Volume 80, Number 7
CENEAR 80 7 pp. 57-69
Despite grim projections for 2002, producers of fine chemicals have many opportunities for above-average growth and performance
According to Peter Nagler, president of Degussa's fine chemicals business unit, indicators for the fine chemicals industry in 2002 are signaling that he and other industry players can expect "a difficult time."
Capacity, especially for active pharmaceutical ingredients (APIs), increased, particularly in the past two years, following forecasts in 1999 of greater than 15% growth per year. But demand for intermediates bound for general consumer products has dropped with the downturn in the economy.
The industry's biggest customer, the pharmaceutical industry, has been slow in getting out new drug entities, and some predicted blockbusters fizzled. Another major customer, the agrochemical industry, has been through a shakeout and, for the time being, is not growing. Meanwhile, mergers, acquisitions, and other trends in the customer industries freed up capacity, reducing the need to outsource.
From 10 to 20% of capacities may be underutilized, according to Gerhart Schreiner, former head of exclusive synthesis at Lonza Group. Now retired, he spoke last December at an industry briefing.
But it's not all gloom and doom. "Opportunities to achieve above-average performance in custom manufacturing will continue to exist," Schreiner said.
The outsourcing needs of the pharmaceutical industry that are filled by the fine chemicals industry fall into two categories. The first is sample preparation for preclinical tests. "This business is small but rapidly growing," Peter Pollak, a fine chemicals business consultant based in Reinach, Switzerland, tells C&EN. The second category is making large quantities of intermediates, advanced intermediates, or active substances by traditional chemistry, which, Pollak says, is flat or growing very little. On the other hand, manufacture of active substances by mammalian cell fermentation is growing rapidly (see page 84).
The different product categories allow room for growth. According to Enrico T. Polastro, vice president and senior industry specialist for pharmaceuticals and fine chemicals at Arthur D. Little International, Brussels, fine chemicals may be categorized as follows: basic building blocks; advanced intermediates and custom-made active ingredients, including APIs; and off-patent APIs. An analysis by Polastro finds custom-made pharmaceutical fine chemicals to be the worst performing of these segments in the past two years and the least likely to grow in the near term.
The finding is ironic, considering how custom manufacturing of APIs had been touted by financial analysts. "Everybody believed this was the field to go, forgetting about the other areas of the fine chemicals arena," Polastro said in London last November at Fine Chemicals Conference 2001. Yet return on sales for custom-made APIs "literally crashed in 2000," he said.
Polastro's analysis further shows only marginal growth for basic building blocks and stagnant demand for nonpharmaceutical custom synthesis. Only off-patent APIs offer a bright spot, with return on sales projected to grow at 6% per year.
Fine chemicals producers can achieve above-average growth by "going beyond frozen stereotypes," Polastro said. He believes it's important to diversify into areas like catalog products and proprietary technology. "Diversity provides stability. Being focused only on custom manufacture is risky. You depend only on a few customers, and you don't control much."
Polastro pointed to Cambrex as an example of a fine chemicals producer with a diversified portfolio and a strong line of standard products. "That's probably why they have been having relatively stable business results," he said.
A BIG CHUNK of the business goes to manufacturing generic APIs, according to Claes Glassell, Cambrex's president and chief operating officer. "Like everybody else, we have lots of reactors, centrifuges, and driers. But because we make generic products, we have been able to maintain good utilization of our capacity."
Opportunities also exist in the changing nature of the customer base, which had been dominated by big pharmaceutical companies such as GlaxoSmithKline, Novartis, and Merck. But now, medium-sized pharmaceutical companies--such as Amersham in England or Sankyo in Japan--are increasingly becoming important as customers.
So are the emerging pharmaceutical companies. These start-ups may not even have a drug but just an idea that they are trying to develop, and they rely on custom manufacturers for chemical development and production (see page 80). Yet in the past three years, Polastro noted, "over 20% of the new drugs introduced have come from emerging pharma. Manufacturers traditionally have gone after the big ones, even though as customers they are the most powerful. When GlaxoSmithKline tells suppliers to reduce prices by 20% in three years or else, what can a one-customer manufacturer say?"
As customer industries were busy merging and acquiring in the past two years, so was the fine chemicals industry. Yet, according to Pollak, consolidation doesn't make sense because economy of size does not apply to fine chemicals. These consolidations may be a response to the growing importance of emerging pharmaceutical companies as customers and the appetite of fine chemicals producers for capturing more value from the supply chain. It's about getting a piece of the action at every stage as a product moves from development to commercial production.
Take Degussa. According to Nagler, finalizing the acquisition of Laporte, a British fine and performance chemicals company, was the major development last year that will most affect its custom manufacturing business this year.
