AnnuAl RepoRt 2005 CoRpoRAte GoveRnAnCe & …...Franklin Templeton Companies, LLC, Fort Lauderdale (USA) Harris Associates L.P., Chicago (USA) % 19.54 10.06 10.04 % 18.44 10.06 9.92

AnnuAl RepoRt 2005 CoRpoRAte GoveRnAnCe & SoCiAl And enviRonmentAl RepoRt

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Lonza annuaL RepoRt 2005 CoRpoRate GoveRnanCe & SoCiaL and enviRonmentaL RepoRt

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Lonza Annual Report 2005

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8 10 1� 20 24 27 28 28 29

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�8 �942

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intRoduCtion Foreword from the Chairman of the Board of Directors and the Chief Executive Officer

CoRpoRate GoveRnanCe Group Structure and ShareholdersCapital StructureBoard of DirectorsManagement CommitteeCompensation, Shareholdings and LoansShareholders’ Participation RightsChanges of Control and Defense MeasuresAuditorsInformation

Human ReSouRCeSThe Key to Operational ExcellenceHuman Resources ActivitiesOur Passion is to Deliver Sustainable Value to our Customers –Interview with Jeanne Thoma, Head of Global Human Resources

SaFetY, HeaLtH and enviRonmentResponsibility and SystemGoals and PerformanceRedevelopment of a Former Industrial Site

aGenda & ContaCtS

CORPORATE GOVERnAnCE & SOCIAL AnD EnVIROnMEnTAL REPORT ContentS

The Lonza Annual Report 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.

5


Dear Readers

We are pleased to present you with our Corporate Governance & Social and Environmental Report, which is part of the Lonza Annual Report 2005. Being keenly aware of our responsibilities towards our customers, our employees, our shareholders and towards society in general, we attach great importance to the matters dealt within this report.

For Lonza, Corporate Social Responsibility is not just a technical term, but an active commitment that is essential to all employees. It is our obligation to act in accordance with the highest legal, environmental and social requirements while pursuing our economic goals. This report covers the areas of Corporate Governance, Human Resources as well as Health, Safety and Environment.

Our concept of Corporate Social Responsibility is defined in the Lonza Code of Conduct, which we consider as a basis for our relations within the company and with all third parties. Our Code of Conduct delineates the professional standards we aspire to in all our activities and expect from all our employees. We have been increasingly successful in our efforts to sensitize our people to the need for responsible care and behavior. We would like to thank the outstanding employees at Lonza for the way they have embraced our business principles and the important contribution they make to the sustainability of all our activities.

We will continue to strengthen our efforts in the field of Corporate Social Responsibility, which is such an essential part of Lonza’s business philosophy.

Rolf Soiron Stefan BorgasChairman of the Board of Directors Chief Executive Officer

CORPORATE GOVERnAnCE & SOCIAL AnD EnVIROnMEnTAL REPORT intRoduCtion

7


8 10 1� 20 24 27 28 28 29

CoRpoRate GoveRnanCe Group Structure and ShareholdersCapital StructureBoard of DirectorsManagement CommitteeCompensation, Shareholdings and LoansShareholders’ Participation RightsChanges of Control and Defense MeasuresAuditorsInformation


8


Group Structure and Shareholders

Lonza Group Ltd, a holding company under Swiss law, is fully committed to good corporate governance. As an internationally active company, Lonza complies with the local rules and regulations of all countries in which it does business. However, Lonza’s corporate governance is measured against the SWX Swiss Exchange “Directive on Information relating to Corporate Governance”. The principles and rules of Lonza Group Ltd are laid down in the Company’s Articles of Association, the Regulations Governing Internal Organization and Board Committees including their Charters, and the Code of Conduct 1. The Board of Directors reviews these principles and rules regularly in light of prevailing best practices.

Detailed information on governance matters are also displayed on the company’s website www.lonza.com.

operational Group StructureLonza is a lifesciencesdriven company, headquartered in Basel, Switzerland, which operates 21 production and R & D facilities in nine countries. Its activities are organized in three divisions. The divisions function as profit centers and bear full responsibility for their respective business activities. Lonza is the leading custom manufacturer of a wide range of active chemical ingredients, intermediates and biopharmaceuticals for the pharmaceutical and agrochemical industries. On the basis of organic chemical, oleochemical and biotechnology platforms, Lonza creates valueadded solutions for the nutrition, hygiene & personal care, wood & water treatment and industrial specialty markets. Lonza also offers polymer intermediates, polyester resins and compounds.

A detailed description of Lonza’s worldwide activities is available on Lonza’s website: www.lonza.com/group/en/company/overview.html.

Exclusive Synthesis & Biopharmaceuticals

Polymer Intermediates Organic Fine & Performance Chemicals

Management Committee

External Audit Internal AuditBoard of Directors

organizational structure

1.

1.1

1 The specified documents may be downloaded from Lonza’s website: www.lonza.com/group/en/company/corporate.html.

CoRpoRate GoveRnanCe

9


Holding Company, Principal Subsidiaries and Affiliates Lonza owns directly or indirectly all companies belonging to the Group worldwide. The subsidiaries and affiliates are all nonlisted entities. They represent 99.4 % of the revenue of the Group.

Principal Subsidiaries1 Two new legal entities were established in 2005: Lonza Biologics Singapore Pte Ltd and Lonza Poland Sp.z.o. o. The principal subsidiaries are shown below:

Company

Lonza LtdLonza Sales LtdLonza Finance LimitedLonza Biotec sroLonza Compounds GmbH & Co. KGLOFO High Tech Film GmbHLonza GmbHLonza Group GmbHGewerbepark Hochrhein GmbHLonza Biologics plcLonza Group UK LtdLonza SpALonza Europe BVLonza Poland Sp.z.o.o.Lonza Guangzhou LtdLonza Guangzhou nansha LtdLonza (China) Investments Co. LtdLonza Guangzhou Research and Development Center LtdLonza Singapore Pte LtdLonza Biologics Singapore Pte LtdLonza America Inc.Lonza Inc.Lonza Biologics Inc.

Town / Country

Visp, CHBasel, CHSt. Helier, Jersey, GBKouřím, CZMiehlen, DWeil am Rhein, DWeil am Rhein, DWeil am Rhein, DWaldshutTiengen, DSlough, GBSlough, GBScanzorosciate, ITBreda, nLKrakow, PLGuangzhou, ChinaGuangzhou, ChinaGuangzhou, China

Guangzhou, ChinaSingaporeSingaporeWilmington DE, USAAllendale nJ, USAWilmington DE, USA (Portsmouth nH, USA)

Purpose

Currency 2

CHFCHFCHFCZKEUREUREUREUREURGBPGBPEUREURPLnUSDUSDUSD

USDSGDUSDUSDUSD

USD

Share capital in 000

60 000

2 000 12

282 100 699

7 671 511

25 10 400

4 500 17 000 51 600

19 50

12 00015 600�0 000

1 500

45 500250

8464

1

% Holding direct

100 100 100

1�100

100

% Holding indirect

100100100100100100100100100100100100

87

100 100 100

100

100

Research & Development

Production

Sales Office

Service / Financing

1 All companies belonging to Lonza Group are nonlisted entities2 Abbreviation of currencies in accordance with ISO standards


10


principal ShareholdersThe following table outlines the identities of those Lonza Group Ltd shareholders and their respective shareholdings with more than 5 % of voting rights (according to information received from these shareholders):

principal Shareholdersnumber of shares at CHF 1 par value

EMSChemie Holding AG, Domat / Ems (Switzerland)Franklin Templeton Companies, LLC, Fort Lauderdale (USA)Harris Associates L.P., Chicago (USA)

%

19.5410.0610.04

%

18.4410.06

9.92

31.12.2005

9 �05 �6�5 07� 7745 002 650

�1.12.2004

9 859 0475 07� 7745 065 650

Lonza Group Ltd knows of no other shareholder(s) that owned more than 5 % of the total share capital of Lonza Group Ltd as of �1 December 2005. To the best knowledge of Lonza Group Ltd, the abovementioned shareholders are not linked by any shareholders’ agreement or similar arrangement with respect to their shareholdings in Lonza Group Ltd or the exercise of shareholders’ rights.

Changes that occurred between the balance sheet date and the date of the auditors’ report are recorded on page 57 in the financial part of the Lonza Annual Report 2005.

Cross-shareholdingsLonza Group Ltd has not entered into any crossshareholdings.

