2003 INDUSTRY REVIEW
An upturn in business continued to elude the chemical industry this year, as companies wrestled with many of the same issues that they saw in 2002
ANN M. THAYER, C&EN HOUSTON
By this time last year, the chemical industry was hoping, even cautiously predicting, that 2003 would finally bring a rebound. The optimism even continued into early 2003. However, the situation didn't actually improve much over time, and companies continued to struggle with high costs for energy and raw materials and declining earnings. So, instead of brighter prospects, the industry faced yet another challenging year.
Among the challenges were many external issues that gained strength and momentum. These included litigation related to past products and pollution, security initiatives, product bans, charges of price-fixing, and European regulatory and U.S. energy policies. Meanwhile, the more mundane aspects of chemicals manufacturing--namely, production, pricing, demand, and trade--remained decidedly mixed.
To cope with structural problems, many chemical companies underwent extensive changes, especially at Dow Chemical, DuPont, and Bayer. Many major firms instituted management shifts while cutting jobs broadly across the industry's employee base. Asset sales, mergers, and acquisitions continued to add up, but without any megadeals as in previous years.
Meanwhile, the related pharmaceutical and biotechnology sectors experienced somewhat better conditions. Pfizer emerged as the new industry leader, and pharmaceutical companies generally posted increasingly strong sales and earnings as the year progressed. New product approvals and a return of investor interest invigorated the biotech sector.
The American Chemistry Council (ACC) recently reported that macroeconomic indicators suggest the U.S. chemical industry will finally see some growth in 2004, although at a rate slightly below that of the gross domestic product. Customers are expected to be ordering chemicals following the most protracted inventory correction since the 1930s. The recovering economy, ACC says, will also set the stage for modest increases in investment in R&D and capital projects.
First three hold onto Global Top 10 positions
NOTE: As reported in C&EN, July 28, 2003, page 17.
CHEMICAL ECONOMY. In early 2003, the credit-rating agency Moody's Investor Service predicted "troughlike" conditions for the industry. Eight months later, Moody's was proven right, with little evidence of better times ever becoming real for chemicals, despite indications of overall economic improvement. Chemical companies confirmed this view in presentations late in the year, but still suggested that the situation might improve in the fourth quarter and into 2004.
DuPont, for example, in the summer had presented two scenarios on the pace and timing of an anticipated turnaround. Unfortunately, by September, the company's chief financial officer, Gary Pfeiffer, said, "The slower scenario is playing out." Like many other companies, DuPont was estimating that 2003 results would end up at the lower end of analyst estimates.
Sales figures belied the cloudy economic picture. For the first nine months of the year, combined sales for 25 leading U.S. producers had risen 13%, compared with the same period in 2002. Sales were up in all three individual quarters as well. Rising costs had given chemical makers some room to boost prices and thus their sales.
These gains, however, did not translate to the bottom line. Earnings in the third quarter fell nearly 13%, after having gained several percentage points in the second quarter and declining only marginally in the first. Over nine months, overall earnings were down just more than 4%.
The picture hasn't been much better outside the U.S. Currency exchange hit European firms hard as the dollar weakened. They also experienced slower economies and sluggish demand. The German chemical industry, for example, estimated only 0.5% growth in production for 2003.
Celanese Chief Executive Officer Claudio Sonder told a press briefing in September that his firm had dropped its goal of hitting $10 billion in annual sales by 2005 because of the chemical industry's poor performance and the failure of industry consolidation to take form. Celanese's 2002 sales were just over $4 billion.
In Asia, results have been mixed as well. Profits for China Petroleum & Chemical (Sinopec) and most of its affiliates surged throughout the first half of the year. But net earnings for the major Japanese chemical firms--including Sumitomo Chemical, Toray Industries, Shin-Etsu, and others--ranged from being down 43% to rising more than eight times over 2002 levels.
U.S. chemical trade remained at a deficit throughout the first nine months of the year. In August, the deficit reached its lowest point at $228 million. The biggest gap between exports and imports came in April when it ballooned to $1.39 billion, followed closely by July at $1.38 billion. Over nine months, exports and imports totaled $67.9 billion and $75.5 billion, respectively, for a deficit of $7.67 billion, compared with $2.83 billion in the 2002 period.
Chemical production in the U.S., reported as the Federal Reserve Board's seasonally adjusted index, has been seesawing all year. It cycled between about 104 (1997 = 100) to a high near 106 twice during the year.