"We are aggressively going after early-phase development contracts," Nagler tells C&EN. Through Laporte--which includes Raylo Chemicals, in Edmonton, Alberta--Degussa completes the range of production capabilities that it needs to be a full-service provider for emerging pharmaceutical companies, sometimes also called "virtual" companies.
Degussa has been able to offer lab-scale manufacturing through a collaboration with MediChem Life Sciences, the Woodridge, Ill.-based drug discovery and development services company that last month was acquired by deCODE genetics, a biopharmaceutical company based in Reykjavik, Iceland. Now with Raylo, Degussa can offer lab- and pilot-scale production of APIs, including high-potency active ingredients.
"But you need a special environment, a different mentality, to offer early-phase services," Nagler says, noting that Degussa's native expertise is in commercial-scale manufacture. "And we have increased our ability to offer those services through MediChem and Laporte."
Similarly, Avecia's acquisition in 2000 and expansion last year of Torcan Chemical, a pharmaceutical development company that is based in Aurora, Ontario, was a strategic move to strengthen Avecia's foothold in early-phase process invention, chemical development, and manufacturing.
Also last year, Albemarle Corp. completed its acquisition of the custom and fine chemicals businesses of ChemFirst, Jackson, Miss. "That filled the middle section of our business," Scott Martin, vice president of Albemarle Fine Chemicals Services, tells C&EN. Albemarle already has discovery and early-phase capabilities at its headquarters in Baton Rouge, La., as well as commercial manufacturing plants in South Carolina, Texas, and Arkansas. But it lacked facilities for producing quantities for Phase III clinical trials or--for agrochemicals--field trials. "ChemFirst provided that," Martin says. "Now we are a one-stop shop."
However, Peter van Tilburg, chief executive officer of ChemShop, a three-year-old contract R&D company based in Weert, the Netherlands, believes that it is not in the customer's interest to let one firm do all the work. The stages of drug development have different dynamics, timelines, cost aspects, and expertise requirements. "You need different types of people at different stages," he explained at Fine Chemicals Conference 2001. "The one-stop-shop concept will not survive," he said.
Then why would vendors insist on offering a service customers don't want? "If they can participate very early in a project and implement their specific technologies--even if only one in 100 projects continues to full commercialization--then the customer is locked in," van Tilburg said. "If the customer leaves, they will not have access to the chemical knowledge."
For this reason, van Tilburg, who worked at DSM for 15 years before founding ChemShop, believes small custom manufacturers will continue to be strong players in early-phase outsourcing. Nimbleness and quick response are these companies' aces. When each day of drug development costs about $1 million, as industry observers say, time is precious.
"We respond by retaining the entrepreneurial spirit of the small companies that make up Cambrex," Glassel says. "In that respect, we have the same flexibility and quick responsiveness that customers would find in a small company."
Getting into early-phase development is driven by other trends in the pharmaceutical industry. At Fine Chemicals 2001, Peter Jackson, business director for Avecia's pharmaceutical products, noted that failure is the norm in drug development. Of 5,000 compounds in preclinical testing, only five will make it to Phase I clinical trials, and only one eventually will be approved. When it's "winner take all" for the one successful product, having a piece of early-phase pies makes sense.
Meanwhile, drugs being developed are increasing in complexity as well as potency. "Complexity means more chemistry and therefore more use of capacity," Jackson said. "But as drugs become more effective, lower and lower doses are required, and the volumes needed to be manufactured get smaller and smaller."
These trends suggest that a small-scale facility will generate more sales per cubic meter than a large-scale plant. However, because the two cost almost the same to build, a small facility can't deliver the same return on capital as a large plant. "The economics of the early-phase activity isn't quite right yet," Jackson said.
Everyone is looking for a competitive edge. That can mean several things, depending on who's talking.
"The magic word for us is service," Nagler says. "For me, the white powder in the drum is a given; it must meet specifications. What's important is how we get it there by solving the chemical problems of our customers." To enhance service, Degussa this year will be installing an Internet-based project- and knowledge-management system. "It'll increase our efficiency by linking all the resources we can bring to bear on a project," Nagler says.
The full range of capabilities that Albemarle has created with ChemFirst makes it "a powerful partner for someone trying to develop a product," Martin says. "The combined entity has been around for only six months. We have work to do in 2002 to make sure people understand what we're capable of."
BASF also expects its experience and range of technologies to gain it a significant share of the market. Despite its recent entry into custom manufacturing, BASF has been in business for more than 135 years. At its headquarters in Ludwigshafen, Germany, more than 6,000 people are engaged in R&D. With these resources, it can be innovative and quick, especially in scale-up, says Gabriel Tanbourgi, a group vice president at BASF.
