Fine Chemicals Weigh on Rhodia

Rhodia has become the latest European chemical maker to grapple with its financially troubled fine chemicals operations. The French company has just written off $125 million in the value of its Rhodia Pharma Solutions unit, giving the firm an operating loss of $85 million for the second quarter rather than a profit of nearly $40 million.

The business “has not demonstrated the expected signs of improvement; therefore, a strong focus is now on delivering a sustainable long-term solution,” the company said in reporting its first-half results.

Rhodia CEO Jean-Pierre Clamadieu once headed the pharma business and stayed committed to it during an earlier round of restructuring. Now, though, he says Rhodia will be studying all options for subtracting the unit and its losses from the company balance sheet, including selling or drastically restructuring it. Any action will exclude Rhodia’s profitable bulk aspirin and acetaminophen operations.

Rhodia’s problems in pharmaceutical chemicals stem from its acquisition of ChiRex in 2000. The purchase—the largest of several that Rhodia made around that time—was celebrated with champagne. But in the years since, structural problems have beset companies throughout the fine chemicals sector. This spring, for example, Lanxess decided to split off its loss-making fine chemicals operations into a stand-alone company.

Lanxess and Rhodia are reacting to the imbalance between supply and demand in the fine chemicals and custom manufacturing industry that has developed since 2000, observes Peter Pollak, a fine chemicals business consultant.

The push by large chemical companies into the business of custom producing active ingredients for the pharmaceutical industry was based on a false assumption, Pollak concludes. Despite various predictions, pharmaceutical companies have not turned to custom manufacturers but have largely done their own drug manufacturing, with some even making sizable investments to expand production capacity.

The result: a fine chemicals sector that, with a few exceptions, is deeply unprofitable because of overcapacity and price competition from lower cost producers in Asia and elsewhere.