The Case For Saltigo

If the new custom chemical manufacturing company Saltigo falters, it won't be due to lack of recognition. Saltigo, whose name is rooted in the Romance language word for "jump," debuted with much fanfare at the CPhI pharmaceutical chemicals conference in Madrid last fall. Saltigo officials touted the company at a Jan. 31 reception in D??sseldorf, Germany, and a further coming-out event took place last month at the Informex trade show in Orlando, Fla.

At Informex, Saltigo had its name stamped on every badge holder, forcing attendees to confront the new firm. And a select group of guests were invited to a lavish party at Disney's Epcot Center, where acrobats and musicians drummed home the message that Saltigo is here and is intent on succeeding.

Its success, however, is by no means ensured. Saltigo is not really a brand-new company but rather a recasting of the fine chemicals arm of Lanxess. Lanxess, in turn, is Bayer's former industrial chemical business, launched on the German stock exchange at the beginning of 2005.

Saltigo has some undeniable strengths, including formidable size and a reputation for technical excellence. With about $480 million in annual sales-90% of that in exclusive synthesis-Saltigo calls itself the world's number two custom chemical company after the Swiss giant Lonza.

Yet it has problems as well. Bayer formed Lanxess to jettison unwanted industrial businesses and concentrate instead on pharmaceuticals, agrochemicals, and performance polymers. Speaking at a press conference at Informex, Lanxess Chairman Axel C. Heitmann was frank in describing his company as made up of "businesses that were essentially neglected and sidelined for the past decade."

By the same token, fine chemicals is one of several Lanxess businesses that was singled out early on as particularly problematic. One of Heitmann's first acts as chairman was to negotiate a deal with German labor unions to eliminate 500 fine chemicals jobs to help cut losses that he has put at hundreds of millions of dollars over several years.

Although Heitmann has divested businesses in spandex fibers, paper chemicals, and specialty coatings, at Informex he insisted that forming Saltigo isn't a prelude to another sale. "Why should I consider selling it?" he asked. "We are turning around and bearing fruit already." Rather, he said, Saltigo is being created because the project-oriented custom manufacturing business is fundamentally different from the rest of Lanxess. "It wants to be differently managed than a basic chemical business or a pigments business," he said.

Heitmann has tapped longtime Bayer and Lanxess executive Axel Westerhaus to shape this different organization. Westerhaus is head of Lanxess' fine chemicals unit and will become managing director of Saltigo when it is formally launched in April.

In addition to slashing staffing from 1,900 to 1,400, Westerhaus said, Saltigo is cutting production capacity, which today is based exclusively at Lanxess' Leverkusen, Germany, headquarters. He said Saltigo seeks to reduce its manufacturing costs 20% by the end of 2007 and to reach the financial performance-cash flow of 16-18% of sales-that some of its competitors enjoy.

Saltigo is also reducing its reliance on Bayer as a customer. About a third of its current sales are to Bayer or former Bayer businesses, and "the dependency goes down on a daily basis," Heitmann said. Reflecting Bayer's historical activities, about half of Saltigo's sales are to agrochemical companies and a quarter each are to pharmaceutical and specialty chemical customers.

Westerhaus and Heitmann acknowledge that Saltigo's all-German manufacturing base is something of an anomaly in this day and age of "offshoring" production to low-cost countries. However, they maintain that the innovation and technology required in custom manufacturing will hold off, at least for now, any threat from competitors with low-wage labor.

"We know the challenges of the industry but at this point in time we are concentrating on our own assets," Heitmann said. In fact, the one potentially significant investment being considered by Saltigo is pharmaceutical chemical capacity in another high-cost country: the U.S. Heitmann says he expects a decision within the next few months.

Otherwise, Saltigo's investments have been modest. About $2 million was spent last year to consolidate and modernize small-volume, or kilo-lab, capabilities in Leverkusen. And less than $1 million is now going to boost low-temperature reaction capability at the site.

Jan Ramakers, director of Jan Ramakers Fine Chemical Consulting Group in East Linton, Scotland, suggests that Saltigo executives should also consider investing in biotechnological capabilities. "If you look at new drugs in development, the number of biologics and drugs that need a biotech production step are increasing," he says. Saltigo competitors like Lonza, DSM, and Degussa already have such capacity, he notes.

That said, Ramakers, who worked for DSM for many years, agrees that forming Saltigo was the right move. "When they were in Bayer, and even Lanxess, they had a reputation for quality and reliability but also for being less flexible," he says. "They now have the opportunity to increase flexibility and the speed at which they can get things done."