Meanwhile, the prices U.S. chemical producers received for their products spent most of the year on a plateau after rising dramatically in the first quarter. Labor Department data showed a producer price index for chemicals and allied products around 155 (1982 = 100) in late 2002. By March 2003, the index had risen to nearly 165. It then slipped a bit in April to about 162 and resided there through October.
Not surprisingly, chemical company stock prices posted modest gains during 2003. In September, rising oil prices and investor worries about future earnings growth hit chemical stocks. Over nine months, combined stock values for 25 leading firms tracked by C&EN gained only 1.4%. This was well below the Dow Jones industrial average's 11.2% gain, showing the improvement in the broader economy while the chemical industry lagged.
EMPLOYMENT WANES. The difficult times affected all ranks within the chemical industry. Companies cut staff to reduce expenses and, along with shareholders, took chief executives to task for poor company performance. CEOs resigned at ICI, Rhodia, Clariant, and Millennium Chemicals, and Monsanto filled a CEO position vacated in late 2002.
||ALL ALONE Shell Chemical's Deer Park, Texas, ethylene project was the only major U.S. petrochemical expansion this year.
SHELL CHEMICALS PHOTO
Industry leader Dow Chemical named Andrew N. Liveris president and chief operating officer, effective in November. William S. Stavropoulos, who had been president, chairman, and CEO of the company since Michael D. Parker's ouster in December 2002, relinquished the title of president but continues as chairman and CEO.
Unemployment among working chemists, as represented by American Chemical Society membership, reached an 11-year high in 2003. According to the annual ACS employment survey, 3.7% of the society's members in the domestic workforce were out of work and looking for jobs. Industrial chemists were hit even harder, with unemployment levels around 4.9%.
Likewise, chemical employment figures from the Labor Department showed a steady decline over the first 11 months of 2003. By November, chemical employment had fallen to 907,900, off 16,800 from November of last year. The number of production workers dropped by 4,700 from November 2002 to 524,800.
At least two dozen companies had announced job cuts as of mid-November, but the size of the cuts had shrunk significantly from ones posted in 2002. Not surprisingly, many cuts came at companies under pressure to improve their performance and often included plant shutdowns or other reductions in operations. Companies fitting this bill were ICI--where the cuts came after the new management took over--Rhodia, and Monsanto.
DuPont just recently announced a $900 million cost-improvement program for 2005. The company says the program will help it to "remain competitive in an environment defined by sustained high energy costs, increased global competitive intensity, and a customer base that is shifting toward emerging economies." Some cost savings will come from workforce reductions it will announce in April 2004.
Eastman Chemical started making cuts in April by reducing all employees' salaries and wages by 3% and those of managers by 6% and by suspending all raises. Then, in October, the company said it would eliminate 600 jobs over nine months, through a combination of attrition and firings, beyond any cuts coming from a review of its coatings, adhesives, specialty polymers, and inks segment.
Akzo Nobel embarked on a nearly $1 billion divestment program and announced several rounds of job cuts. Strengthening its Organon human health care business will involve cutting about 700 employees. Its polymer division has been restructuring and will shed some 250 jobs, while its surface chemistry unit started an efficiency improvement program that includes the loss of about 200 jobs.
COMPANY MOVES. The job cuts were generally part of larger plans to revamp operations and restructure businesses to deal with economic and other issues. The cuts only deepened as the year progressed and a turnaround failed to appear. Companies also increased their cost-cutting and savings goals to meet financial obligations.
The predictions that Moody's made early in the year included the expectation that companies might have problems meeting their debt obligations and might have their credit ratings downgraded. High-profile downgrades included Lyondell Chemical, Equistar Chemical, Solutia, Millennium Chemicals, Crompton, and Wellman. Downgrades also affected the Huntsman Group, which in November said it would implement a $200 million cost-cutting program over 18 months and soon announce site consolidations and employee reductions.
"The severe economic slump the chemical industry has been experiencing for the last three years continues unabated," said Peter R. Huntsman, president and CEO of the Huntsman companies. It offers, he added, "an opportunity to reposition our businesses at the bottom of the cycle to ensure their long-term competitiveness and profitability." The intention is to manage the businesses so they can pay down debt, make interest payments, and invest in new projects.