Capital Structure

Share CapitalThe share capital of Lonza Group Ltd as of �1 December 2005 is CHF 50 450 000, fully paidin and divided into 50 450 000 registered shares with a par value of CHF 1 each.

Shareholder Structure

SwitzerlandGreat BritainGermanyUSAOthersShares in transitTreasury shares without voting rightstotalTotal number of shares

2004 1 Shares

%

�9.4418.68

0.4615.20

�.�016.8�

6.09100.0

50 450 000

Shareholders

%

94.780.471.870.562.�1

0.01

100.0

2005 1

Shares %

�4.5617.25

0.5411.25

�.5926.71

6.10100.0

50 450 000

Shareholders

%

9�.500.582.090.8�2.98

0.02

100.0

authorized and Conditional CapitalAs of �1 December 2005, Lonza Group Ltd has conditional capital of CHF 2 500 000 at its disposal. This conditional capital was created by the Annual General Meeting held on 11 April 2005.

1.2

1.�

2.

2.1

2.2

1 As of �1 December


11


Changes in Capital

Share Capital and Registered Shares

Share capital in CHFRegistered sharesPar value in CHF/share

2004 1

50 450 00050 450 000

1

2005 1

50 450 00050 450 000

1

200� 1

50 450 00050 450 000

1

Changes in Lonza Group Ltd Capital and Reserves

CHF

Share capitalGeneral legal reserveReserve for own sharesAvailable earnings brought forwardTotal capital and reservesnet income for year

Financial year 2004 1

50 450 00025 225 000

��5 897 598675 527 850

1 087 100 448201 257 424

Financial year2005 1

50 450 00025 225 000

��6 251 047814 8�8 497

1 226 764 544158 80� �56

Financial year 200� 1

50 450 00025 225 000

��5 958 272425 147 1948�6 780 466�11 915 066

For additional information, please refer to the consolidated statement of shareholders’ equity, displayed on page 15 in the financial part of the Lonza Annual Report 2005.

Shares and participation CertificatesLonza Group Ltd registered shares, with a par value of CHF 1 each, are listed on the SWX Swiss Exchange and included in the Swiss Market Index (SMI). They are traded on the virtx, an electronic trading system in London.

Lonza Group Ltd has not issued any participation certificates (nonvoting shares).

Security number: 001�84101 (valor), ISIn CH001�841017, stock symbol: LOnn (Telekurs)

On �1 December 2005 Lonza had a market capitalization of CHF 4 056 million (2004: CHF � 229 million).

Bonus CertificatesLonza Group Ltd has not issued any nonvoting equity security (Genussscheine, bonus certificates).

Limitations on transferability and nominee RegistrationsPurchasers of registered shares declaring that they have acquired these shares in their own name and for their own account will be entered without limitation as shareholders with voting rights in the share register. Persons who do not declare to have acquired the respective shares in their own name and for their own account are considered “nominees” and will be entered with voting rights in the share register up to a maximum of 2 % of the share capital unless the actually entitled persons are revealed. The details are set out in Article 6 of the Company’s Articles of Association.

2.�

2.�.1

2.�.2

2.4

2.5

2.6

1 As of �1 December


12


Convertible Bonds and optionsConvertible Bond In June 2002, Lonza Finance Limited, St. Helier, Jersey (GB), raised CHF �00 million via a convertible bond, due 2006, with a 2 % per annum fixed interest rate. The bond is convertible into Lonza Group Ltd shares from 1 July 2002 up to and including 21 June 2006 at a conversion price of CHF 1�5 per share. Each bond of CHF 5 000 principal amount is convertible into �7.0�704 shares with a par value of CHF 1. The purpose of the issuance of the convertible bond has been to purchase shares under the share repurchase program and for general corporate purposes. The usual risk associated with convertible bonds is that the conversion will not be executed at the end of the conversion period.

In conjunction with this convertible bond Lonza Finance Limited, St. Helier, Jersey (Great Britain), purchased 2 222 222 shares in Lonza Group Ltd, with a par value of CHF 1 each, in the period from 12–25 June 2002. The average purchase price was CHF 118 net per registered share.

In July 2005, Lonza Finance Limited, St. Helier, Jersey (Great Britain), raised CHF 4�0 million via a convertible bond, due 2009, with a 1.5 % p.a. fixed interest rate. The bond is convertible into Lonza Group Ltd shares from 25 August 2005, up to and including 1 July 2009, at a conversion price of CHF 91.70 per share. Each bond of CHF 5 000 principal amount is convertible into 54.5256� shares with a par value of CHF 1 each.

The net proceeds from the offering will be used for the refinancing of the convertible bond due in 2006 and for general corporate purposes.

Options Options granted to the members of the Board of Directors and the members of the Management Committee are mentioned under section 5.6 of this report. Disclosure of all options outstanding is provided in the notes to the consolidated financial statements as specified in Lonza’s financial report 2005. no further options or similar instruments have been issued by Lonza Group Ltd or any of the Group companies.

2.7


1�


members of the Board of directors The Board of Directors is made up of nonexecutive members and comprises three Swiss and two nonSwiss members.

The members of the Board of Directors as of 1 January 2006 were as follows:

expiration of current term of office

2006

2006

2006

2006

2006

name

Rolf Soiron

Sir Richard Sykes

peter Kalantzis

Bernard mach

peter Wilden

nationality

Swiss

British

Swiss and Greek

Swiss

German

Year of birth

1945

1942

1945

19��

1957

position held

Chairman of the Board of Directors and Member of the nomination and Compensation Committee

ViceChairman of the Board of Directors and Chairman of the nomination and Compensation Committee

Member of the Board of Directors and Member of the Audit and Compliance Committee

Member of the Board of Directors and Member of the nomination and Compensation Committee

Member of the Board of Directors and Chairman of the Audit and Compliance Committee

Year of initial appointment

2005

200�

1999

2001

2004

Rolf Soiron was elected to the Board of Directors at the Annual General Meeting of 2005 and appointed as its Chairman.

3.

�.1

Board of directors


14



activities and Functions

Rolf Soiron Holds a PhD in history from the University of Basel

and a PMD from the Harvard Business School

– Chairman of the Board of Directors of Lonza Group Ltd, Basel (since April 2005)

– Chairman of the Board of Directors of nobel Biocare Holding Ltd, Zurich (since 200�) – Chairman of the Board of Directors of Holcim Ltd, Jona (since 200�) and member of the Board (since 1994) – Member of the Board of Directors of Jungbunzlauer Group, Basel (199�–200�) – Sandoz Group – COO and Head of Pharma in Basel (1992 – 199�), Group Vice President Agribusiness USA in new York (1988 –1992)– Protek Group (Orthopedic implants) President and CEO in Berne (198� – 1987)– Sandoz Group – various functions in Human Resources, Finance and Corporate in Basel (1972 –198�)

– Chairman of the Basel University Council (1995–2005)

Sir Richard Sykes PhD in Microbial Biochemistry from Bristol University and DSc from the University of London. Fellow of The Royal Society. Member of a number of government and scientific committees. Holds a number of honorary degrees and awards from institutions both in Great Britain and overseas. He received his knighthood in the new Year Honours List for services to the pharmaceutical industry (1994).

– ViceChairman of the Board of Directors of Lonza Group Ltd, Basel (since April 2005)– Member of the Board of Directors of Lonza Group Ltd, Basel (since March 200�)

– Member of the Board of Directors of Rio Tinto plc (since 1997) – Rector of Imperial College, London (since January 2001) – Chairman and Chief Executive of Glaxo Wellcome plc, London (1997–2002) – Deputy Chairman and Chief Executive of Glaxo plc (199�–1997) – Deputy Chief Executive of Glaxo Group Research Ltd, London, and Group Research and Development

Director of Glaxo plc, London, and Chairman and Chief Executive of Glaxo Group Research Ltd (1987–199�) – VicePresident, Infectious and Metabolic Diseases, Squibb Institute for Medical Research, Princeton,

new Jersey (198�–1986) – Director of Microbiology and Associate Director, Squibb Institute for Medical Research, Princeton,

new Jersey (1979 –1982) – Head of the Antibiotic Research Unit of Glaxo Research Ltd, London (1972–1978)

– Served as President of the British Association for the Advancement of Science (1998–1999)

Peter Kalantzis PhD in economics from the University of Basel

– Member of the Board of Directors of Lonza Group Ltd, Basel (since September 1999) – Executive Vice President of Alusuisse Lonza Group Ltd, Zurich (1991–2000) – Held various positions in Lonza Ltd, Basel

– Chairman of the Board of Directors of Clair Finanz Holding Ltd, Cham (since 2004) – Member of the Board of Directors of Lamda Development Ltd, Athens (since 2004) – Member of the Board of Directors of Hansa AG, Basel (since 200�)– Member of the Board of Directors of Paneuropean Oil and Industrial Holdings SA, Luxembourg (since 2002)– Chairman of the Board of Directors of Moevenpick Holding, Cham (since 2001)– Chairman of the Board of Directors of PrivatAir Holding SA, Geneva (since 2001)

– Acting President of the Swiss Society of Chemical Industries (2001–2002) – Member of the Executive Board of economiesuisse (2001–2002)

�.2

15



Bernard Mach MD from the University of Geneva and PhD from Rockefeller University, new York. Until his retirement in 1998, Bernard Mach was Professor of Molecular Genetics and Chairman of the Department of Genetics and Microbiology at the University of Geneva Medical School.