Last year, DSM completed the integration of the pharmaceutical business of Catalytica, Mountain View, Calif. That gives DSM U.S.-based formulation and manufacturing capabilities. These would favorably affect DSM's fine chemicals and custom manufacturing businesses in 2002, says Nitin Parekh, vice president for business development and technology at DSM Fine Chemicals USA.
Specialized technology is a differentiator that many custom manufacturers claim.
Rhodia Chirex is touting the supercritical fluid chromatographic capability it has added to its Malvern, Pa., facility for chiral separations. In addition, it has successfully commercialized the hydrolytic kinetic resolution technology of Harvard University chemistry professor Eric N. Jacobsen to produce key chiral building blocks, according to Stuart E. Needleman, senior vice president for business development.
Groupe SNPE is counting on its strong position in the manufacture of protected amino acids as a competitive edge. Michel Arque, vice president of strategy and development for chemicals, says the group's position will be bolstered further by new processes that have been developed for preparing tertiary butyl esters and N-carboxy anhydrides. In addition, a fully operational facility for high-pressure hydrogenation, as well as pilot-scale facilities for asymmetric hydrogenation and biocatalysis, are now available, he says.
BIOTECHNOLOGICAL capabilities also make companies more competitive. For Avecia, its biotechnological capabilities--microbial fermentations for therapeutic proteins and small-molecule biotransformations, as well as solid-phase synthesis of peptides and nucleic acids--are a real differentiator, Jackson says. But at present, perhaps the best advantage here is in mammalian cell culture production. Among fine chemicals manufacturers, DSM and Lonza are the major players in the field.
As pressures to reduce costs continue, a powerful advantage is process development.
To get a real advantage from process development, it must cut significantly the steps required to make the product, allow use of more readily available raw materials, or dramatically improve workup, Pollak says. "Gaining a few percentage points of yield here and there is not going to work."
For the long term, survival will depend on how custom manufacturers manage their resources. "In the past, companies have grown by adding capacity, developing new technology, signing up new customers, and retaining their existing customers," Jackson said. Companies should start looking at other ways of growing.
"Instead of just adding capacity, consider adding assets that can do something really new and specialized. Or instead of relying just on your own resources to meet a customer's need, consider bringing in a competitor with expertise and capacity in a technology you don't have," Jackson said.
That's the strategy Clariant is using to address its current weakness in certain areas, such as in biotechnology, Darrort says. "For the moment, I will form alliances to help me fill this gap."
Furthermore, companies that have developed nice technology positions could extract more value out of those by using a different business model. "Instead of keeping a very tight control over technology, think about licensing it to customers," Jackson said.
Whatever survival strategies companies adopt, it surely will help that the recession appears to have bottomed out and that recovery is under way. As far as the fine chemicals industry is concerned, "we're probably approaching the bottom of the business cycle. The outlook for 2002 is a slight recovery but not spectacular," Polastro said.
"But one should never be blinded by just short-term considerations," Polastro continued. Ups and downs are inevitable, he said. What's important are the long-term trends, and those continue to be solid. The main customer--the pharmaceutical industry--is expected to grow at 7% per year. And there is no reason to believe that the customer industries will revert massively to manufacturing in-house.
ChemShop's van Tilburg sees the long-term prospects this way: "The time to develop a new drug to market is now between 10 and 12 years. The pharmaceutical industry would like to cut this time in half. To do so, they'll have to outsource an incredible amount of work so that they can concentrate on what they're good at--discovering new chemical entities. They'll have to let the experts in other areas do the rest."
Certain Companies Think They'll Do Well In 2002
The outlook for 2002 is positive, says George Biltz, vice president for Dow Chemical's custom and fine chemicals business unit. That's because, in this challenging economic environment, customer companies must improve their competitive advantage, "and outsourcing manufacturing is an established vehicle for speeding time to market and reducing investment costs," he tells C&EN.
The mood indeed is generally upbeat. ChemShop, a three-year-old contract R&D company based in Weert, the Netherlands, is very optimistic about its prospects in 2002. Still on a steep growth curve, the company looks to increasing its $2 million sales in 2001 to more than $3 million in 2002.
BASF, which recently has started marketing in custom manufacturing, is targeting 2002 sales of $30 million, also up 50% from sales in 2001. Without disclosing 2001 sales, Rhodia ChiRex nevertheless also expects double-digit growth in 2002.