Mississippi Chemical and Texas Petrochemical both defaulted on bond payments in the second quarter and declared bankruptcy during the year. Farmland Industries and W.R. Grace were still in the bankruptcy reorganization process, whereas new funding took some pressure off Hercules, Sovereign Specialty Chemicals, and Sterling Chemicals early in the year.
After a protracted battle, Hercules also avoided takeover by ISP, which had become wholly private in March. However, ISP did complete its buyout of bankrupt Ameripol Synpol.
NL Industries, Clariant, Rhodia, and Sasol announced restructurings, often with planned asset sales. After foundering since its 2000 acquisition of BTP, Clariant wants to reestablish itself as a leading specialty chemicals company. To raise $1.1 billion, it intends to sell two major businesses--cellulose ethers and electronic materials--and several other unnamed operations.
Bayer, meanwhile, had debuted its holding company structure in 2002 and proceeded this year to form separate polymer, crop science, chemical, and health care operations. Yet the company is planning a more dramatic step by 2005--the spin off of basic, industrial, and fine chemicals, along with some polymers, into a new company with annual sales of $6.5 billion. Bayer will remain a firm focused on health care, crop science, and materials with sales of $25.5 billion.
Like Hoechst before it, Bayer is putting its life sciences businesses at the forefront. This leaves BASF as the last of the three German chemical giants separated from I.G. Farben at the end of World War II to remain a broad-based chemical company. Also in Germany, RAG's takeover of Degussa was finally accomplished, followed by RAG's plan to divest three of four business units of chemical maker Rütgers that it owned independently of Degussa.
BASF and Bayer still rank among the top five chemical producers, although that may change. Likewise, DuPont's sale of its Invista textile and fibers operation to Koch Industries may shift it from the number two position. Overall, the top 10 ranks, based on 2002 chemical sales, showed little change except for Akzo Nobel joining the group and ICI exiting it at the 10th spot.
Among chemical companies there were several dozen acquisitions, asset sales, and mergers in 2003, but only a few larger deals. Koch's planned $4.4 billion purchase of Invista was among the largest transactions, followed closely by Suez's sale of Nalco to an investment group for $4.2 billion. DSM finally completed its acquisition of Roche's vitamins and fine chemicals business at a lowered price of about $2 billion.
MG Technologies decided to put its Dynamit Nobel chemical operations on the block, with a price tag of more than $2.3 billion, and focus exclusively on engineering. Similarly, OM Group reversed course and sold its precious-metals business to Umicore for about $752 million. The sale includes all the businesses OMG obtained when it purchased dmc2 in 2001. And Goodyear Tire & Rubber is exploring the sale of its $750 million chemicals business.
In Asia, LG Chem and Honam Petrochemical bought South Korea's beleaguered Hyundai Petrochemical, spending about $506 million to acquire shares and $380 million to cover debt. Sumitomo Chemical and Mitsui Chemical dropped their merger plans to create the world's fifth largest chemical company after failing to agree on valuations. In October, the two firms disbanded a polyolefins venture formed in April 2002 as a first step toward a full merger.
General Electric went on a buying spree in 2003, both in and outside chemicals. It signed a $9.5 billion deal in October to acquire the life sciences company Amersham. Earlier in the year, it swapped its specialty chemicals unit and $650 million in cash for Crompton's OSi Specialties organosilicones business.
In another swap, BASF traded its nylon fibers business for Honeywell's nylon engineering plastics business. Both businesses have roughly $350 million in annual sales; Honeywell also got $90 million in cash as part of the deal. Meanwhile, investment firms exchanged assets when Ripplewood Holdings sold Kraton Polymers, a former Shell styrenics business, to Texas Pacific Group for $770 million.
Huntsman finally bought out ICI's 30% interest in Huntsman International Holdings--ICI's former European commodities business--in May for $440 million. In June, the investment firm MatlinPatterson Global Opportunities bought Vantico, the financially troubled former epoxy business of Ciba Specialty Chemicals, and merged it into Huntsman, in which MPGO owns a significant interest.
PRODUCTION CHANGES. The difficult economic environment decreased investments in new capital projects. Early in the year, when some optimism remained, a survey of 24 major chemical firms found that overall capital spending was expected to rise less than 1% in 2003. This same group had cut spending by more than 7% in 2002. And spending as a percentage of sales was predicted to hit a 10-year low of 5.2% in 2003, down from a recent high of 8.6% in 1998.
||REACH European Chemical Industry Council President Eggert Voscherau holds a draft version of Europe's proposed chemicals policy.