– Member of the Board of Directors of Lonza Group Ltd, Basel (since March 2001) – ViceChairman of the Board of Directors of Lonza Group Ltd, Basel (2002–April 2005)

– Founder and Chairman of novImmune SA, Geneva (since 1998) – Member of the Board of Directors of Serono Ltd, Geneva (since 1997) – Founder and Chairman of the Scientific Board of Lombard Odier Immunology Fund, Geneva (since 1995) – Founder and former Board member of Biogen Inc., Geneva, then Boston

– Member of the French Academy of Sciences (since 1995) – President of the Union of Swiss Societies for Experimental Biology (1990 –199�) – Member of the Swiss Research Council (1969 –1980)

Peter Wilden Holds a degree in business administration and information technology, as well as a PhD in business administration from the University of Kiel

– Member of the Board of Directors of Lonza Group Ltd, Basel (since March 2004)

– Executive VicePresident Finance and Chief Financial Officer of Ferring Pharmaceuticals in Lausanne, Switzerland (since 2000).

– Member of the Board of Trace Biotech AG, Braunschweig, Germany (1999–2002) – Held various managerial positions in the Ferring Group (1991–2000) – Consultant for Mak Data System, Kiel, Germany, and the Krupp network (1988–1991) – Management Assistant with Krupp MaK Maschinenbau GmbH, Kiel, Germany (1986–1988) – Scientific Assistant at the Kiel Institute of World Economics (198�–1986)

– Member of various scientific research organizations in Germany, the United States and the netherlands.

Cross-involvementBesides their mandate for Lonza Group, none of the members of the Board of Directors or parties closely linked to such persons had any crossinvolvement or other important business connections with Lonza in the period under review.

elections and terms of officeThe members of the Board of Directors are elected by the Annual General Meeting for a term of one year; reelection is possible. The Board constitutes itself and elects from amongst its members the Chairman, the ViceChairman and the Board Committees.

�.�

�.4

16


internal organizational Structure In accordance with the law and the Articles of Association, the Board of Directors is the supreme management body of the Group. It consists of the Chairman, the ViceChairman and the other members. In accordance with the Articles of Association the number of members must be at least three. The term of office for all members of the Board of Directors is one year, reelection is possible with an age limit of 75 (this age limit will be reduced in 2006 to 70 years).

The members of the Board of Directors sat on the following committees in 2005:

definition of areas of ResponsibilityThe Board of Directors is responsible for the tasks assigned to it according to (i) Article 18 of the Company’s Articles of Association and (ii) the Regulations Governing Internal Organization and Board Committees. The Board of Directors defines the strategic direction and is responsible for the ultimate management of Lonza as well as the supervision of the persons entrusted with Group management, especially with regard to compliance with the law, the Articles of Association, the regulations and the directives and is entitled to issue the necessary instructions. In compliance with the law and the Articles of Association, the Board of Directors has delegated the management of the Company to the Management Committee, with the exception of nondelegable and inalienable duties.

Organizational Structures and Control Instruments The Board of Directors continues to commit itself to maintaining the highest standards of integrity and transparency in its governance of Lonza. The Regulations Governing Internal Organization and Board Committees set out in detail the powers and responsibilities of the Board of Directors, its Committees and the Management Committee. The standing Board Committees in the areas of audit/compliance and nomination/compensation provide modern corporate governance guidance and support to the Board of Directors. The Code of Conduct expresses Lonza’s core principles and values in professional business conduct, and provides assistance in recognizing, understanding and complying with the laws and ethical standards that govern Lonza’s business activities.

Broad supervisory and reviewing powers are held by the Board of Directors which is directly supported by Internal Auditing.

�.5

�.6


nomination and Compensation Committee

Chairman Member

Rolf Soiron

Sir Richard Sykes

peter Kalantzis

Bernard mach

peter Wilden

audit and Compliance Committee

Chairman

Member

17


The Regulations Governing Internal Organization and Board Committees confer on the CEO the duty to inform the Management Committee and – together with the Chairman – the Board of Directors on the business activities and all important business transactions including risk issues. The Board of Directors meets periodically with the Management Committee or its subcommittees for business updates and decisions on action to be taken.

Audit and Compliance Committee The Audit and Compliance Committee meets and consults regularly with the Management Committee and the internal and external auditors to review the scope and results of their work. Internal and external auditors have full and free access to the Audit and Compliance Committee. The Audit and Compliance Committee reviews the systems of internal control and financial reporting and the compliance with laws and regulations.

nomination and Compensation Committee The nomination and Compensation Committee is entrusted, for example, with the review and recommendation of compensation policies and programs (e.g. incentive compensation and equity plans), the Chairman’s and the CEO’s compensation based on their performance as well as the compensation of the members of the Management Committee and key executives. Further, the nomination and Compensation Committee periodically evaluates potential members of the Board of Directors.

Attendance and Agenda Detailed information on attendance at Board and Committee meetings in 2005 is provided in the following table:

nomination and Compensation Committee

�

100 %

– Salary benchmark to industry– Alignment of management goals with shareholder goals– Structure of longterm incentive– new Board members

Audit and Compliance Committee

7

100 %

– Control systems

– Risk management

– Implementation of internal audit findings– Financing, convertible bond

Board of Directors

10

86 %

number of meetings

Overall attendance

Main topics

In addition, the members of the Board of Directors supported the Management Committee through regular contacts.


18


information and Control instrumentsLonza maintains a system of internal financial and accounting policies, procedures and controls to provide a reasonable assurance, given the inherent limitations of all internal control systems, at appropriate cost, that transactions are executed in accordance with company authorization, that they are properly recorded and reported in the financial statements, and that assets are properly safeguarded. Lonza’s internal auditors comprise three experts who oversee the finance, operational and process activities of the Group with a riskbased audit program. They continually evaluate the adequacy and effectiveness of this system of internal accounting policies, procedures and controls, and take appropriate action to correct deficiencies as they are identified. In 2005, they delivered 20 internal audit reports to the Audit and Compliance Committee.

In addition to the documents required to pass resolutions, the Board of Directors receives the following reports:

– Monthly reports on the sales and earnings performance of the company with the relevant market information in the same period since the beginning of the year, structured by divisions and business sectors with the main sales areas and key product groups– A monthly report on the cash flows, debt and debtequity ratio, plus other relevant key figures

for the Group– Regular qualitative assessments of the divisions, business sectors and major subsidiaries– Audit reports prepared by the internal and the external Group auditors– Regular analysis of the shareholder structure– Annual overview of the Group’s key staff benefit schemes including pension funds– In cases involving extraordinary events of considerable commercial relevance, the Board of Directors receives direct, immediate information.


�.7

19



20


The Management Committee is appointed by the Board of Directors of Lonza Group Ltd. It performs the duties assigned to it by the Board of Directors, either under the terms of the Regulations Governing Internal Organization and Board Committees or additional tasks as delegated. It is responsible for leading Lonza and for developing and implementing the Lonza policy and strategy after approval by the Board of Directors. It supports and coordinates the activities of the divisions, business sectors and corporate functions. It is also responsible for leadership development and succession planning.

members of the management CommitteeAt 1 January 2006 the Management Committee consisted of seven active members.

Current function

Chief Executive Officer

Chief Financial Officer

Head of the Organic Fine & Performance Chemicals division

Head of the Biopharmaceuticals business sector

Head of Global Human Resources

Head of the Exclusive Synthesis business sector

Head of the Polymer Intermediates division

name

Stefan Borgas

toralf Haag

Beat in-albon

Stephan Kutzer

Jeanne thoma

Lukas utiger

Rosario valido

nationality

German

German

Swiss

German

American

Swiss

Italian

Year of birth

1964

1966

1952

1965

1959

196�

1952

In the reporting year Gerhard Klement and Roland Waibel relinquished their functions as members of the Management Committee.

