Issue Date: April 5, 2004
BREATHING LIFE INTO CORPORATE CORRIDORS
At their annual spring meeting in Philadelphia last month, more than 100 members of the Commercial Development & Marketing Association (CDMA) wrestled once again with ways to use the latest business tools to boost the corporate bottom line.
The opening and closing discussions at the three-day meeting centered on the appropriate use of venture capital in a corporate setting. In other sessions, economists, Wall Street analysts, and business leaders participated in panel discussions where they assessed the business environment and opportunities for new business expansion.
Keynote speaker James A. Mack, chief executive officer of Cambrex, talked about identifying new business trends and then changing course to take advantage of them. He offered a primer on how Cambrex navigated the transformation from a chemical company with a mix of businesses to a firm with a life sciences focus.
Mack assured his audience that "you can use the strategic planning process to change your business." And he emphasized the centrality of technology in creating new opportunities. "We can't find or get enough proprietary technology," he said. "It's the underpinning of what we do."
About 10 years ago, Cambrex executives looked at the prospects for pharmaceutical ingredients, bioproducts, and biotech therapeutics and were sold on the growth potential in such businesses (C&EN, Feb. 2, page 17). Acquisitions such as Bio Whittaker in 1997 and Bio Science Contract Production in 2001 were part of the transformation. Last year's sale of Rutherford, a mix of fine and intermediate chemicals businesses, to Arsenal Capital Partners for $65 million marked Cambrex's completion of the transformation to a technology-rich firm.
"All forces good and evil conspire to drive a business to break even," Mack explained. But "unique technology when properly applied can provide lasting differentiation."
However, Cambrex has yet to turn its differentiation approach into lasting profits. It registered a net loss last year. But in a market where energy and raw material prices are sky-high and overcapacity is rife, companies like Cambrex continue to look for ways to reduce the effects that traditional business cycles have on their operations.
Underscoring the pessimistic outlook for traditional commodity chemical producers, Lehman Brothers Senior Vice President Sergey Vasnetsov said, "High energy prices are killing my chemical companies." The analyst, who covers such firms as Dow Chemical and Lyondell Chemical, said that plans to build terminals and import liquefied natural gas just won't help. "Liquefied natural gas is a silver bullet with very low velocity," because it takes so long to get permits and build such terminals.
Duncan Meldrum, chief economist at Air Products & Chemicals, conceded that "the chemical and industrial sector has been losing out in the recovery now under way." Though government policies have driven the U.S. recovery over the past year, he sees a bright side in that private investment is picking up.
"We are reaching the end of a long, ugly valley," Meldrum said, predicting a U.S. manufacturing production increase of about 5% this year and next. "This year should be the peak growth year in the recovery cycle as momentum is very strong, inflation remains tame, and investment surges. It also should be a strong year for economy-wide profits." Nevertheless, Air Products intends to exercise caution: "We are planning for a recovery less strong than the consensus."
BALANCING GROWTH and profitability was a concern for several speakers. For instance, Paul J. Norris, CEO of W.R. Grace, said his firm works at increasing the productivity of businesses that grow at the same rate as the economy. These slower growth businesses are the "cash cows" for higher growth opportunities.
Grace's slower growing "foundation" businesses account for nearly three-quarters of its annual sales of almost $2 billion, but they get only about half the firm's R&D budget, Norris said. Its other, faster growing businesses get the other half.
Recently retired Air Products executive Robert E. Gadomski said the Allentown, Pa.-based firm has mechanisms in place for balancing growth with financial performance. The former executive vice president said: "Not meeting basic financial numbers quarterly prevents you from moving ahead. Doing so gives you the freedom and opportunity to invest in the future." He emphasized the need to focus new initiatives on "hard" performance deadlines, and he suggested killing projects early when they do not meet goals.
Balancing growth while satisfying investor demands for profits is particularly difficult for a publicly traded company, Gadomski noted. And Peter T. Francis, CEO of privately held J. M. Huber, agreed. Huber is free to make the right economic decisions because it must satisfy only a small group, said Francis, a member of the family that owns the $1 billion-plus maker of chemicals, timber products, and minerals.
Huber bought Finnish carboxymethyl cellulose (CMC) firm Noviant at the low point in the chemical industry cycle in 2000. Francis, who earlier had a career in venture capital, said that raising capital is not a problem for a private firm like his. "Bankers will lend us money." Huber, he said, also didn't hesitate to expand chemicals R&D when it saw an opportunity. It recently built a $2.3 million R&D lab in Nijmegen, the Netherlands, to push CMC into the pharmaceutical tableting market.
Expanding an existing business is difficult enough, but as Todd C. Peterson, principal of Foster Chamberlain, so delicately told the opening session of the meeting on corporate venturing, "Big companies have a spotty track record launching new businesses." Peterson's firm advises clients such as DuPont and Boeing on ways to apply venture-capital insights to corporate investments in start-up businesses.
"The reason a venture fails usually has nothing to do with the technology, but has more to do with the success of business management in carrying out the business plan," Peterson said. For new businesses developed within the corporation--and also for investments in external ventures--he encouraged managers to set milestone deadlines, to take risks appropriate to the profit expected, and to work according to a plan for success.
WHEN DUPONT invests in a start-up firm, it looks for such qualities as experienced management, the value of the firm's technology to customers, and a defensible intellectual position, said Jay Rappaport, business and licensing director. Investments usually run between $1 million and $5 million, and DuPont will generally get some equity, board observer status, and an option on the technology for its money.
Executives from two start-up firms each gave a short presentation at the last of the CDMA sessions. Panelists representing mock companies interested in putting money in start-up firms queried the actual executives about patent positions, limitations of the technologies, business goals, and the availability of exclusive licenses.
Andrew W. Hannah, CEO of Pittsburgh-based Plextronics, discussed the benefits of the inherently conductive polymers his firm is commercializing before the investment board of a putative coatings company. The Carnegie Mellon University spin-off developed technology for the production of regioregular polythiophenes that can be mixed into polymers to make static dissipative flooring, anticorrosive coatings, or electronic shielding.
Kenneth Bradley, chief operating officer of Chicago-based Arryx, a spin-off from the University of Chicago, discussed the holographic laser steering tools his company is developing to do such things as sort and purify drugs or assemble nanoparticle devices. His make-believe investors were part of an instrumentation company considering funding Arryx for a chemical sensor Arryx would develop and manufacture.
Ada C. Nielsen, BP Chemicals commercial development manager, says the exercise was intended to show one way in which people with new technologies can raise money. It's important for those hoping to tap corporate coffers to explain how their partner could make money with the technology they are offering, said Nielsen, who is also CDMA's president.
Entrepreneurs must understand what their technology can do for the corporation. "Will it fit the corporation's strategy? Will it reduce costs? How will the corporate partner make money?" Nielsen asked. And entrepreneurs must also explain how they expect an alliance to help them with issues other than money, such as with marketing or environmental expertise. Too often, entrepreneurs don't take the time to think these questions through, she said, expecting corporate executives to figure it out for them.
Corporate executives have too many other worries. The challenge, Nielsen said, is for entrepreneurs to think like corporate investors and for corporate investors to be cajoled into thinking like entrepreneurs.
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