Research On Intangible Assets Of Lonza Company
Business Model of Lonza
Lonza is a Business to Business (B2B) company, with their main revenue coming from contracts with other businesses. Lonza was awarded a contract to generate research grade iPSCs by the National Institutes of Health Center for Regenerative Medicine, and signed an exclusive agreement with Index Ventures for the development and manufacture of biologics for portfolio companies.
Lonza researches, manufactures and supplies a variety of products to companies in industries such as pharmaceutical, biotechnology and speciality ingredients markets. The products can be classified into two purposes; to serve the Healthcare Continuum™ or to meet Global Market Trends. Examples of products sold range from custom development and manufacturing of active pharmaceutical ingredients, dosage forms, and hygiene products to combat a broad range of pathogens. Expenses incurred for Lonza, as a manufacturing company, include the cost of goods sold, marketing and distribution, research and development, administration and general overheads, and other operating costs. Lonza also acquires companies that can help to manufacture new or enhance existing products. In 2016, Lonza acquired InterHealth Nutraceuticals, which complements Lonza’s nutritional portfolio in sports nutrition, weight management, immune health and pet health. This strengthened their offerings to the Healthcare Continuum™. In 2017, Lonza acquired Capsugel. This allowed them to combine their existing knowledge of science, engineering, formulation and capsule expertise to optimize the bioavailability, targeted delivery and overall performance of their products.
Identification of Intangible Assets
The first intangible asset we have identified is the research and development costs of Lonza’s own projects. The costs of Lonza’s research and development of its own projects are not recognized by the company as assets in its financial statements since these development costs are internally generated. However, it is evident that Lonza does conduct research and development on its own projects since they have reported research and development expenses in its income statement of up to CHF 157 million in 2017.
Being a company centred on the development and production of biotechnology, conducting its own research and development is critical to ensure the competitiveness of its goods and services. Therefore, Lonza’s research and development costs on its own projects are likely to be one of its most important unreported intangible assets. The second possible intangible asset we have identified is the brand recognition of the company name itself. Lonza’s own branding is not recognized by the company as an intangible asset as it is internally generated and indistinguishable from the cost of developing the business as a whole. Instead, Lonza’s marketing costs were reflected as an expense of up to CHF 345 million in 2017. However, the strength of Lonza’s branding is evident from the exclusive contracts and agreements it has received, such as the contract to generate research grade iPSCs awarded by the National Institutes of Health Center for Regenerative Medicine.
Lonza’s brand reflects a well-respected global company, and it is likely through this well-established brand that Lonza was able to drive sales of CHF 5. 1 billion in 2017. Hence, brand recognition is an important unreported asset that the company possesses.
Reasons to Recognize Intangible Assets
To establish the criteria by which these assets will be evaluated, we will define an asset as a resource owned or controlled by the company that can bring future economic benefits to the company, and intangible as being non-monetary and without physical substance. Research and development is a crucial aspect to Lonza’s profitability since the technological industry it is based in is rapidly changing. It is thus important for Lonza to continuously revise and expand on their range of products to remain ahead of its competition. Although it might be argued that future economic benefits from internally generated research and development costs are not guaranteed, the nature of Lonza’s business and its industry makes research and development essential to ensure its continued profitability. Additionally, even though Lonza obtains new technologies through acquisition, it still spends a substantial amount on research and development on its own products, evidenced by the research and development expense of CHF 157 million in 2017. Part of this research and development expense is absorbed under its cost of goods sold, which shows that Lonza’s own research and development has contributed to its product sales, and is able to bring the company economic benefit. Therefore, research and development costs of Lonza should be recognized as an intangible asset.
The second intangible asset we have identified is Lonza’s brand recognition, which is also crucial to the company’s economic success. Lonza’s branding certifies the quality and reliability of their products, building customer loyalty. Its brand is evidence of its strong track record, having been established for more than a century and given the scale of its operations as an international business with over 100 sites. The prestige of its brand increases its appeal to future investors, partners and customers, which is especially important to Lonza as a business to business company. Furthermore, Lonza has created its own trademarks, in particular, the Healthcare Continuum™ that determines what products they will develop. Hence, it is a critical part of the company’s business model and is essential to bringing future economic benefits to the company. Since Lonza’s brand recognition is important to its financial success, it should be recognized as an intangible asset.
Identification of Stakeholder
We have identified the Chief Financial Officer (CFO) of Lonza as the stakeholder. The CFO’s role includes tracking cash flow and financial planning as well as analyzing the company’s financial strengths and weaknesses. Therefore, we believe the CFO may have a differing view on recognizing research and development and Lonza’s brand as intangible assets. Firstly, by excluding development costs on the balance sheet, it could work in favor of the company because it does not have to incur amortization expenses. Additionally, when there is a lack of recoverability of the carrying amount of these assets, such as when the market value of Lonza’s brand falls, it can trigger an impairment loss. However, since these assets do not appear on the balance sheet, Lonza will not be subjected to such a charge. If these assets are to be included in the balance sheet, it will reflect higher amortization and impairment expenses, which will lower the net income of the company, discouraging potential investors. Furthermore, net income is a crucial factor in obtaining a business loan, being an important criterion for creditors to determine a company’s ability to pay future debts.
Hence, with a lower net income, Lonza might find it difficult to attract investors and negotiate a better deal with creditors. Secondly, a reason why the CFO might have an opposing view is that intellectual property such as brands and trademarks cannot be properly valued in terms of their ongoing management. The difficulty in obtaining the information needed to manage the value of intangible assets has held many companies back. Proper communication of the value of intangible assets also requires much effort, as analysts and investors will scrutinize this information. Lonza will have to make sure that the information they present is acceptable and up to date, clearly representing what decisions they are taking for the management and development of their assets, which may be too rigorous and time-consuming a process, especially given the difficulty in valuing intangible assets.
Lastly, the accounting standards that Lonza’s CFO must follow states that internally-generated intangible assets cannot be recognized. An internally generated intangible asset is not separable from the entity nor does it arise from contractual or other legal rights, hence it is not an identifiable resource under IFRS. In order for an internally generated intangible asset to be recognized, its generation must be divided into a research phase and a development phase. In Lonza’s case, the two phases may not be distinguished, thus the CFO may choose to write-off research and development as an expenditure if he cannot guarantee that the asset will generate future economic benefit.
In conclusion, Lonza’s CFO may not want to recognize Lonza’s research and development costs and branding as intangible assets to reduce amortization costs and boost net income. The valuation and management of these assets is also a rigorous process, and recognition of these assets does not comply with financial reporting standards.