4.

4.1

management Committee


CORPORATE GOVERnAnCE & SOCIAL AnD EnVIROnMEnTAL REPORT doLoReS ipSum 21


Members of the Lonza Management CommitteeBeat InAlbon Rosario Valido Toralf Haag Jeanne Thoma Stephan Kutzer Stefan Borgas Lukas Utiger

22


activities and Functions of the members of the management Committee

Stefan Borgas Holds a degree in business administration from the University of Saarbruecken and a lic. oec. HSG degree (MBA) from the University of St. Gallen

– Chief Executive Officer (since June 2004)

– Worked in various functions for the BASF Group (1990–May 2004): Group VicePresident, Regional Business Unit Fine Chemicals north America, BASF Corp. (200�–May 2004) Group VicePresident, Regional Business Unit Fine Chemicals Europe, Africa, Middle East, BASF AG, Ludwigshafen (2001–200�) Director Strategic Marketing Animal nutrition, Fine Chemicals Division, BASF AG, Ludwigshafen (1998–2001) Group Logistics Manager, Engineering Plastics, BASF Corp. (1995–1998)

Toralf Haag Holds a degree in business administration from the University of Augsburg and a PhD from the University of Kiel

– Member of the Management Committee and Chief Financial Officer (since August 2005)

– Worked as Chief Financial Officer and Member of the Management Board at norddeutsche Affinerie AG, Hamburg (2002–August 2005)

– CEO (President) Stamping & Frame Division of The Budd Company Detroit, a subsidiary of ThyssenKrupp Automotive (2000–2001)

– Director Finance, M&A and Corporate Development, The Budd Company Detroit (1997–1999) – Assistant to the CEO of Thyssen Handelsunion AG, Duesseldorf (1994 –1996)

Beat InAlbon Holds a PhD in economics from the University of Fribourg – Member of the Management Committee (since november 1999) – Head of Organic Fine & Performance Chemicals (since June 200�) – Head of Organic Fine Chemicals (1998–May 200�) – Jointed Lonza in 198� and held various managerial positions with Lonza Ltd, Basel

Stephan Kutzer (1965) Holds a PhD in chemical engineering from the Technical University of Munich

– Member of the Management Committee (since July 2005) – Head of the Biopharmaceuticals business sector (since June 2005) – Head of Performance Chemicals (200� – May 2005) – Site manager of Lonza’s Bayport, TX, facilities (november 1999 – December 2002)– Assistant production manager in Lonza Guangzhou Ltd., Guangzhou, China (July – September 1999)– Joined Lonza in 1996 as assistant production manager at Visp and became production manager

nicotinates in 1998.

4.2


2�


Jeanne Thoma Holds a Bachelor of Science from Montclair State University and a Master of Business Administration (MBA) from Fairleigh Dickinson University

– Member of the Management Committee (since August 2005) – Joined Lonza as Head of Global Human Resources (December 2004)

– Held various positions with BASF Corporation in Sales, Marketing and Logistics. (1990 to August 2004) – Worked as a Sales and Marketing Consultant to Fortune 500 companies (1985 to 1989)

Lukas Utiger Holds a PhD in chemical engineering from Imperial College, London

– Member of the Management Committee (since August 2001) – Head of the Exclusive Synthesis business sector (since August 2001) – Head of Research and Development for Exclusive Synthesis (October 2000–July 2001) – Joined Lonza as R & D chemist in 1992 and became R&D group leader for fine chemicals in 1998

– Acquired his business experience at ICI, Chemicals & Polymers Division, in Runcorn (1988–1992)

Rosario Valido Chartered accountant with a degree from the University of Milan

– Member of the Management Committee and Head of Polymer Intermediates (since July 2002) – Managing Director of Lonza SpA, Scanzorosciate and Chairman of Lonza Compounds, Brembate and

Lonza Composites, Scanzorosciate (since July 2002) – Deputy Head of Polymer Intermediates (2001–June 2002) – General Manager of Anhydrides and Chemicals (1999–2001) – General Manager of Resins and Compounds (1995–1999) – General Manager of Resins business unit and Site Manager at San Giovanni Valdarno (1992–1995) – Member of the Management Committee of Lonza Polymer Intermediates (since 1992) – Joined Lonza in Italy in 1982 as Commercial Director of the Resins business unit

management ContractLonza Group Ltd and its subsidiaries have not entered into management contracts with third parties.

4.�


24


method of determining Compensation and the Shareholding programs The nomination and Compensation Committee oversees the Lonza Executive Salary Plan, the Incentive Plan and the Stock Option Plan.

The nomination and Compensation Committee decides the terms of employment of the members of the Board of Directors and the Chief Executive Officer. This Committee and the Chief Executive Officer decide the terms of employment of the members of the Management Committee.

Compensation is based on periodic benchmarking to comparable enterprises with regard to basic salaries and the incentive programs.

The nomination and Compensation Committee consults with the Head of Global Human Resources and also with independent thirdparty consultants on general matters concerning compensation, pension and welfare benefit plans. The Lonza compensation programs consist of the Lonza Salary Plan, the Incentive Plan and the Share Option Plan for key employees (in 2006 the Share Option Plan will be replaced by a Longterm Incentive Stock Plan for key employees (LTIP). To qualify for stocks under the LTIP, ambitious targets1 must be reached. In addition significant own investments in Lonza shares are a mandatory prerequisite for the participating key employees). The overriding objective of the Company’s remuneration policy is to offer market and performanceoriented remuneration, to align employees and company objectives to increase the value of the company.

The Members of the Board of Directors may elect payment in cash and shares whereby the cash portion cannot exceed 40 %. The Members of the Board get a contribution based on their function as a Board Member and an additional contribution, if they are nominated as head of one of the Board’s Committees (Audit and Compliance Committee or nomination and Compensation Committee).

The members of the Management Committee receive their base salary and their incentive – if the business objectives have been accomplished – in cash. The long term incentive for the members of the Management Committee is granted in options (Stock Option Plan).

The Members of the Board of Directors are reimbursed for travel and other related expenses associated with the performance of their services for Lonza.

transactions with Key management personnel

Compensations for the Board of directors and the management Committeemillion CHF

Shortterm benefits 2

Postemployment benefits �

Other longterm benefitsTermination benefitsShare/optionbased payments 4

total

2004

4.4760.1670.0000.0001.6866.329

2005

5.0410.�070.0000.5291.9477.824

5.

5.1

5.2

Compensation, Shareholdings and Loans


1 Outperformance of TSR (total shareholder return) and EPS (earnings per share) 2 Including Incentive 2005 at 90 % satisfaction level, pay out in March of 2006� Social Security and Pension Fund4 The fair values were calculated using the market price at grant date according to IFRS 2

25


1 restated according to IFRS 22 including contribution for social security and pension fund


Board of Directors In 2005 payments to acting members of the Board of Directors of Lonza Group Ltd totaled CHF 2.175 million (2004: CHF 2.075 million1), 75.17 % (2004: 78.07 %) of which was distributed in the form of shares. The compensation system for members of the Board of Directors allows them to choose either a payment in shares or a combination of cash and shares. Shares granted are rated at the market price at grant date. They are blocked for a period of three years. Free access to these shares is only available in the fourth and later years.

2005 directors’ Compensation

Sergio marchionne Chairman of the Board (until April 2005)

Rolf Soiron Chairman of the Board (since April 2005)

Richard Sykes Vice Chairman of the Board

peter Kalantzis Member of the Board

Bernard mach Member of the Board

peter Wilden Member of the Board

Currency

CHF

CHF

CHF

CHF

CHF

CHF

Restricted Lonza Shares

(number)

5 466

� 55�

4 415

2 985

� 005

2 649

annual Cash Compensation

0

150 000

0

125 000

125 000

140 000

With the exception of Sergio Marchionne, none of the other members of the Board of Directors have given up their functions in the year under review.

Management Committee The acting members of the Management Committee and those who gave up their functions in the year under review received for their contributions and time served in 2005 CHF 5.649 million (2004: 4.254 million)2 in cash, options and additional benefits. In 2005, there were nine members on the Management Committee. Two of these members relinquished their functions in the year under review. The average number of Management Committee members during the year was 7.2 fulltime equivalents.

The members of the Board of Directors and the Management Committee did not receive any credits or benefits in kind.

