CPhI Showcases Transformation

Fine and custom chemical manufacturers at CPhI 2004 in Brussels earlier this month said they are still waiting for the market to revive. Many smaller, niche-oriented players report solid revenue growth for 2004, but major producers such as Lonza, Degussa, and DSM say they are still under pressure from overcapacity and delays in drug approvals. Some estimate that the market will not fully revive until 2006.

A surprise burst of enthusiasm detected at last year's CPhI in Frankfurt was not sustained, according to several attendees. That reprieve in the dour tone that has typified CPhI events since 2000 was attributed by many to the wave of restructuring and downsizing, primarily among larger firms, that was pushing through the industry in 2003.

"Last year, a lot of companies had committed to restructuring, and the thought of taking costs out was the source of some euphoria," according to Peter Jackson, vice president of Avecia's pharmaceutical unit. "This year, they have to deliver on the top line [revenue], so it's a little bleak again."

Avecia may be a case in point. The company cut about 100 jobs from its late-stage and launch-scale active pharmaceutical ingredient (API) operations in Grangemouth, Scotland, over the past 18 months, in response to a downturn in late-stage contract manufacturing projects across the industry, Jackson said.

Demand for early-stage contract manufacturing is picking up, he said, as is demand for process development, an area in which Avecia last year formed a group working on encapsulated catalysts. Although the net effect is a decrease in contract work this year, Jackson claimed that efficiency improvements have led to increased profitability for the group.

This year, companies at CPhI reported significant shifts in management, spin-offs of fine chemicals operations, and mergers and acquisitions. Some of the exhibitors showed an entirely new face in Brussels.

For example, the fine chemicals division of Lanxess, the chemical business that Bayer is in the process of spinning off, made its first appearance under its big red "X" logo. Similarly, Sigma-Aldrich's fine chemicals business launched its new identity as SAFC, a $250 million business that combines existing operations with the recent acquisitions of Ultrafine and Tetrionics.

The firm is rebranding in part to elevate its recognition as a custom fine chemicals manufacturer, according to Ed Roullard, SAFC's European director. The company's objective is to move by 2007 to a 50-50 split between catalog products and custom manufacturing from today's 70-30 split. At current growth rates, Roullard estimates the objective may be exceeded.

Sigma-Aldrich's acquisitions helped fill in gaps in service to build an operation that covers the span from early-stage development to commercialization. This is a continuing trend that keeps the merger-and-acquisition market lively in contract manufacturing.

For example, NovaSep is merging with Dynamic Synthesis, the contract and fine chemicals operations that Rockwood Specialties purchased from MG Technologies earlier this year. The aim is to build an organization that links early- to late-stage development and manufacturing services with contract R&D and separation equipment sales.

The merger brings together three companies within Dynamic Synthesis--Finorga, Rohner, and Dynamit Nobel Special Chemistry--with three businesses at NovaSep--separations equipment and services and two recently acquired businesses. In 2003, NovaSep purchased Seripharm, a subsidiary of Aventis that had developed the process for manufacturing Taxotere (docetaxel). A year ago, NovaSep purchased Applexion, a separation and purification services group serving the biotech sector.

Roger-Marc Nicoud, president of NovaSep, said he wants to establish a company with "one head and two legs," the head being process and product development. He also hopes to leverage NovaSep's relationships with major pharmaceutical companies, most of which use NovaSep equipment.

The combined company is expected to have sales of more than $400 million in 2005. Nicoud acknowledges that business is tough in the sector, as exemplified by problems Rohner has had with a new, five-story contract manufacturing facility in Basel. Rohner lost a major contract in 2003 and continues to operate well below capacity at the new site. Nicoud is confident the site will rebound. "It's not easy, but in our eyes, the business is okay," he said. "We are building our future on long-term business by offering stability in tough times."

Many smaller firms try to balance a generics API business with more lucrative but volatile contract work in order to guard against risk. Orgamol, in Evionnaz, Switzerland, booked $147 million in 2004 revenues, representing a 10% increase, according to Chief Executive Officer Jean-Paul Surbeck. He attributed a comeback following a revenue drop in 2003 to "two or three big contracts" this year and to the addition of new generic APIs, including prilocain.

