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Business

Mixed Outlook for Custom Chemicals

Most suppliers expect 2005 to be only slightly better than 2004, but some are riding high

by A. MAUREEN ROUHI, C&EN WASHINGTON
January 17, 2005 | A version of this story appeared in Volume 83, Issue 3

COVER STORY

MIXED OUTLOOK FOR CUSTOM CHEMICALS

Custom manufacturers gather in Las Vegas this week for the annual Informex trade show organized by the Synthetic Organic Chemical Manufacturers Association. Most are glad 2004 is over, but views vary about what 2005 will bring. Mirroring the fragmentation of the fine chemicals industry, custom manufacturers are forecasting different outlooks and anticipating different challenges, according to an informal survey by C&EN. Following are the views from 12 suppliers, ranging in size and services from one-stop shopping to specialized offerings.

ChemCon began manufacturing active pharmaceutical ingredients (APIs) in Freiburg, Germany, in June 1998. It concentrates on small-scale production of highly potent products, such as cytostatic compounds. The largest scale of production it undertakes is 100 kg per year. "It's a niche in the market," says Peter Gockel, one of the company's founders. "We need to be in a niche to survive." ChemCon is not just surviving; it is thriving. Although 2003 was "a bit quiet," 2004 was "very good," with sales of about $6 million, he says. The company has five APIs in the market, all produced on a custom-synthesis basis. ChemCon also has facilities to produce injectable APIs, which are subject to a higher level of microbiological regulation than other APIs. The business is "steadily growing," Gockel says.

ON THE SPOT
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Credit: SOCMA PHOTO
A custom manufacturing mecca, Informex provides multiple opportunities to network, negotiate, and nail down business.
Credit: SOCMA PHOTO
A custom manufacturing mecca, Informex provides multiple opportunities to network, negotiate, and nail down business.

At Clariant, the mood is upbeat. Last December, its facilities in Origgio, Italy, successfully passed Food & Drug Administration preapproval inspections for two APIs. It is not true that all pharmaceutical companies are making their APIs in-house, says Ralf Pfirmann, senior vice president and global business director for Clariant's pharmaceuticals business unit. "People are outsourcing, but you have to do it well to get the business." The major challenges, he says, are the imbalance that still remains between capacity and demand and the unpredictable success rate of pharmaceutical pipelines.

For Degussa Exclusive Synthesis & Catalysts, "we see only a stabilizing of the market, no real turnaround," according to Rudolf Hanko, vice president for exclusive synthesis. The challenges continue to be competition from Asia and overcapacity in the industry. To survive and succeed, Degussa is investing heavily on innovation, which already is paying off, he adds. For example, tens of millions of dollars invested in catalysis R&D enabled Degussa to build expertise in catalysis. Custom synthesis at Degussa draws upon that expertise for the development of routes involving asymmetric reactions and other catalysis-mediated steps. "But Degussa does not rely only on internal research and development efforts," he notes. "It supports or has collaborations with universities in Europe and the U.S. for chiral technology and catalysis research."

DSM EXPECTS a "still tough climate" for 2005, although new business leads are increasing both in quality and in quantity, "and the project portfolio is stronger than ever before," according to Ellen de Brabander, business unit director for DSM Pharma Chemicals. DSM has responded to the poor market conditions of previous years by closing some assets, building a network of Chinese partners for sourcing raw materials, expanding custom synthesis activities to early drug development, and optimizing internal efficiencies to deliver required services at competitive costs, she says. DSM also is relying heavily on innovation, focusing on technologies for homogeneous catalysis and biocatalysis for a wide range of applications, says Ronald Gebhard, director of global R&D for DSM Pharma Chemicals. "Otherwise, it is impossible to develop something new for each new molecule."

Helsinn Chemical Operations, the custom manufacturing arm of the Helsinn Group, has been going against the current in the past four years, according to Gabriel Haering, director of the commercial division. "We have had a nice stream of projects, and we were expanding because we needed capacity," he tells C&EN. The company produces only APIs, and drug registrations are key to its business.

This year, Helsinn is expanding both its high-potency and regular API facilities. With its involvement with the Helsinn drug palonosetron, an antiemetic launched in the U.S. in 2003, the custom manufacturing group gained valuable experience in producing highly potent compounds, managing regulatory filings, and handling other issues related to development and launch of a drug product that few contract manufacturers have, Haering says. "All this know-how is available to our customers. We have gotten new opportunities because of our success with palonosetron."

"Measured optimism" is Isochem's outlook for 2005, based on "tangible successes in the past six months," according to David Simonnet, deputy general manager of Isochem. However, because of the high failure rate of new molecules, "we must be realistic" about the long-term viability of new projects. Key challenges for 2005, he says, are to improve Isochem's effectiveness in Europe, the U.S., and Asia and to ensure the consistency of services to customers throughout the life span of products. To improve competitiveness, Isochem is relying on technology-based breakthroughs in process development to match product needs at key stages of the life cycle--that is, rapid production at early development and continuous gains in efficiency and reductions in cost as the product moves through development, launch, and maturity.