A severance payment was made to one member of the Management Committee who gave up his function in 2005. This payment is included in the total compensation of the Management Committee.

Conflict of Interest no member of the Board of Directors benefits materially from any contract between a Lonza company and a third party.

26


Compensation for Former members of Governing Bodies no compensation was paid to former members of governing bodies.

Share allotmentIn 2005, the members of the Board of Directors received shares as part of their total remuneration. There were no further share allotments except as stated in section 5.2 of this report.

Share ownershipBased on information available to Lonza Group Ltd, the members of the Board of Directors and parties closely associated with them 1 held 51 1�2 (2004: 49 774) registered shares in Lonza Group Ltd at �1 December 2005 and controlled 0.1 % (2004: 0.1 %) of the share capital. none of the directors owns shares in the Group’s subsidiaries or associates.

The members of the Management Committee and parties closely associated with them1 held 2 615 (2004: 1 4�4) registered shares in Lonza Group Ltd per �1 December 2005.

optionsUnder the various option schemes instituted since 2000, the following options were granted every year to the members of the Board of Directors and the members of the Management Committee. As of �1 December 2005 the following options were held:

issue

Board of Directors 2

Management Committee 2

RatioStrike price in CHF

total

846 026911 190

2005

0�55 000

10:17�.80

2004

0270 000

10:164.25

200�

0187 440

10:177.00

2002

641 02658 750

10:111�.00

2001

205 00040 000

10:1104.50

The options vest after three years from grant date and become exercisable thereafter for a period of two years. After the exercise period, the options lapse without compensation.

Details on the development of the Lonza Option Plan are published on pages 48 and 49 in the financial part of the Lonza Annual Report 2005.

additional RemunerationDuring the year under review, none of the members of the Board of Directors or the Management Committee or parties closely linked to such persons has billed honoraria or other remunerations to Lonza Group Ltd or any subsidiaries for additional services performed.

Loans Granted by Governing Bodiesno loans were granted, nor are there any loans outstanding from previous years.

Highest total Compensation The highest compensation conferred on a member of the Board of Directors in 2005 was CHF 416 158, paid out in cash (CHF 150 000) and in the form of shares (number of shares: � 55�). Further information is contained in section 5.2.

5.�

5.4

5.5

5.6

5.7

5.8

5.9

1 Spouse, children below age 18, any legal entities that they own or otherwise control, or any legal or natural person who is acting as their fiduciary2 Acting members


27


The shareholders’ participation rights are described in the Company’s Articles of Association.

voting-rights Restrictions and RepresentationOnly persons with valid entries in the share register are recognized as shareholders or usufructuaries. A shareholder may only be represented at the Annual General Meeting by a legal representative or – by way of written proxy – by another shareholder entitled to vote, the appointed representative of the corporate body, the independent proxy or an assignee of proxy votes for deposited shares.

Each share has the right to one vote.

The shares held by Lonza Group Ltd are not entitled to vote at the Annual General Meeting and bear no dividend.

Lonza is using an electronic voting system for all the resolutions to be taken at its Annual General Meetings.

Statutory QuoraExcept as otherwise stipulated by law, an absolute majority of the votes represented at the Annual General Meeting is required for resolutions and elections.

For certain important matters such as the change of the company purpose and domicile, the dissolution of the company without liquidation, and matters relating to capital increases, Article 704 of the Swiss Code of Obligation provides for a twothird majority of votes cast representing an absolute majority of nominal values of shares represented.

Convocation of Shareholders’ meetingsOrdinary Shareholders’ Meetings are called in accordance with the law and the Company’s Articles of Association. Extraordinary Shareholders’ Meetings must be called upon resolution of a Shareholders’ Meeting or if demanded by one or more shareholders representing at least 10 % of the share capital.

Lonza posts the invitation to shareholders at least 20 working days before the Annual General Meeting and publishes it on its website as well as in the Swiss Official Gazette of Commerce and several newspapers.

agendaOne or more shareholders representing together shares with a par value of CHF 1 million may request an item to be included in the agenda of Shareholders’ Meetings. The request to include an item must be submitted in writing at least 40 days before the meeting, stating the item to be included and the motions.

entry in the Share RegisterPurchasers of Lonza Group Ltd shares may submit a request to be entered, without limitation, as shareholders with voting rights in the share register, provided they expressly declare that they have acquired these shares in their own name and on their own account. Special rules exist for persons who do not expressly declare in the entry application that they hold the shares on their own account (nominees).

There are no special statutory rules concerning a deadline for entry in the share register. The share register is regularly closed � working days before the Annual General Meeting.

6.

6.1

6.2

6.�

6.4

6.5

Shareholders’ participation Rights


28


duty to make an offerAn offer to acquire all shares must be made in accordance with Art. �2 SESTA (Federal Act on Stock Exchange and Securities Trading) if the threshold of �� 1/3 of the voting rights is exceeded. no special optingout or optingup dispositions are contained in the Company’s Articles of Association.

Clauses on Changes of Control Clauses on changes of control are not part of any employment agreements or benefit plans.

auditors

duration of the mandate and term of office of the Head auditorSince 1999, KPMG Fides Peat, Badenerstrasse 172, CH8026 Zurich 4, Switzerland, has held the mandate as the external auditor of Lonza Group Ltd and the Group.

The external auditor is elected for a term of one year.

Hanspeter Stocker from KPMG Fides Peat has been the auditor in charge since 1 April 2005.

The Board of Directors proposes that KPMG Fides Peat be reelected as statutory auditors and Group auditors for the business year 2006.

Head of the Internal Audit of Lonza is Emilio Rubio.

auditing HonorariumLonza Group paid KPMG Fides Peat CHF 1.9�� million (2004: CHF 1.4�9 million) for professional services rendered in connection with the audit of the Group’s annual financial statements and other auditrelated activities.

additional HonorariumKPMG Fides Peat received a total fee of CHF 1.�08 million (2004: CHF 2�7 000) for other services rendered to Lonza.

Supervisory and Control instruments vis-à-vis the auditorsThe Audit and Compliance Committee is responsible for evaluating the external auditors on behalf of the Board of Directors. In the reporting year, there were three joint meetings with the representatives of the external auditors.

The Audit and Compliance Committee reviews Lonza’s financial reporting process on behalf of the Board of Directors. Management is responsible for the financial statements and the reporting process, including the system of internal controls.

The external auditors, KPMG Fides Peat, is responsible for expressing an opinion on the accounting records and the financial statements prepared in accordance with Swiss law and the Company’s Articles of Association. As external auditors, KPMG Fides Peat is responsible for expressing an opinion on the consolidated financial statements (balance sheet, income statement, cash flow statement, statement of changes in equity and notes) prepared in accordance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), and Swiss law.

The Audit and Compliance Committee is responsible for overseeing the conduct of these activities by the Lonza management and the external auditors.

7.

7.1

7.2

8.

8.1

8.2

8.�

8.4

Changes of Control and defense measures


29


Lonza pursues a proactive, integrated and professional communication policy. Lonza Group Ltd publishes pricesensitive information in accordance with the obligation to disclose pricesensitive facts as required by the SWX Swiss Exchange.

Corporate Communications reports directly to the Chief Executive Officer while Investor Relations reports to the Chief Financial Officer. On basic matters of general corporate policy, Corporate Communications receives its guidelines from the Management Committee.

Lonza Group Ltd provides all shareholders entered in the share register with an annual report (on request only) as well as with the full and halfyear reports. These reports are also available on the company’s website www.lonza.com. The website is regularly updated and provides relevant information such as share price development, news releases and presentations. It also contains an interactive version of the annual report.

Media conferences and analyst meetings take place at the Company’s global headquarters or by conference call. Lonza runs a program of investor meetings.

Investors, potential investors, as well as financial analysts, are welcomed at the Company’s global headquarters in Basel.

anticipated Key Reporting datesThe list of all corporate events of special interest is subject to change during the year as dates are adjusted and added.

Annual General Meeting for the financial year 200522 March 2006, 09.�0 amConvention Center, MCH Swiss Exhibition Ltd, Basel

Halfyear Report 2006, Media conference and analyst meeting26 July 2006

Fullyear Report 2006, Media conference and analyst meeting24 January 2007

Annual General Meeting for the financial year 200628 March 2007, 09.�0amConvention Center, MCH Swiss Exhibition Ltd, Basel

Dividend Transfer to BanksAs a rule, Lonza Group pays the dividend to its shareholders on the fourth business day following the Annual General Meeting.

