Midway through 2002, producers are cautiously optimistic about business, adopting different strategies to achieve growth
A. MAUREEN ROUHI, C&EN WASHINGTON
Observers still predict a lackluster year for the fine chemicals industry, although perhaps a little better than 2001. The basic drivers of the industry have not changed since the beginning of the year. The industry still suffers from overcapacity and low demand. And increasingly, U.S. and European producers face aggressive competition from Asia.
"There's still no light at the end of the tunnel," says Peter Pollak, a fine chemicals business consultant based in Reinach, Switzerland, about the prospects for the industry. And Enrico T. Polastro, vice president and senior industry specialist at Arthur D. Little Benelux, expects the worsening of results that began in 2000 to continue through 2002 across all industry segments, from intermediates to active ingredients and from multiclient products to custom synthesis.
SPOTLESS This filter-drier in a clean room at Lonza's plant in Visp, Switzerland, complies with current Good Manufacturing Practice and is used in custom manufacture of pharmaceutical intermediates and active ingredients.
Industry insiders give mixed reviews. Depending on who's talking, the outlook for the rest of 2002 ranges from lousy to great.
Companies that supply upstream materials or nonpharmaceutical intermediates or products have felt the onslaught of Asian competition the most. They are desperate to figure out what more they can offer when buyers are routinely getting half-price bids from Asian companies.
A way out is to reduce dependence on that market. That's what Regis Technologies did when it decided in 1993 to refocus its business from chromatography and nonpharmaceutical chemical products to pharmaceutical custom synthesis.
"Being a small chemical manufacturer and competing on price is not a fun place to be," says Regis' president, Louis J. Glunz IV. "When we became a small pharmaceutical manufacturer competing more on value added, we became a winnable proposition. We're not experiencing any pains."
The shift has produced dramatic results, Glunz says. In 1993, sales were $2.6 million, with 58% from chromatographic products. This year, Glunz projects that sales will reach $14 million, up 30% from last year. And 86% of that will come from custom synthesis. The company is running out of capacity and will be building a pharmaceutical production plant that will be operational in 2004.
Asian competition for pharmaceutical intermediates and active ingredients is still manageable. Nevertheless, customers are more aggressive than ever in demanding low prices. This trend--along with the overcapacity and low demand brought about by consolidation in the pharmaceutical industry and the slow rate at which new chemical entities are being developed and approved by the Food & Drug Administration (FDA)--creates a challenging business climate.
"So far, this year has been better than last year," says Peter Nagler, president of Degussa Fine Chemicals. "But I do not see that the economy will all of a sudden boom for a 100% turnaround. We are cautiously optimistic."
"Folks are having a tough time," Simon Edwards, vice president of sales and marketing for Lonza's exclusive synthesis business, tells C&EN. "We've had our share of products that have been pulled or put on hold by the FDA. Along with few new compounds from drug companies, the situation has led to low capacity utilization in the industry."
Many companies have been similarly hit by product withdrawals. For example, at about this time last year, two drugs for which FMC Lithium had been supplying synthetic reagents failed after launch. "It was painful. We had nothing to fill the gap," Gregory R. Hahn, marketing and sales director for organometallics, tells C&EN. "But this time, we're coming back a bit because of new projects involving statin drugs."
"We're not out of the woods yet" is the view from the small company Organic Technologies. Jack Etheridge, vice president for sales and marketing, says sales are down 25% from last year. Adding to the problems of product failures, delays, and withdrawals are U.S. tax and regulatory policies, which have created an uneven playing field for U.S. companies. Disputes between customer companies also have roiled some markets as people joust for positions based on legal issues, he adds. "The litigious climate adversely affects small businesses like us."
RECOVERY WILL vary from company to company, Polastro says. In pharmaceutical custom manufacturing, for example, companies that are doing well are those that chose winning products and customers. But that does not guarantee repeat success year after year.
Without a crystal ball to pick winners, makers of fine chemicals increase their chances of success in different ways. For some, success lies in serving a diverse range of customers.
"Albemarle's stock price has doubled since mid-2001 because we've performed well in this tough environment," says Scott Martin, vice president and general manager for fine chemistry services. He says the success is due to Albemarle's diverse portfolio, from polymer additives to active ingredients. Two major products, ibuprofen and naproxen, are recession-proof, he says. Production of both is "running very hard," he adds. He estimates that current capacity utilization is about 80%, although custom manufacturing plants are only about 60% occupied.
Jai P. Nagarkatti, president of Sigma-Aldrich Fine Chemicals (SAFC), says sales through the first quarter of 2002 are on track at 12% growth per year. That has been achieved by not depending on one industry sector for growth, he adds.