Dow, still absorbing the effect of its 2001 purchase of Union Carbide and a major management shift, instituted a series of plant closures. Among them was the expected shutdown of two olefins plants in Texas and the idling of some North American polyethylene capacity and polyester production in Italy.
Dow was also among several producers shutting down plants in the polyurethanes area, which has suffered from overcapacity and high raw materials prices. In 2003, Dow shut methylene diphenyl diisocyanate plants in La Porte, Texas, and in Italy. Bayer and Shell Chemicals closed their 34-year-old Antwerp-based isocyanates joint venture in July. Separately, Bayer closed a toluene diisocyanate venture in Mexico.
But Dow, Bayer, and Shell were among companies picking up the pace of projects in Asia, where there was still growth. Dow completed an epoxy resin plant in China, and Bayer advanced isocyanates. BASF, Huntsman, and Chinese partners moved ahead on constructing an integrated isocyanates complex, whereas industrial gas producers signed major deals to support new facilities.
The first three ethylene crackers that foreign companies--BASF, BP, and Shell--are building in China with local partners began taking shape in 2003. Meanwhile, BP and Celanese started going head-to-head about plans for acetic acid plants in Nanjing. And DuPont initiated plans for fluorochemical and fluoropolymer production in the region.
Activity continued apace in the Middle East, where Dow and its partner Kuwait Petrochemical Industries made plans to build a second ethylene and derivatives complex. Qatar Petroleum and South Africa's PetroSA agreed to develop a huge methanol plant in Qatar. And although talks on sweeping initiatives to develop Saudi Arabia's gas fields ended, Shell and Total signed a scaled-back deal in November.
The U.S. petrochemical industry continued to feel the pains of running slow-growth, low-profit commodity chemical and polymer businesses, weighed down under unrelentingly high natural gas prices and overcapacity. North American-made ethylene, ammonia, and derivatives were clearly at a disadvantage, compared with the same products produced elsewhere in the world.
For example, Celanese, Degussa, and Nova Chemicals all decided to reduce their positions in the methanol business. Methanex took significant charges to write down its New Zealand and Medicine Hat, Alberta, methanol plants. And in the related methyl tert-butyl ether market, Global Octanes, Texas Petrochemicals, and EOTT Energy all shut down plants.
Styrene producers underwent some major shifts as well. Cos-Mar, a Carville, La.-based joint venture between Atofina and GE Plastics, made plans to increase capacity by nearly 30%. Around the same time, BASF decided to take 12% of its North American polystyrene capacity off-line because of market conditions. Late in the year, BASF also began revamping its styrenics business in Europe.
SPECIALTY GROWTH. Other sectors of the industry had a different view of the world. Although not as severely impacted by feedstock and energy costs as commodity producers, specialty and fine chemicals companies had their own challenges. They, too, suffered from overcapacity, competition, and a cautious customer base, especially in pharmaceuticals. And the large, deep-pocketed companies with broad arrays of technologies were pitted against smaller niche players.
||GROWING Degussa's Raylo Chemicals unit offers drug companies special services, such as those from this high-potency compound suite.
The fine chemicals industry's custom synthesis capacity was about 37% idle two-thirds of the way through the year. Several major players in the active pharmaceutical ingredients (API) area--including DSM, Clariant, and Lonza--mothballed or shut down capacity. However, some smaller firms and even the larger BASF--which announced plans to invest an "eight-digit sum" in a new API plant to open in late 2004--were expanding.
Overall, the fine chemicals sector anticipates another tough year in 2004. Despite this bearish outlook, small-scale product and service announcements were numerous, as were deals between pharmaceutical chemistry service providers and drug firms. Most of the announcements fell into three categories: biotechnology-related expansions, new technology capabilities, and early-stage service offerings.
For example, Lonza started up a new biopharmaceuticals plant in Visp, Switzerland, and boosted downstream biologics capacity in the U.S. and U.K. DSM advanced its biologics plans and decided to build a new large-scale plant in Montreal. In Germany, Bayer launched a contract biologics unit, while Boehringer Ingelheim spent $300 million to double its cell culture plant.