9. information


�1


�2

�4

Human ReSouRCeSThe Key to Operational ExcellenceHuman Resources ActivitiesOur Passion is to Deliver Sustainable Value to our Customers –Interview with Jeanne Thoma, Head of Global Human Resources


�2


the Key to operational excellence

Leadership and Collaboration Operational excellence is the focus of our business strategy and people are the key to outstanding performance. Developing a corporate culture of trust and entrepreneurship is essential for individuals to perform at their best. In pursuit of this goal, we promote and foster the principles discussed below so that wherever we work, we work together.

We treat each other with trust and respect. We recognize that diversity of ideas, style, background and culture enhances creativity and decisionmaking.

It is the mission of the Human Resources organization to proactively support Lonza’s business strategy through a relentless focus on Organizational Excellence and to provide and retain the right people to meet the business needs. This is accomplished with the aid of Lonza’s defined competencies: Drive, Develop, Decide and Deliver. Drive leads to proper execution, while Development provides building and management of talent. The Decisionmaking value supports entrepreneurialism, and this leads to the swift and agile delivery of results.

At Lonza we recognize the relationship of risk and reward. Managers provide mentoring to minimize risk and maximize opportunities, with continuous performance improvement in mind. To foster growth, people are encouraged and empowered to take decisions. We celebrate our successes and share the knowledge gained from our failures.

We benefit from the advantages of teamwork by leveraging the individual’s knowledge, skills and abilities. Individuals can, and often do, contribute good ideas, but really great ideas are more often the product of collaboration. We create opportunities for exploration and invention through crossfunctional teams that broaden the individual’s knowledge of other businesses and disciplines. We know that teamwork boosts productivity, the capacity for innovation and the competitiveness of our company. Teamwork also creates a more dynamic work environment.

At Lonza we are performanceoriented. Employees understand what is expected of them and how they are measuring up to these expectations. Employees are entitled to regular feedback discussions to gauge their individual performance and potential. They are increasingly rewarded in accordance with the performance principle.

In order to meet our business objectives now and in the future, talent management is critical. Ongoing training and staff development along with strategic recruitment ensure that our company has the right people and skills in order to remain a leader in our industry.

Our responsibilities extend beyond the company to our fellow human beings and society as a whole. We deal with cases of hardship with fairness and integrity. We recognize employee representatives as our partners in strengthening labor relations and improving the corporate culture.

Leadership by example is critical to the acceptance of and compliance with these principles.

It is the responsibility of the Human Resources organization to provide the businesses with the tools, systems and procedural guidelines that enable them to manage their human resource requirements.

It is the goal of these principles to create a culture of trust and entrepreneurship that will help retain our existing pool of talent and recruit talented new people as well, to ensure we meet our strategic objectives.

Human ReSouRCeS

��


Human Resources Development In December 2005 the headcount stood at 5 984 worldwide (2004: 5 668). The increase of 5.6 % is attributed to the investments made in China, USA, Great Britain and Switzerland to further our strategic initiatives.

Our training activities throughout 2005 focused on leadership and management development. In the reporting year over 250 ma nagers and management candidates attended special events for which they invested an average of 12 working days. Educational activities will continue in 2006 and will be expanded regionally. Specialist training courses were held in parallel, ranging from safety training to good manufacturing practice (GMP). In 2006 Lonza will launch several online learning programs the first of which will focus on legal compliance.

Lonza’s apprenticeship program in Switzerland is run in collaboration with other companies from the chemical and biotech industries.

Compensation At Lonza the scale of compensation is based on job responsibility and performance criteria. Compensation includes base salary and variable components. It varies according to management level. Variable compensation amounts to a maximum of 70 % of base salary. In addition, we have longterm incentive plans in the form of a stock option plan for executives in key positions and a share purchase program for employees.

In 2005 we formed a steering committee to focus on developing a Global Human Resource Strategy based on the Lonza² Strategy. As a result, the following global processes were implemented in 2005:

– Leadership development programs– Sales and marketing training– Performance management– Succession planning

Outlook 2005 was a year of invention; 2006 will be a year of fortification. The Human Resources activities will focus on supporting the programs launched in 2005, gathering feedback from endusers and improving the tools and processes.

As a company, Lonza supports its local communities and – in keeping with its Code of Conduct – encourages all employees to participate in activities that contribute to good citizenship.

Human ReSouRCeS

employees by region 2005

Switzerland 4�.1 %

EU

�0.2 %

north America 17.6 %

Asia

8.9 %

Others 0.2 %

employees by division 2005

Exclusive Synthesis & Biopharmaceuticals

40.7 %

Organic Fine & Performance Chemicals

�5.9 %

Polymer Intermediates

20.4 %

Holding and Others

�.0 %

�4


Our passiOn is tO deliver sustainable value tO Our custOmers

OUR EMPLOYEES ARE THE KEY TO DELIVERInG THE RESULTS OUTLInED In OUR STRATEGY.

TO BE SUCCESSFUL, WE MUST DEMOnSTRATE OUTSTAnDInG LEADERSHIP SKILLS AnD An

EnTREPREnEURIAL APPROACH TO THE BUSInESS.

interview with Jeanne thOma, head Of GlObal human resOurces

What is the role of Human Resources at Lonza?

the role of human resources is the same as the role of every employee at lonza: to support the successful implementation of the business strategy, increase customer benefits and subsequently shareholder equity. human resources’ function is to be the caretaker of lonza’s valued employees. the primary responsibility of all managers is to support, guide and motivate our employees. this requires that managers answer questions such as: does my team understand the strategy? do they understand their role in achieving the business objectives? do we trust one another?

does my team have an entrepreneurial approach to our business objectives? who really contributes what in terms of performance? are these efforts valued, recognized and rewarded by the company? are we proud to work for lonza? then it is up to us to translate these insights into concrete objectives and priorities.

“strong leadership and leadership development provides lonza with a competitive advantage.”

through the effective development of our employees we provide lonza with a competitive market advantage. in order to accomplish this, human resources must not only understand human resource processes but also know our businesses. we too must have an entrepreneurial approach to our objectives. through this approach, the development needs can be identified and the talent of all employees realized.

You’ve mentioned Human Resources objectives and priorities. Can you expand upon what the Human Resources objectives and priorities are at Lonza?

Human ReSouRCeS

�5


from a strategic perspective, it is our priority to develop a talent pool that has the depth and breadth to provide lonza with the leadership and expertise it needs. we also need simple, effective processes and procedures. Our human resources processes and procedures are intended to provide enough structure to give a framework, but not to the point where they become bureaucratic. we must always keep an eye on our processes and procedures to ensure they are meeting the business needs and not taking on a life of their own. the problems begin when structures become so rigid that exceptions can no longer be considered. while that makes life a lot easier for administrative purposes, the effect is that the organization begins to manage to the lowest common denominator, instead of managing people as they are – individuals.

Lonza’s vision is expressed in the state-ment: “Our passion is to deliver sustainable value to our customers.” How does Lonza’s culture support this vision?

lonza has a culture of trust and entrepreneurship. trust comes from open and honest discussion – which can sometimes be painful – and by treating one another’s ideas with respect. trust is hard to win and easy to lose, and therefore something we must cultivate and nurture every day through effective communication. this is an ongoing challenge as our business becomes increasingly more complex, expanding into new businesses and new parts of the world. human resources is a catalyst for trust and therefore helps to create the foundation for entrepreneurial initiative.

entrepreneurship requires that we be open to innovation, providing a process framework – not bureaucracy – that allows ideas to be communicated throughout the organization, and demonstrate through our actions that innovation and entrepreneurship are valued and rewarded.

Leadership development is recognized as “vital for sustaining the Lonza strategy”. What steps has Lonza taken to cultivate leadership development?

research by the corporate leadership council (clc), an organization that provides best practices and statisti

cal research, has found that companies with aboveaverage leadership talent pools have a significantly higher chance of achieving longterm success than their industry peers. strong leadership and – as its prerequisite – leadership development provide lonza with a competitive advantage.

“leadership” is not necessarily related to “management”. leaders are found at all levels and in all disciplines within the company. consequently their development needs vary greatly. therefore our approach to leadership development is a multifaceted, ongoing process. in support of this process, several programs have been initiated or expanded this year.