According to Nagarkatti, 60% of SAFC's revenues come from chemically synthesized compounds and 40% from biochemicals--proteins, cell culture media, and biological buffers. Most products are multiclient, but custom synthesis is growing. Also key are chemicals for electronics and other nonpharmaceutical applications, where the company's strengths--handling of air-sensitive reagents, custom formulation of cell culture media, and protein extraction from biomass and purification--can be applied in large scales.
Diversification works with small companies, too. An example is the German company Organica, with annual sales in 2001 of about $8 million. Despite increased competition in the past three years, sales have grown at an average of 1520% per year until last year, says its managing director, Bodo Schulze. "The main reason is that we have diverse customers," he says.
Although Organica mainly supplies the imaging industry, it occupies a niche of high-value dyes used for information storage in compact discs and digital video discs. It also sells azide-chemistry-based intermediates off the shelf or as custom products. And it produces a diagnostic dye--indocyanine green--as an active pharmaceutical ingredient (API).
Compared with mid-2001, Organica's sales so far are flat. But with the German economy poised for growth in the second half of the year, Schulze says, "we are still hopeful for positive growth by year's end."
OTHER COMPANIES find strength in special niches, usually based on core technologies. And more and more, these companies are cultivating the natural extensions of those core expertises.
For example, FMC Lithium is known as a supplier of organolithiums. Now, Hahn says, the company is extending that knowledge to other organometallics or other reagents made from organolithiums. And it is pursuing opportunities to prepare intermediates through syntheses involving organometallics as reagents.
Hahn says: "We have been trying to set a new image by calling ourselves 'more than lithium.' We want to emphasize that we're staying with our lithium roots but stepping beyond to manufacture other reagents and to do organic synthesis."
Along the same vein but in a different area, Organic Technologies is capitalizing on its expertise in custom distillation, extraction, and purification. The company has applied for process patents for pure nutraceutical products, high-performance fuel or propellant components, and pharmaceutical intermediates.
Interest in this capability has increased, Etheridge says. "Petrochemical companies that have scaled back their pilot plants come to us for custom distillation of new products." Intense interest is coming from the nutraceutical market, from which nearly 50% of the company's current sales come. The market seems to be consolidating around higher purity products, he adds.
One of the company's strengths is its expertise in engineering fabrication and installation. "That is very valuable because we can engineer a new process, retrofit and modify our plant, and make our equipment better matched to a customer's process without the expense and delays that going to a third party entails."
Likewise, Ozark Fluorine Specialties is building its pharmaceutical and fine chemistry services on a special skill: its ability to handle hydrofluoric acid and elemental fluorine in bulk. This skill is used in various markets, including consumer products.
For 50 years, Ozark has been a supplier of dentifrice fluorides, active ingredients in consumer products that are made under FDA and U.S. Pharmacopeia rules. The company has leveraged its familiarity with regulated manufacture to supply inorganic fluorinated reagents to the pharmaceutical industry.
Now, a collaboration with its sister company LithChem brings to Ozark expertise in handling liquid organic chemistry, says Philip E. Rakita, director of business development. That will allow Ozark to develop new product lines that are more organic than its traditional product lines, he adds.
A PRODUCT in development that Rakita is excited about is the ionic liquid butylmethylimidazolium hexafluorophosphate. Ionic liquids have been touted as environmentally friendly solvents for organic synthesis but have not been available in sufficient quantities for commercial adoption, he says. Ozark is now doing pilot-plant runs aimed at producing several hundred kilograms. "This will be the first time that this material will be available at a reasonable price for somebody to do more than just a bench-top reaction."
Similarly, the small public company Synthetech is capitalizing on its origins in biotechnology development to keep a stronghold in a narrow segment of the pharmaceutical intermediates market. Synthetech is known for unusual amino acids, amino acid derivatives, and peptide building blocks, says M. (Sreeni) Sreenivasan, its president and chief executive officer. The focus has not insulated the company, however. Sales, which peaked at $23 million in 2000, dipped to less than $10 million in 2001. But business has rebounded in the past six months, he adds.
Sreenivasan says the company's resilience is due to its involvement in drug development projects in very early phases. And in the past three years, Synthetech has gotten deeper into projects by doing downstream chemistry. The strategy has made the company visible as a supplier of advanced pharmaceutical intermediates, he says.
The importance of getting involved early in the game is underscored by Stuart Needleman, senior vice president for business development at Rhodia ChiRex. He expects that the company's 2002 sales will grow over last year's, but it may not come from manufacturing. "We're in the development business," he says. " That's the feeder that puts projects in our manufacturing plants." Last month saw one sweet delivery of this feeder: dedication of a plant in Holmes Chapel, England, to production of an intermediate for an AstraZeneca product in late-stage development.
