for customers, giving them added value to differentiate their market

positions. Thus, it both intensifies our dialogue with existing customers and supports us in gaining new ones,” adds Kiy. Lonza works increasingly closely with customers to support their prod-uct development.

Lonza regards the Nutrition business as absolutely core. Much of the com-pany’s accumulated expertise in key areas of biotechnology such as fer-mentation and biotransformation are applied here.

“All of the Nutrition products are duced by biological or chemical

pro-cesses and go into promoting health in people or animals. We are a life-sci-ence company and this is 100% the definition of what the life sciences are,” says Kiy.

< Niacinamide

< L-carnitine crystals

< Arabinogalactan

< Microalgae ulkenia

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35

Polymer Intermediates / Other

Acquired Bio-businesses

Resins with fiber glass which are applied for end use in composites for the electrical and transportation industries; enlarged 677 times.

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36

Polymer Intermediates

1

_{/ Other}

ORGANIZATION AND ACTIVITIES ACTIVITY REPORT

Polymer Intermediates million CHF

Sales

Margin in % EBITDA Margin in % 2005* 627 48 7.7 77 12.3 2006** 629 43 6.8 68 10.8

For the ﬁ rst ten months of the year, ending in October 2006, the Polymer In-termediates division – Polynt S.p.A. – re-corded sales of CHF 629 million, an im-provement on the same period last year. Operating income reached CHF 43 milli-on, while the operating margin equaled 6.8%. These results were achieved due to higher selling prices and an improved product mix.

Sales of phthalic anhydride and general-purpose plasticizers for PVC applications increased due to the recovery of the cons-truction and automotive end-market seg-ments in southern Europe.

Demand for maleic anhydride and deri-vatives, sold to the unsaturated polyester sector in Europe, met expectations. Ex-ports to the USA and the Far East were adversely affected by the strength of the euro versus the US dollar.

The catalyst business achieved record re-sults thanks to the new catalysts for ﬁ xed-bed, butane-based maleic anhydride.

Trimellitic anhydride volumes were in line with expectations. However, exports to US and Asian markets failed to recover due to currency effects. Special plasticizers de-veloped well in Europe, in terms of both sales volume and margin, conﬁ rming ex-pectations.

Resins performed well overall as a result of volume increases and stable margins. Sales of compounds were boosted by brisk demand from the electrical and trans-portation industries.

Research & Development New catalysts for both phthalic and maleic anhydride plants were added to the development pipeline. Other new developments includ-ed resin formulations for applications in the coating industry and new maleic de-rivatives for use in wind turbines. Time-to-market for new plasticizers was reduced to 60 days, offering greater competitive advantages to customers.

Results 2006

* The prior year was restated due to reclassiﬁ cation of Singapore Pte Ltd from the “Polymer Intermediates” seg-ment to the “Other” segseg-ment as a result of the change in management structure.

** Results from January until 30 October 2006

1 _{The majority of the Polymer Intermediates business was}

divested on 30 October 2006 via the Polynt S.p.A. IPO on the STAR segment of the Mercato Telematico Azionario (Electronic Stock Market) of the Borsa Italiana S.p.A.. At the end of the reporting year 2006, Lonza held 31% of the shares. Polymer Intermediates sales are refl ected in fi nan-cial fi gures for 10 months of the fi scal year 2006 in profi t and loss statement. Lonza retains the Singapore purifi ed isophthalic acid plant that was previously incorporated in the Polymer Intermediates business.

Other million CHF

Sales

Change in %

Change due to

Volume and prices Currency translation Scope of consolidation

Margin in % EBITDA Margin in % 2005* 118 (23) (19.5) (11) (9.3) 2006 137 16.1 18 1 0 (22) (16.1) (8) (5.8)