Avecia expanded in chiral chemistry with the acquisition of Synthon Chiragenics, whereas DSM took a 25% stake in Chiralix and a 30% stake in Syncom. Solutia boosted chromatography-based services in Switzerland, while Bayer is adding commercial-scale simulated moving bed chromatography for chiral separations in Germany. Dow launched a radiopharmaceutical services business and opened a commercial-scale oligonucleotide facility in Michigan this year.
Several companies expanded their portfolios by offering more early-stage services. For example, Borregaard added a research facility and pilot-scale plant for APIs. Cambrex boosted custom services for generics at two different locations, and Solutia added a development lab for high-potency active ingredients. Clariant opened a pharmaceutical technology center designed to meet drug developer needs in early-stage clinical trials.
Other specialty markets, such as the volatile electronics sector, garnered interest and investment from chemical and materials producers, while presenting challenges of their own. The electronics area is still trying to emerge from a slump that began back in 2001. On top of this, technology advances are requiring new materials at the same time that customers are looking to cut costs.
To keep up the pace of development and meet customer demands, electronic chemical producers continued to plug into the business. Early in the year, Dow Corning went on an expansion spree, buying up two smaller firms and setting up joint development deals. To build on its core silicon technology, the company later launched two new businesses: Photonics Solutions for optical applications and Compound Semiconductor Solutions to serve other sectors.
Meanwhile, DuPont opened a new photonics business in March to make integrated devices for optical networks. It also invested in a facility to make materials for flat-panel displays that should open by 2005. And Dow signed a deal to supply light-emitting polymers for organic light-emitting diode microdisplay modules made by MicroEmissive Displays.
Praxair and Bayer's H. C. Starck unit formed an alliance to develop, make, and sell colloidal silica slurries for use in semiconductor manufacturing. The alliance will compete with similar joint ventures between DuPont and Air Products & Chemicals, and between Arch Chemicals and Wacker Silicones, as well as with Cabot Microelectronics.
Air Products took a bigger step into electronics with the $300 million purchase of Ashland's electronic chemicals business in September. Honeywell sued unsuccessfully to halt the acquisition, saying it would violate a high-purity chemical supply agreement that Air Products has with GEM Microelectronics Materials, a joint venture of Honeywell and Mitsubishi Chemical.
TECHNOLOGY FLOWS. Small nanotechnology firms benefited from big companies' desire to explore new materials for electronic and other applications. DuPont, for example, signed an exclusive license with Nanomix for carbon-nanotube-based materials for use in flat-panel field emission displays.
||POLISHED Arch Chemicals develops, makes, and tests 248-nm and 193-nm photoresists at its North Kingstown, R.I., facility.
DSM invested in Optiva, which develops thin-film technology; Carbon Nanotechnologies, a producer of single-walled carbon nanotubes; and nanomaterials maker InMat. Air Products invested in and started joint development in metal nanoparticles with Nanotechnologies Inc. And BASF invested in catalyst developer Catalytic Solutions.
Adding further support to the area, President George W. Bush signed the Nanotechnology Research & Development Act early this month. The act formalizes the National Nanotechnology Initiative into law and authorizes $3.7 billion over the next four years for the program, which includes the transfer of developed technology into the marketplace.
New technologies for energy generation and storage also advanced during 2003. BASF invested in Zoxy Energy Systems, which is designing zinc-air fuel cells, and pursued hydrogen storage using its own metal-organic nanocubes.
Fuel cells similarly grabbed the attention of Air Liquide, Dow, GM, and Air Products. Air Liquide's Axane subsidiary launched a line of ready-to-use hydrogen fuel cells for powering small vehicles or lighting isolated sites. In a larger scale test, Dow and GM began installing 500 fuel-cell units at Dow's Freeport, Texas, chemical complex.
Renewable energy and related programs gained ground, aided in large part by government funding. In the U.S., companies receiving or extending Department of Energy grants included Novozymes, for enzymes to make ethanol; Cargill and ADM, for biomass conversion projects; and Cargill, for producing industrial chemicals from oilseeds. Similarly, Genencor, DuPont, and Diversa reported progress in existing DOE-backed biomass-to-chemicals programs.
DuPont and DOE agreed to build the world's first integrated "biorefinery," using corn and other renewable resources to make fuels and chemicals. It is part of a larger, $38 million project consortium led by DuPont that is looking into the practicality of alternative energy and renewable resource technologies. Separately, DuPont and Statoil formed a joint venture to develop methane-based fermentation.