Lonza also is playing the early-phase game. And it has widened the range of projects it now considers, from only API projects to early and advanced intermediates as well. "Focusing only on $10 million, 50-ton-per-year API projects is not providing service. That's gone," Edwards tells C&EN.
And Kaneka, too, is involved in early phases because "customers are qualifying suppliers earlier and earlier in the development process," says Alan E. Walker, director of marketing and development for fine chemicals.
Whatever companies do to weather difficult times, technology reigns. Suppliers with the resources to bring products to market the fastest will not lack for customers.
"There may be overcapacity in general, but we are continuing to build new assets," says David J. Moody, director of new technology ventures at Avecia Fine Chemicals. "Companies with standard technology may be suffering because they have no particular way of enticing business. You need something that's differentiating."
IN LARGE-SCALE chiral separations, for example, Avecia is aiming to develop a superior alternative to current methods with a technique based on molecular recognition. Customer response has been encouraging, Moody says, with separations comparable with that achieved by simulated moving beds or crystallization. Plans are under way to have an operational plant for clinical-trial volumes within a year, he adds.
Meanwhile, FMC Lithium will be pushing its expertise in two technologies as it creates a more-than-lithium image: directed ortho-metallation and addition of a protected functionalized organolithium to an intermediate.
In directed ortho-metallation, lithium replaces a hydrogen of an aromatic substrate at the position ortho to a directing substituent. Electrophilic substitution of the ortho-situated lithium then regiospecifically attaches complex functional groups on the aromatic ring. Hahn says this reaction has been used to prepare intermediates for the antihypertensive losartan and the HIV inhibitor efavirenz. "We will develop a portfolio of organic molecules made with this reaction and our reagents so that potential customers can see what chemistry we can do," Hahn tells C&EN.
Addition of a functionalized lithium to an intermediate is unique, Hahn says. In one step, the organolithium compound adds functionality and a carbon chain to the intermediate. Because functional groups on organolithium compounds usually are unstable, the transformation has not been readily available. Now, FMC Lithium is commercializing it, he says.
Elsewhere, SNPE recently patented a method to prepare highly pure amino acid N-carboxyanhydrides (NCAs). Jean-Pierre Senet, scientific director for SNPE's fine chemicals group, says NCAs are polymerized to peptides that serve as active ingredients in pharmaceuticals or as delivery carriers in cosmetics. However, control of the degree of polymerization, which is key to these applications, is affected by impurities in the monomers.
According to the patent, NCAs are prepared from amino acids by phosgenation in the presence of a chlorine scavenger. Thus, when l-leucine reacts with phosgene in the presence of a-pinene, the chlorine in the product is less than 0.05%. a-Pinene forms bornyl chloride as it mops up the hydrochloric acid by-product. The chemistry is now practiced in 100-kg scale.
As chemistries continue to be developed, technology for biopharmaceutical production also is being embraced more and more. Lonza's early entry into this arena is paying off in a big way. Fine chemicals sales in 2001 were 30% higher than in 2000, mainly because of rapidly growing biotech sales, Edwards says. He adds that Lonza is investing $300 million to increase capacity for biopharmaceuticals.
On the other hand, as a major producer of baker's yeast, Kaneka has been in biotechnology for 50 years. And from that base, it has broken into fine chemicals, where it has focused on building expertise in asymmetric synthesis. Kaneka's fine chemicals group combines chemical synthesis and biotransformations to develop efficient processes that are keeping its capacity fully utilized, Walker says.
EFFICIENT PROCESSES are the key, Pollak says. Companies can't build on one-stop shops, technology toolboxes, and customer intimacy without processes that cut the cost of a synthesis and the time to market of a product, he emphasizes.
And in process development, companies committed to R&D lead. DSM's fine chemicals business, for example, has 330 R&D people in seven sites worldwide, financed by 5% of its annual sales, according to Ellen de Brabander, global director of R&D for custom and multiclient chemical products. Collaborations with other R&D groups in DSM yield synergies resulting in successes. An example is DSM's route to cephalexin, now practiced in industrial scale.
The route was codeveloped by DSM's anti-infectives group and fine chemicals group. It is based on using acylases to form an intermediate and the product. The reactions are water-based and generate less waste, making the process green, explains Marcel Wubbolts, competence manager for biocatalysis and biotransformations. He notes that other R&D synergies are evident in the fine chemicals group's use of the same enzymes in biocatalytic resolutions for making chiral amines and unnatural amino acids.
At BASF, ChiPros products and services also take advantage of synergies in R&D, as well as in production and raw material use. The business, aimed at drug discovery and development, grew out of BASF's well-established expertise in amines and its more recently developed biotechnological capabilities.
Although market research had identified chiral intermediates and services as a viable market segment, the business began tentatively 10 years ago with a small facility in Ludwigshafen, Germany, and little investment. Now it is well received and commands three production plants, says Stefan Wolff, head of global chemistry development for life science intermediates.