The business climate is "slightly improving," says Wilhelm Stahl, head of pharmaceuticals marketing and of R&D at Lanxess. "Since May last year, we have been seeing positive signals, slow but steady." Formerly a part of Bayer as Bayer Fine Chemicals, Lanxess, now an independent player in the custom synthesis market, greets 2005 with several advantages, he says. It already has a solid reputation. As a smaller company, it can be more flexible and faster in responding to customers than it was as part of Bayer. And most important, with Bayer out of the picture, Lanxess can now be more attractive to customers who were reluctant to work with Bayer Fine Chemicals before because of its connection with Bayer's pharmaceutical business.

In positioning itself in the market, Lanxess will be stressing solutions and services, Stahl says. R&D will focus on identifying new chemistries with great potential for adding value--by improving the flexibility and efficiency of synthetic routes--and taking them to commercial scale. A recent example, he points out, is the aromatic-bond-forming chemistry of Stephen L. Buchwald, a chemistry professor at Massachusetts Institute of Technology (C&EN, Sept. 6, 2004, page 62). "Specific inquiries have come in because of this technology," he says. Furthermore, "when presented with a synthetic challenge, we now have another method to offer that has distinct advantages."

Demand for custom synthesis might "see a little pickup" in 2005, according to Peter Stevenson, president of Pfizer CentreSource (PCS). PCS is the sales and marketing arm of Pfizer for custom manufacturing. In the depressed business climate of recent years, "we've held our own, because in our particular segment the market has been reasonably stable," he says, referring to PCS's focus on specialized markets such as respiratory and steroid hormones. Nevertheless, PCS is vulnerable also to competition from Asia, he points out. What keeps PCS ahead, he says, is that its custom manufacturing is backed by the same technology; quality systems; respect for intellectual property; and consideration of environmental, health, and safety aspects of manufacturing that are behind Pfizer's blockbuster drugs, such as Lipitor.

Nick Green, president of Rhodia Pharma Solutions, also sees signs that the custom synthesis market will improve in 2005. "Rationalization among custom synthesis providers is bringing supply and demand closer to balance," he says. Because the main challenge this year is to be faster and more flexible in delivering services, Rhodia Pharma Solutions is continuing to simplify its organization and operations to boost speed and flexibility, he adds. Customers are also looking for technology that offers better synthetic routes or higher process efficiencies. Green points out that Rhodia's hydrolytic kinetic resolution, aromatic-bond-forming, and phosphorus technologies have enabled the custom synthesis group to develop innovative processes.

MEANWHILE, at SAFC, the fine chemicals division of Sigma-Aldrich, business is "going crazy," with inquiries for custom synthesis doubling over the past six months, according to Edward Roullard, director of SAFC Europe. SAFC has embarked on a program to be recognized as a manufacturer, distinct from the catalog business, and the effort is now paying off. At present, custom synthesis accounts for 30% of SAFC's sales; the goal is to take that to 50% by 2007, according to Roullard. "If things continue as they are going now, we'll be ahead of schedule. With business growing so fast, the challenge is to maintain service and quality," he says.

The custom synthesis business is "looking good" for 2005, says Dennis P. Bauer, vice president for sales and marketing of the U.S. operations of Siegfried. "We had a dip in 2003 in the number of products in our portfolio, but by about April last year new products filled our pilot plants and kilo labs, and we have had them filled ever since." Continuing success depends on how far these projects will move through the pipeline, as well as Siegfried's ability to remain competitive. "Fortunately, Siegfried concentrates only on a market segment where quality makes a difference: We will make only APIs and regulated intermediates. We have a quality system in place that has been inspected multiple times by the Food & Drug Administration, and that's where we hang our hats," he says.

Bauer adds that six new projects are under evaluation at present, the challenge being to manage the timing so that capacity is available when a new project is ready to start. Another challenge, he says, is a numbers gap in analytical method development--that is, the human resources available to develop assays for APIs and to validate them for reproducibility, precision, and other measures required by regulatory agencies. Regulatory requirements have increased "by an order of magnitude over the past 10 years, and analytical development people are tough to come by," he explains.

For the fine chemicals division of Sumitomo, the challenge for 2005 is to demonstrate that its merger in July of last year with Sumika Fine Chemicals benefits customers. The merger brings together Sumika's API manufacturing facilities in Japan and Sumitomo's technology base. "Sumika was known for exemplary service and fast response. Sumitomo is known for route development and process technology. All that is now blended together," better positioning Sumitomo Fine Chemicals to compete for both APIs and advanced intermediates, says Simon Sellers, president of the fine chemicals division of Sumitomo Chemicals America. Customers have greeted the merger with "general approval," Sellers adds. "They like the fact that it expands our manufacturing capability and gives us greater flexibility and speed when scaling up production."

Summarizing the challenges not only for Sumitomo but also for all pharmaceutical custom manufacturers, Sellers says: "The industry is hypercompetitive. You need multiple differentiating factors, particularly novel technology, because other companies also have nice facilities and good service. Success is about credibility and track record. Credibility comes with experience you've developed, the response you get from regulatory agencies when they visit, and having assets on the ground. Track record is about developing a relationship with a customer, delivering great quality on time at a reasonable price, and building on that to grow additional business."

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