Chemical companies tried to advance the overall process of R&D as well. DuPont began building its third overseas corporate R&D lab, this one near Shanghai, an area that has already attracted other foreign firms such as GE, BASF, Degussa, and Hitachi Chemical. Meanwhile, DuPont's home base, Experimental Station in Wilmington, Del., turned 100 years old.
Rhodia decided to build a "Laboratory of the Future" in Bordeaux, France, for application and process chemistry. Both Bayer and BASF upgraded their polymer R&D operations; Bayer consolidated R&D in Pittsburgh, whereas BASF set up a new lab in Strasbourg, France. And Akzo Nobel invested in R&D facilities in both the U.S. and Brazil.
In a bid to drive new product development, 3M reorganized its corporate R&D workforce. It disbanded 12 corporate centers, moving 400 scientists into research units connected to its 40 business units and 500 scientists into one corporate research laboratory.
In a dramatic move, Mitsubishi Chemical turned its corporate R&D efforts into a separate company that will sell its services back to Mitsubishi. The intent was to improve Mitsubishi researchers' understanding of the market value of their work.
Study results released by the Council for Chemical Research showed that chemistry is an enabling force behind innovation in numerous industries. But R&D spending by U.S. chemical companies was expected to fall about 1% in dollar terms during 2003, while remaining a steady 4% of sales. Companies said they still try to balance long-term research and short-term market drivers; nevertheless, a recent European Commission study found European firms struggling to transform laboratory knowledge into marketable innovations.
PHARMACEUTICALS. This year marked the 50th anniversary of discovering the DNA double helix as well as the completion of a final draft of the human genome sequence. Turning such discoveries into products is also the overriding goal of the pharmaceutical and biotechnology industries.
But the major drug firms found success in the current business environment to be challenging. Drug company sales and earnings gained momentum with each successive quarter, ending the first nine months up nearly 11% and 7%, respectively. However, drug company stocks haven't yet reflected these gains and declined throughout 2003.
To cope, some companies restructured operations. Merck spun off its Medco pharmacy services business and later announced that it would cut 4,400 jobs to reduce costs. Abbott Laboratories decided to spin off its hospital products business into a new $2.5 billion company. Early in the year, Abbott froze U.S. employee salaries to help finance the launch of its rheumatoid arthritis drug, Humira.
Schering-Plough, and its new CEO Fred Hassan, fought an uphill battle for most of the year to turn the company around. The company managed to resolve some issues but is still undergoing dramatic restructuring to fix and rebuild its operations.
No big pharmaceutical mergers were announced in 2003, although Pfizer completed its acquisition of Pharmacia in April. Subsequently, Pfizer announced the shutdown of some R&D facilities and staff cuts. Former employees moved on and started nearly a dozen new companies, some with Pfizer's backing, in areas including clinical R&D and chemistry services.
In other transactions, Novartis increased its ownership in Roche to 32.7%. However, Roche remains adamantly independent. Japanese drugmakers Teijin and Kyorin Pharmaceutical planned to merge but called it off when they couldn't agree on a valuation. And Bayer and Aventis halted plans to combine their blood-products units; Aventis later agreed to sell its unit to Australia's CSL.
For a change, more positive events occurred for Bristol-Myers Squibb in its billion-dollar alliance with ImClone Systems. The Food & Drug Administration accepted their application for the anticancer drug Erbitux. FDA's rejection of the drug in late 2001 had been at the center of an insider-trading scandal and problems in the companies' partnership. Meanwhile, Swiss authorities approved Erbitux.
Alliances between small biotech and major pharmaceutical companies continued to be popular. Although the size of most deals diminished, a few larger ones stood out. For example, Millennium Pharmaceuticals and Johnson & Johnson will collaborate on the development and marketing of Millennium's cancer drug Velcade outside the U.S. J&J will pay royalties and up to $750 million in milestone and shared development payments to Millennium.
Aventis agreed to pay $125 million up front and up to a total of $510 million in milestone and other payments to license Regeneron Pharmaceuticals' lead antiangiogenesis compound, Vascular Endothelial Growth Factor (VEGF) Trap. GlaxoSmithKline agreed to pay Theravance up to $545 million to work on discovering drugs against respiratory diseases.