Could you share some specifics about these programs and the associated program benefits?

lonza’s performance management program, p2 – performance and progress, is the starting point. there are many benefits to this program. first, it provides visibility to leaders at all levels of the organization and identifies their development needs. second, p2 provides managers with the tools to conduct an open discussion with their employees about what is expected of them in terms of the business strategy and how they are doing in relation to those expectations. it is an opportunity for every manager to ensure that our employees’ behavior and performance reflect lonza’s culture and values. third, p2 provides our employees with a chance to discuss their personal career development ideas. the discussions facilitated through the p2 process provide all of us with clear direction and wellmanaged expectations.

the development of leadership skills requires different activities depending upon the individual’s needs and can include leadership training programs, peer review, team projects, academic training, job rotation and coaching, to name just a few.

customized leadership training programs are being developed and modified to address different skill levels – from new supervisors and team leaders to project managers and senior management – with an eye towards the different cultural and business needs of our globally diverse population. there are

several programs that have been in place for some time in different areas of the company. we leverage this experience and expand the curriculum or simply launch the programs in new regions, in addition to the development of new programs.

Our succession planning process has been finetuned this past year. the result is a much more robust process which will better enable us to identify gaps, close them over time and provide feedback for the leadership development program. all these processes are regularly reviewed with the management committee and discussed in detail with the board on an annual basis.

Human ReSouRCeS

�7


�8 �942

SaFetY, HeaLtH and enviRonmentResponsibility and SystemGoals and PerformanceRedevelopment of a Former Industrial Site


�8


SaFetY, HeaLtH and enviRonment

Lonza is committed to operations and practices which prevent harm to people and damage to the environment or property. Our principles for safety, health and environment (SHE), which derive from the company’s ethical convictions, take precedence and apply throughout the Group.

The responsibility Lonza is fully committed to the principles of sustainable development in its industrial operations in the chemicalpharmaceutical sector. We are also aware that our use of natural resources and our industrial activities have an impact on man, nature and the environment. We therefore strive to keep any negative effects to an absolute minimum and reduce them further in a drive for continual improvement. At the same time, we are doing all we can, in collaboration with our customers, to enhance the benefits of our products and services for the good of society. We commit significant financial and human resources to the achievement of this aim. For instance, �.� % of our more than 5 900 employees, a total of 196 people, work directly in the SHE area. Capital expenditure on SHE came to CHF 25.2 million in 2005, equivalent to 1.0 % of sales and 10 % of the Group’s total investment in fixed assets. The operating expenses for SHE amounted to CHF 59.7 million, 6 % up on the previous year’s level.

In addition to the internal dialogue and shared experience, Lonza strives to maintain a good and balanced relationship with the authorities and the neighboring population at all its locations. We contribute to the safe handling of chemical substances and the sustainable use of raw materials in particular through our commitment to Responsible Care and similar programs of the chemical industry as well as our active participation in national and international bodies working in the SHE area (CEFIC 1, SOCMA 2, BIAC �, SSCI 4, ESCIS 5).

The system Continual improvement in the SHE area requires farsighted planning, painstaking implementation and effective monitoring of the measures. Standards are developed and implemented at the production sites on the basis of the SHE policy that is valid across the Group. Having intensified its support and monitoring activities, the organization of regional SHE coordinators introduced in 2004 has proven its value and is to be continued. In the reporting year, the SHE coordination team issued a risk profile matrix for benchmarking process risk analyses. This is valid worldwide and binding on all production sites. Lonza is confident it will help further reduce process risks. Key figures on industrial safety, resource consumption, emissions and waste management measure our progress in the SHE field and enable us to identify weak points and establish goals. Regular internal and external audits serve as a check on compliance with internal and external standards, and can also be used as a means of providing expert support across the different locations and for exchanging experiences. In the event of an incident, each site has a local, trained response unit at its disposal for crisis and incident management. A Groupwide incident communication system ensures reporting to the Management Committee and enables the responsible decisionmakers to act.

Responsibility and System

1 Conseil Européen des Féderations de l’Industrie Chimique – European Chemical Industry Council2 Synthetic Organic Chemical Manufacturers Association (USA)� Business and Industry Advisory Committee to the OECD4 Swiss Society for Chemical Industry5 Expert Commission for Safety in the Swiss Chemical Industry

�9



6 Losttime injury frequency rate: number of accidents per 1 million hours worked7 Losttime injury severity rate: number of hours lost by accidents per 1 million hours

worked8 Carbon dioxide9 Volatile organic compounds10 nOx – nitrogen oxides; SO2 – sulphur dioxide11 Intensity: Consumption of a resource or emission of a pollutant in relation to the

production of one metric ton of finished goods

occupational accidentsper 1 000 000 hours worked (LTIFR)

2000

2001

2002

200�

2004

2005

The Group’s total energy requirement in the year under review was 11 622 terajoules. The main energy sources used by Lonza are: utilization of waste (�7 %), natural gas (�5 %) and electricity (22 %). Liquid fossil fuels account for 4 % of the overall energy consumption. Energy from hydroelectric generation belongs in the category of renewable energy sources. In the year under review Lonza obtained 6� % of its electrical energy from hydroelectric sources.

energy consumptionin terajoules

Selfgenerated Liquid fuels natural gas

Steam Electricity

2000

2001

2002

200�

2004

2005

Goals and performance

The goals On the basis of the longterm strategy and in alignment with our obligations under the Responsible Care system, the Management Committee in 2005 formulated the following goals for the Lonza Group:

Goal 2010

4.0 (60 %)

600 (60 %)

Status end 2005

5.8

849

Basis2000200�

10

1 500

Safety

LtiFR6 number of accidents (per 1 million hours worked)

LtiSR7 Severity of accidents (per 1 million hours worked)

Goal 2010

850

600

1 100

Status end 2005

79�

627

1 286

Basis 2000

9�0

760

1 500

environment

Co2 emissions 8 in 1000 metric tons

voC emissions 9 in metric tons

air impurities 10 (VOC, nOx, SO2 and particulate matter) in metric tons

The performance Compared with the previous year, the accident frequency fell by 20 % and there was a significant drop in accident severity of �7 %. This welcome trend is the result of the targeted implementation of programs to improve industrial safety as well as systematic training of employees at all levels. Seven of the 21 production and research sites operated without a single losttime accident in 2005. There was a further reduction in the consumption of energy and resources in 2005 compared with the previous year. The energy intensity 11 fell by �.5 % to 14 gigajoules per metric ton of finished goods, a performance that can be attributed to a wide variety of technical and organizational measures. CO2 emissions were below the midterm target of 850 000 metric tons; however, given the associated growth expectations, it will be a challenge for Lonza to achieve the absolute goal set for 2010.

indicators 2005 (change on 2004)

Energy intensityIndustrial water intensityCO2 intensityAir impurity intensityHazardous waste intensity

14.0 GJ / t12.1 m� / t958 kg / t1.55 kg / t104 kg / t

(�.5 %)(10.1 %)

(�.9 %)(1.1 %)

(16.2 %)

Further details on SHE management and performance can be found on our webpages: www.lonza.com/she.

40



Visp (Switzerland) Implementation of the Safety 2005 project was initiated at the beginning of the year. The most important innovations concern the introduction of softwaresupported notification and investigation of occupational accidents, absence management with defined indicators and training blocks, a job matrix to support individual SHE training and – as a human resources measure – the introduction of safety coaches. These are specially trained members of the plant teams, who act as discussion facilitators, working with the team to develop and implement measures to increase safety at work. In the energy sector, the Visp center realized several thousand megawatt hours of energysaving potential at various locations, for example through installation of a new heat exchanger, adjustment of steam input and coupled power generation via the steam turbine, as well as through systematic maintenance and replacement of leaky or wrongly dimensioned steam traps.

Kouřím (Czech Republic) An accident prevention program combined with intensive audit checks and intensified engagement of the local management in SHE matters brought a 50 % drop in accident frequency compared with the previous year. Further improvements were achieved by installing noise reduction measures, expanding the waste water treatment plant as well as coordinated training with the public emergency services.

Weil am Rhein (Germany) Although new, closed filtering systems for two thinner lines and the extension of pressure monitoring on the filmcasting machines to prevent solvent discharges improved the situation, they could not prevent a shortfall on the target of reducing diffuse dichloromethane emissions to a maximum of 2.� % of the quantity used.

Miehlen (Germany) Thanks to simple measures to address issues raised by internal audits, safety behavior and environmental awareness were greatly increased. Measures included the introduction of compulsory wearing of protective goggles, zoning for order and cleanliness, rules for eating and drinking at the workplace, as well as replacement of all earthing clamps to reduce the danger of explosion through static electricity.