Fifteen compounds are now being produced in multiton scale, and scalable processes are in place for another 50, Wolff says. If a compound is not in the portfolio, ChiPros evaluates whether it can be made with its technology and raw materials, and if so, develops quantities required at various stages of drug development, he adds.
A shift from a purely chemical to a chemical/biocatalytic process for L-carnitine enabled Lonza to competitively manufacture this nutraceutical, according to Pollak. Lonza's purely chemical synthesis, starting from ethyl -chloroacetoacetate, "involved some brilliant chemistry," he says, but did not offer economic advantage over that used by the Italian pharmaceutical company Sigma-Tau, the major competition in this market. Then Lonza switched to a new starting material, g-butyrolactone. The compound is easily converted chemically to -butyrobetaine. An enzymatic reaction enantioselectively installs a hydroxyl group in high enantiomeric excess.
At Kaneka, ongoing improvements of processes for fine chemicals production have resulted in successes that the company just recently has begun discussing publicly. One is a hydantoin route to D-amino acids that has cut costs by 20%.
The leap in efficiency is due to two factors, says Masahiko Yamada, Osaka-based manager of the new products development group of Kaneka's fine chemicals division. One is the ability to immobilize the key enzymes, D-hydantoinase and decarbamoylase. The other is Kaneka's robust decarbamoylase, developed through mutagenesis. "It will be difficult to reproduce our decarbamoylase reaction," he says. "We've used the same enzyme for one year to produce 1,000 tons of product."
Another success is in asymmetric reduction of simple ketones. The chemical route requires ruthenium, chiral phosphine ligands, and chiral amines. But it doesn't work for substrates such as chloroketones or 2-acetylpyridine. The chiral amines destroy the substrate or racemize the product, Yamada says.
Kaneka's solution is biocatalytic reduction. This route, which is not unique to Kaneka, requires expensive coenzymes that must be regenerated. Kaneka's advantage, Yamada says, is its libraries of reductases and coenzyme-generating systems, allowing the reaction to be tailored to substrates. For example, chloroketone esters are reduced to chlorohydroxy esters in a two-phase system.
Recently, Kaneka has been paying more attention to APIs. This year, an API it had been working on for several years was launched in Japan. The route to the product--biapenem, an antibiotic--exemplifies Kaneka's skill in combining chemical syntheses and biotransformations.
Even though such combinations are becoming more and more common, they will not replace purely chemical routes.
On this front, Pollak offers two examples: Finorga's process for an intermediate used in the synthesis of Pfizer's antidepressant sertraline (Zoloft) and Roche's process for oseltamivir phosphate (Tamiflu), an antiflu drug.
THE KEY INTERMEDIATE to sertraline is an aryl-substituted tetralone. Finorga, now a part of Dynamit-Nobel, used to make it through a demanding four-step synthesis from diethyl succinate, benzoyl chloride, and o-dichlorobenzene. A one-step process involving a Friedel-Crafts reaction between -naphthol and o-dichlorobenzene simplified production, enabling Finorga to become an important supplier of Pfizer, Pollak says.
In the case of oseltamivir phosphate, Roche was under pressure to speed development to try to win a race against Glaxo Wellcome, now GlaxoSmithKline, to bring an anti-influenza drug to market. The original process involved 16 steps, required the expensive raw material ()-quinic acid, involved a hazardous azide intermediate, and gave poor yields, Pollak explains. The results of process development "are really fascinating," he says.
First, Roche replaced the expensive raw material with the more readily available shikimic acid, eliminated the azide intermediate, cut the number of steps to 10, and raised yield from 10% to 35%. Then, a synthesis was developed based on a Diels-Alder reaction between inexpensive raw materials, furan and ethyl acrylate. Finally, a third process, based on catalytic hydrogenation of a pyrogallol, was designed.
More recently, Dow disclosed its manufacturing route for travo-prost (Travatan), an antiglaucoma agent [Org. Process Res. Dev., 6, 138 (2002)]. The route was developed by a team led by Ian C. Lennon, technology leader at Chirotech Technology Ltd., now part of Dow's pharmaceutical services business.
Travoprost has five chiral centers and two stereochemically defined double bonds. Mindful of regulatory requirements for levels of impurity, the team came up with a 22-step synthesis. Most of the steps go into assembling a single-enantiomer ketone that is then oxidized to a crystalline lactone. Formation of a crystalline product limits the need for chromatographic purification late in the route. From there, four steps complete the synthesis.
Process development is a paramount differentiating opportunity, Pollak says. It addresses a key need of customers, and for many processes, there is much room for improvement. But to be effective, it must aim to reduce synthesis steps, switch to readily available raw materials, and simplify work-up.