Amgen will pay $87 million up front and potential total payments of $400 million for Biovitrum's small-molecule enzyme inhibitors in treating metabolic diseases. Amgen also entered a five-year oncology partnership with Tularik, paying up to $21 million per target, $50 million in R&D funding, and royalties on any sales. And Biogen will pay Sunesis $60 million each for as many as six targets in inflammatory and autoimmune diseases.
But most small firms did not strike deals or launch new products to generate revenues. As a result, and with investor interest lacking in the past few years, many biotech companies found themselves strapped for cash. At least 20 of them announced job and R&D program cuts during 2003, while Deltagen filed for bankruptcy and PPL Therapeutics closed.
Mergers and acquisitions became another popular way to conserve resources, with more than 20 deals announced. The largest deal was the $6.5 billion merger of Biogen and IDEC Pharmaceuticals to create the third largest biotech company in the U.S. Even the big companies got involved: J&J spent $2.4 billion to buy Scios, Novartis paid $255 million for a 51% stake in privately held Idenix Pharmaceuticals, and Eli Lilly said it will acquire Applied Molecular Evolution for $400 million.
As the year progressed, prospects brightened for biotech firms as they posted substantial revenues gains. For the first nine months, sales for a group of 30 leading companies rose 33% and earnings soared a combined 88%. The stock market also picked up, with biotech stocks rallying in all three quarters and gaining nearly 42% since the end of 2002. This helped open the market for stock offerings, and several companies launched their stock market debuts.
Several new drugs were approved in 2003, including the flu vaccine FluMist, psoriasis drug Raptiva, asthma drug Xolair, and cholesterol drug Crestor. Mark B. McClellan, serving his first full year as FDA commissioner, brought a new attitude toward drug approval and outlined agency programs to streamline the process and stimulate innovation. At the same time, new generic drug rules came into play that may increase competition from that sector.
REGULATORY SHIFTS. As in pharmaceuticals, regulation played a significant and ongoing role in the activities of chemical companies. The industry faced a major change in regulators when Environmental Protection Agency Administrator Christine Todd Whitman resigned midyear. Michael O. Leavitt was installed in November as the new EPA head and was welcomed by the chemical industry.
||SYNERGY Hydrogen-storing nanocubes, such as these made by BASF, combine the emerging fields of new materials and fuel cells.
Air regulations generated much activity in 2003, with changes proposed and debated throughout the year. Specific chemicals coming under regulatory pressure in both the U.S. and Europe included brominated flame retardants, fluorinated gases, and phthalates. In the U.S., scrutiny continued on methyl tert-butyl ether (MTBE), perfluorooctanoic acid, and bisphenol A.
But four major governmental issues--namely, European chemicals policy, plant security plans, international trade problems, and U.S. energy policy--took center stage. The U.S. battled Europe, Canada, Japan, and other regions, which had the support of the World Trade Organization, over possible trade sanctions if the U.S. didn't change its policies on duties on dumped or subsidized goods.
In September, trade talks covering a broader range of issues collapsed at the WTO meeting in Cancun, Mexico. By November, trade tensions escalated again as the European Union adopted a plan for $4 billion in retaliatory tariffs on U.S. imports because of corporate tax breaks. The Bush Administration then proposed to eliminate tariffs worldwide by 2015, including those on chemical products by 2010.
An agreement on U.S. energy policy failed, although the House and Senate, with industry input, debated bills all year. The House passed a bill, but the Senate failed to do so and in late November killed the measure. The fatal hitch was a provision giving a liability waiver to MTBE producers, exempting them from lawsuits on cleanup costs for MTBE contamination.
The chemical industry fared better on security matters. ACC reported that nearly 500 chemical plants, out of 2,000 member company plants, had completed terrorist vulnerability assessments and determined what security measures were needed. About 120 plants considered most vulnerable must, under an ACC program, have measures in place by year-end, and the rest by June 2004. The remaining 1,500 plants are believed to face little risk.
A national approach for chemical plant security has been under discussion for more than a year. A Bush Administration bill eventually passed a Senate committee in October but is expected to generate heated debate on the floor again.
By far the most contentious regulatory initiative was the European Union's proposed policy on the Registration, Evaluation & Authorization of Chemicals, called REACH. Launched in October, it would cover most chemicals produced, imported, and marketed in the EU.
Replacing more than 40 existing sets of regulations and directives, REACH could cost the chemical and downstream industries as much as $6 billion. Although nobody is completely happy with the proposal, even after years of negotiations, it was sent to the European Parliament and the EU's Council of Ministers for approval, which could take up to two years.