Total output of carbon dioxide in 2005 was 79� 000 metric tons, 4 % down on the previous year and in line with the fall of total energy consumption. Carbon dioxide intensity as measured by tons CO2 emitted per ton of finished goods produced fell by �.9 %. The emissions of the greenhouse gas CO2 generated by burning fossil fuels were �2 % of total CO2 emissions in 2005.

Co2 emissionsin 1000 metric tons

Other sources Fossil fuels

Volatile organic compounds (VOC) and nitrogen oxides (nOX) are responsible for 91 % of all air impurities, totaling 1 286 metric tons in 2005. At �21 metric tons, the proportion of halogenated VOC represents 51 % of the total VOC output and is generated mainly by the film plant at Weil am Rhein (D).

air impuritiesin metric tons

Particulate matter SO2 nOx VOC

2000

2001

2002

200�

2004

2005

2000

2001

2002

200�

2004

2005

41



Conshohocken, Riverside (USA) With an investment of CHF �.7 million, the incinerator for hazardous wastes was expanded and updated through the installation of an electrostatic wettype filter and modifications to the burner. These improvements resulted in a �0 % lowering of nitrogen oxide emissions, coupled with a higher incinerating capacity, increasing the site’s selfsufficiency with regard to waste disposal.

Italy, all sites The Zero Accidents program is taking effect, with accident frequency down by a third compared with the previous year. At the San Giovanni Valdarno production center, a project to install a combined heat and power plant received approval and planning work got underway. This facility will increase the energy efficiency of the works by more than 20 %, at the same time reducing CO2 emissions by approximately 8 500 metric tons per year.

Singapore A new waste water filtering system led to a marked reduction in effluent outfall and a lower organic load, coupled with decreased consumption of fresh water and higher product recovery. This resulted in savings of CHF 0.75 million per year. Specifically, the consumption of fresh water, a precious resource in Singapore, was reduced by 15 %.

Incidents none of our plants reported major incidents or breakdowns. nor were there any accidents or damage in connection with the transportation of Lonza products and raw materials. We will do everything in our power to ensure that all sites continue to operate safely and that no one is harmed during transportation of our products to customers.

Final destination of special waste 2005

Incineration 87 %

Landfill 12 %

External recycling 1 %

The total quantity of waste produced by Lonza in 2005 was 169 000 metric tons, of which 86 000 metric tons consisted of special (hazardous) wastes and 8� 000 metric tons of non hazardous wastes or inert materials. Lonza has a specialized waste disposal concept at all its sites, dedicated to the principle of avoidance, recycling and environmentally sound disposal.

Waste categories1000 metric tons

nonhazardous waste Hazardous waste

In 2005, 88 % of special waste materials were incinerated or externally recycled, and 12 % went to secured landfills. All the transportation, processing and final disposal companies involved are known to Lonza and are specially selected also in accordance with SHE criteria. As a matter of principle they are reputable firms which comply with all legal requirements.

2000

2001

2002

200�

2004

2005

42



Redevelopment of the former Lonza industrial site at WaldshutTiengen (Germany) The redevelopment of disused industrial premises plays an important part in our efforts to ensure that our use of natural resources is environmentally compatible and sustainable.

Production at the site of LonzaWerke GmbH in Waldshut between 191� and 1994 was mostly centered around inorganic products (calcium carbide, silicon carbide and corundum). Thereafter the former factory site, with around one hundred partly dilapidated buildings and technical installations, lay deserted for many years. In 2002 the Waldshut authorities and Lonza agreed on a plan of action. The jointly commissioned planning project opened up the way for a redevelopment of the industrial wasteland to create Hochrhein Business Park, the largest cohesive commercial zone in the southern German region between Basel and Lake Constance.

The Board of Directors of Lonza subsequently approved a budget of around EUR 14 million for the deconstruction and redevelopment of the Lonza site, which covers a total area of 560 000 m2 and was started in December 2004.

Working in total partnership with the environmental agencies of the Waldshut district authority and the regional administration in Freiburg, about twothirds of the old structures had been deconstructed within a year. The procedure opted for, in consultation with the experienced contracting companies, is a model for the redevelopment of disused industrial sites:

– Investigation of the history of usage of all buildings and useful areas– Comprehensive sampling of soil, walls and deposits prior to deconstruction work– Selective removal of contaminated material (mercury, asbestos, mineral oil, electrical

installations etc.) by specialists– Deconstruction of buildings and complete removal of all materials (concrete, steel, brick

work, wood and tiles) as defined plant debris, without mixing of contaminated materials– Deconstruction of foundations and excavation of any contaminated soil – Sampling and analysis of the debris – Decision on further use of materials (recycling, incineration, disposal) in cooperation with

external experts and the authorities– Crushing of concrete and brickwork to create rubble of defined particle size– Database to monitor further use of recycled material, e.g. for building new infrastructure

The very large quantities of material produced by the deconstruction present a big challenge for project logistics with regard to temporary storage on the construction sites:

250 000 t

10 000 t2 500 t1 100 t

970 t4�0 t

Concrete and brickworkSteelWoodFlooring, glassElectronic scrapCement asbestos

The Hochrhein Business Park has led to a welcome surge in investment in the zone between the towns of Waldshut and Tiengen. More than ten companies and local government offices, with a total of 88 employees, have already moved into the renovated buildings, and around 120 local companies have been contracted for construction works. The German and Swiss authorities are planning joint customs facilities for clearance of commercial shipments. The location directly on the border makes the site particularly attractive for logistics, manufacturing and commercial operations, as well as Swiss companies interested in gaining a foothold in the EU.

Redevelopment of a Former industrial Site

Corporate GoVernanCe & SoCial and enVironMental report AGendA & ContACtS

imprintproduction lonza Group ltd, Corporate Communications, Basel, Switzerland | all rights reserved | editorial completion: February 2006 | design zahnzimmermannfankhauser creative projects ltd, Zurich, Switzerland | photography tim lüdin, timage, Sissach, Switzerland | SeM pictures eye of science, o. meckes, n. ottawa, reutlingen, Germany | Martin oeggerli & daniel Mathys, Basel, Switzerland | lithography McHighend ltd, allschwil, Switzerland | print Birkhäuser+GBC ltd, reinach, Switzerland

legal domicileBasel, Switzerland

Global headquarterslonza Group ltdMuenchensteinerstrasse 38CH-4002 Basel, Switzerlandtel +41 61 316 81 11Fax +41 61 316 91 11www.lonza.com

anticipated Key reporting dates

annual General Meeting for the financial year 200522 March 2006, 09.30 amCongress Center, MCH Swiss exhibition ltd, Basel

Half-year report 200626 July 2006

Full-year report 200624 January 2007

annual General Meeting for the financial year 200628 March 2007, 09.30 amCongress Center, MCH Swiss exhibition ltd, Basel

dividend transfer to banksas a rule, lonza Group ltd pays the dividendto its shareholders on the fourth businessday following the annual General Meeting.

listing and Security information

Stock exchange listingSWX Swiss exchange

Stock exchange tradingvirt-x

Common stock symbolsBloomberg lonn VXreuters lonZn.VXtelekurs lonn

Security numberValor 001384101iSin CH0013841017

Forward-looking Statements

Forward-looking statements contained herein are qualified in their entirety as there are certain factors that could cause results to differ materially from those anticipated. investors are cautioned that all forward-looking statements involve risks and uncertainty. in addition to the factors discussed, among the factors that could cause actual results to differ materially are among others the following: the timing and strength of new product offerings; pricing strategies of competitors; the company’s ability to continue to receive adequate products from its vendors on acceptable terms, or at all, and to continue to obtain sufficient financing to meet its liquidity needs; and changes in the political, social and regulatory frame-work in which the company operates or in economic or technological trends or conditions, including currency fluctuations, inflation and consumer confidence, on a global, regional or national basis.

Contacts

For publications and further information please contact:

lonza Group ltdMuenchensteinerstrasse 38CH-4002 Basel, [email protected]

investor relationstel +41 61 316 83 47Fax +41 61 316 82 [email protected]

Media / Corporate Communicationstel +41 61 316 85 66Fax +41 61 316 95 [email protected]

Share registerc/o nimbus ltdp.o. BoxCH-8866 Ziegelbruecke, Switzerlandtel +41 55 617 37 29Fax +41 55 617 37 [email protected]

lonza annual report 2005

43

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AnnuAl RepoRt 2005 CoRpoRAte GoveRnAnCe & …...Franklin Templeton Companies, LLC, Fort Lauderdale (USA) Harris Associates L.P., Chicago (USA) % 19.54 10.06 10.04 % 18.44 10.06 9.92