Surbeck said the company's niche focus is a strong platform for growth. The firm specializes in phosgenation, azide chemistry, low-temperature chiral synthesis, catalytic hydrogenation, and Grignard chemistry. Surbeck said he is budgeting for a 15% increase in revenue for 2005.

Fabbrica Italiana Sintetici (FIS), Vicenza, Italy, is still rebounding from the loss of a major contract three years ago, according to Roger Laforce, general manager for marketing and sales. Laforce said the firm anticipates sales in 2004 to be flat with 2003 at $106 million, following a 30% decrease in revenue stemming largely from the lost contract.

Laforce said privately owned FIS has invested more than $185 million in growing its contract manufacturing business over the past 10 years and is currently adding a kilogram-scale lab for cytotoxic manufacturing. This will be followed by a larger scale plant late in 2005.

"THE STRATEGY is to get more diversified, increase our custom manufacturing, and slowly increase our generics," said Laforce, who joined FIS from Helsinn, where he was senior marketing and sales manager, earlier this year.

He noted that FIS will soon add two new generics, fluvastatin and sertraline, to its portfolio--both manufactured by its partner, PHF, in Switzerland. He said the firm is adding two salespeople in Europe and plans to grow its U.S. sales operation, currently a one-man shop. The target is to double revenues within five years and grow contract manufacturing from half to between 60% and 80% of the business, Laforce said.

Helsinn, based in Biasca, Switzerland, is also investing to expand contract work. To that end, the company is adding R&D, technology-transfer, and quality-control capabilities at its plant in Dublin, where it has primarily manufactured its own pharmaceuticals, according to Gabriel Haering, commercial director.

Haering said contract manufacturing revenues grew by more than 30% this year, and he expects a repeat performance in 2005. He attributes growth to being a small manufacturer and to specialization in areas such as high-potency active ingredients. The firm is expanding its high-potency capacity in Biasca.

Most large producers say they are still in the midst of making adjustments to their organizations, rationalizing businesses, and positioning for a comeback in pharmaceutical contract work. DSM said it is on schedule with Vision 2005, its five-year-old initiative to shift its weight into life sciences by next year. It has set its revenue sights lower, however, according to Herman J. Wories, director of marketing and sales for DSM Pharmaceutical Products, seeing itself as an $11 billion life sciences firm as opposed to the original $13 billion.

At a press conference, Clariant described its moves in 2004 to improve its roughly $400 million-per-year business. These included the sale of its Lancaster Synthesis catalog and discovery chemicals business to Johnson Matthey and its electronic materials business to the Carlyle Group. Clariant's remaining life sciences chemicals group consists of custom synthesis and pharmaceutical and specialty fine chemicals.

"We have indeed maintained our course," said Norbert Dieterich, completing his first year as head of Clariant's pharmaceutical fine chemicals business, "and this strategy is working for us." Business improved in 2004, he said, and looks even better for 2005.

Clariant announced at CPhI that it is adding controlled-substance manufacturing at its Springfield, Mo., site; expanding hydrogenation capacity 20% by mid-2005 in Origgio, Italy; and entering a cooperative agreement with Jupiter Bioscience of Hyderabad, India, through which it will gain access to peptide and amino acid technologies.

As was the case with Lanxess, Lonza, under new CEO Stefan Borgas, said it will have more information on its strategy in the sector in January. Other companies hope to close loops next month as well. GenCorp's Aerojet Fine Chemicals (AFC) division, which was put up for sale in October, hopes to announce it has a new owner, according to AFC President Joseph Carleone.

Degussa announced that Patrik Wohlhauser will take over as head of its year-old exclusive synthesis and catalysts business unit in January, replacing Peter Nagler, who moves to Brazil to head Degussa South America. And Avecia said it may spin off its encapsulated catalysts business by as early as next month.

Such is the pace of change in the sector, in fact, that there should be plenty of news when major chemical producers move their exhibit booths to Las Vegas in January for the Informex trade show. That was the event last year at which the news broke about the departure of Lonza CEO Markus Gemuend, kicking off a year of transition in the industry.

But don't count on life getting any easier, according to Nick Hyde, business director for Dowpharma. "You'd like to think that things are going to get better in this market," Hyde said, "but that would be uncharacteristic."