Siegfried Ltd. of Zofingen, Switzerland, projects a 15% growth in sales for custom manufacturing in 2002. Its pharmaceutical sales in 2001 were about $195 million. Of this, about 75% ($146 million) is due to custom manufacturing of active pharmaceutical ingredients, registered intermediates, and finished solid dosage forms, says Stefan M. Peterli, key account manager responsible for the U.S. market. He says part of the growth in 2002 will come from new development capacity, expanded production capacity, and resumption of operations at its manufacturing site in Pennsville, N.J.
Groupe SNPE expects its $170 million sales in 2001 to grow by up to 10% in 2002, depending on what happens to its Toulouse, France, plant, which was damaged last September by an explosion from a nearby fertilizer plant (C&EN, Oct. 1, 2001, page 14). If the plant restarts in the first quarter, the 10% could be realized for both pharmaceutical and agrochemical sales, says Michel Arque, vice president of strategy and development for chemicals. If not, 10% growth could be expected only for pharmaceutical sales, which make up 50% of the total custom manufacturing sales.
With 2001 sales of between $350 million and $420 million, Clariant expects that growth in 2002 will exceed projections for the customer industries--0% for agrochemicals and 7% for pharmaceuticals. François Darrort, president of Clariant's life sciences and electronics division, says the above-market growth rates will come as a result of the full integration of BTP, the British fine chemicals company that Clariant acquired in 2000. "BTP strengthened our pharmaceutical production capabilities and brought in a client portfolio. Now we'll see some results," he tells C&EN.
At Degussa, custom manufacturing and sales of advanced intermediates in 2001 were about $300 million, according to Peter Nagler, president of Degussa's fine chemicals business. With phaseouts of old projects almost balancing new projects coming in, sales in 2002 may be just slightly higher than those of 2001, he says.
Lonza Group, with about $527 million in sales from its exclusive synthesis and biotechnology businesses in 2001--up 30.1% from sales in 2000--says it can do better in 2002.
For Agrochemicals, Another Annus Miserabilis
For suppliers of the agrochemical industry, 2002 may be yet another miserable year: There's not enough business to cover costs, and the consensus among industry observers is that market growth will be flat. The poor market conditions and competitive pressures that have plagued the industry since 1998 show no signs of letting up.
"We lost three major projects in the past two years when customers had to get out because of price pressures," says John C. Wetzel, director of custom manufacturing at Rütgers Organics Corp. in State College, Pa. Like many fine chemicals suppliers of the agrochemical industry, the company is struggling. Custom manufacturing sales in 2000 were about $40 million, according to Wetzel. "It is a little less than that for 2001, and it'll be really hard in 2002 even to be as good as 2001."
The company is taking various measures to survive. It's going to big companies for opportunities to license technologies. It's collaborating with groups that have the resources to innovate, including academic researchers. "We're too small to invent new technologies," Wetzel says, "but we're experts at applying, improving, developing, and optimizing."
The company is also constantly looking for ways to improve its value to customers through process innovation. "That's how we get people to come back." And it's trying to decrease its dependence on custom manufacturing by developing more of its own products.
Despite the run of bad years, agrochemicals remains a major market for custom manufacturers, although to a less significant extent than pharmaceuticals. "Despite all this discussion about genetically modified plants, chemistry won't disappear in agriculture," says Peter Nagler, president of Degussa's fine chemicals business. "There are definitely new requirements for agrochemicals, and we are active in this area."
"I know there's new business coming out," Wetzel says. "It really comes down to how many people are sitting on chairs when the music stops."
THE RIGHT WORD
Active pharmaceutical ingredient (API) is the biologically active compound in a drug formulation that imparts the desired therapeutic effect.
Commodity chemicals are low-value, high-volume compounds produced in dedicated plants and used for a wide variety of applications.
cGMP (current Good Manufacturing Practices) refers to the body of regulations that describe the methods, equipment, facilities, and controls required for producing human and veterinary products, medical devices, and processed food. Manufacturers of APIs must comply with these regulations. In drug development, samples for clinical trials must be produced under cGMP conditions.
Custom manufacturing is manufacturing a product exclusively for a client. When applied to patent-protected active ingredients, it is also called exclusive synthesis. Depending on the client's requirement, the manufacturer can develop the manufacturing process, improve on the client's process, or use the client's process as is (see Toll manufacturing).
Fine chemicals are low-volume, high-value, single-substance chemicals sold on the basis of specifications, that is, on the basis of what they are, not on the basis of what they do. They include basic intermediates, advanced intermediates, and active ingredients.
Specialty, or performance, chemicals are chemicals sold on the basis of performance criteria. Usually, they are not pure substances but are blended with other compounds according to proprietary formulations.
Toll manufacturing is producing a product for a client using the client's process--no more, no less.
SOURCES: Peter Pollak and http://www.cgmp.com
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