INDUSTRY ISSUES. If security, regulatory, and trade issues weren't enough, on top of the dismal economic climate, chemical companies had to deal with other pressures as well. Litigation and charges of price-fixing became critical problems during 2003.
||ANGRY Residents of Anniston, Ala., protested pollution from polychlorinated biphenyls.
PHOTO BY TRENT PENNY/ANNISTON STAR
Several companies--including Grace, Honeywell, Dow, and Hercules--took multi-million-dollar charges to cover litigation over asbestos exposure. Honeywell, which early on settled about 90% of claims, set aside $900 million, whereas Dow projected costs at about $2.2 billion, of which about $1.4 billion might be recovered from its insurers. An attempt to legislate an end to costly asbestos litigation failed because Senate negotiators could not agree on the size of a victim compensation fund to be paid for by companies and insurance firms.
Similarly, Solutia's liquidity was in peril from lawsuits related to polychlorinated biphenyl contamination in Alabama and elsewhere. In August, Solutia and its former parent Monsanto agreed to pay $600 million to settle claims by more than 20,000 residents of Anniston, Ala. At year's end, Solutia delared bankruptcy under the weight of environmental and retiree obligations (see page 12).
Meanwhile, 142 Michigan residents sued Dow over high dioxins levels near their homes downstream from a Dow plant. Dow and about a dozen other former manufacturers of the defoliant agent orange could again be in court after the U.S. Supreme Court deadlocked in June and allowed Vietnam veterans who became ill after 1994, when a $180 million settlement fund ran out, to pursue lawsuits.
Past practices concerning chemicals in electronics manufacturing went on trial in a California case involving IBM, Royal Dutch/Shell, and Dow's Union Carbide subsidiary. Two workers blame their cancers on exposure to solvents and etchants at an IBM plant and are seeking compensation. The case is the first of more than 200 similar lawsuits targeting IBM and its chemical suppliers to go to trial. Some cases have been settled out of court, and others have been dismissed. The chemical makers deny responsibility.
A raft of price-fixing investigations and charges emerged again in 2003. Early in the year, regulators from Europe, Japan, the U.S., and Canada began a coordinated investigation into price-fixing among plastic additives producers. EU regulators also probed potential price-fixing agreements for hydrogen peroxide, solvents, methacrylates, and polyvinyl chloride plasticizers. They levied fines totaling nearly $160 million on four companies for setting prices for sorbate food preservatives and $85 million on five firms involved in price-fixing organic peroxides.
A federal appeals court ruled in January that non-U.S. customers can sue Roche, Aventis, BASF, and other vitamin makers in the U.S. The companies had already reached settlements with U.S. customers and with U.S. and European regulators, but now could face new claims amounting to billions of dollars. The U.S. Supreme Court is now reviewing the case. Aventis also paid $178 million to settle U.S. civil suits related to artificially inflated prices for the feed additive methionine.
EU regulators investigated four deep-sea maritime tanker companies to look for evidence of a cartel agreement. Then, in December, Dow sued London-based Stolt-Nielsen, Odfjell of Norway, Jo Tankers of the Netherlands, and Japan's Tokyo Marine Co., alleging that they rigged bids and conspired to inflate shipping prices.
Certainly none of these problems did much good for the chemical industry's overall image. ACC and its members spent much of the year discussing a new campaign to help improve the public's view of the industry. But the trade group postponed any movement forward as it hashes out budget issues and tries to reach a consensus on the reputation initiative's design.
ACC's performance led to the resignation of three member companies--Huntsman, Lyondell Chemical, and Chevron Phillips Chemical. Executives from the companies complained about operational inefficiencies and ineffective advocacy efforts at the trade group.
Among the issues chemical companies wanted ACC to handle was the crisis over natural gas supplies and prices. ACC and other trade groups were among those who pushed unsuccessfully for energy legislation to increase the natural gas supply.
In the year ahead, the price of natural gas is not likely to increase or decrease much, DOE predicts; spot prices were recently above $6.00 per million Btu, or about three times historic levels. Natural gas demand and supplies are expected to be near normal, and DOE says prices should remain relatively stable, possibly around $4.00 per million Btu. However, this still isn't what the chemical industry wants to hear as it may herald another tough year in 2004.
CRYSTAL CLEAR X-ray crystallography is among the many technologies used by Roche in drug R&D.