New Lines Drawn At Chemspec Europe

The annual Chemspec Europe trade show has traditionally offered a view of both the specialty and the fine chemicals markets, as most of the diversified companies exhibiting have sold both types of chemicals. Smaller European players also have typically had a mix of pharmaceutical fine chemicals and specialty products targeting various other markets.

Chemspec Europe 2006, held in Geneva last month, continued to reflect industry trends by illustrating the much more distinct split that has developed this year between specialty and fine chemicals operations. At the same time, the event demonstrated a renewed emphasis on expanding specialties businesses.

Larger companies such as Clariant and Rhodia—diversified firms that divested their pharmaceutical fine chemicals operations this year—detailed new alignments for their specialties operations around specific product lines and chemistries. Smaller firms, such as France's PCAS, discussed recent separations of drug— and health-care-related activities from specialty and nonpharmaceutical operations.

Some of the divergence of fine and specialties businesses results from an exit from pharmaceutical chemical manufacturing on the part of firms that got caught up in the rush into the sector in the 1990s. Much of it, however, results from a downsizing and streamlining of businesses and an emphasis on growth through innovative product development-measures that most companies agree require the segregation of fine chemicals from specialties operations.

Clariant has shifted its focus to the management of specialties following the sale of its pharmaceutical chemicals business to private equity firm TowerBrook Capital Partners. With the exit, according to Jean-Michel Alarcon, business director for specialty intermediates, Clariant is emphasizing innovative chemistry. "It's a different business model," he said. "We are selling chemistry and technology now, not reaction vessels."

Clariant is still involved with pharmaceuticals, however, and reports $80 million in annual sales of drug intermediates that are not certified under current Good Manufacturing Practices (cGMP). That business is part of a $440 million specialty fine chemicals operation that remains after the sale of the pharmaceutical chemicals unit.

Alarcon said the main push at Clariant now will be toward what he calls application chemistry—"selling properties instead of selling molecules"—a strategy that affirms the distinction between specialties and fine chemicals. A performance chemicals mind-set will also be turned on other markets with the development of environmentally safe alternatives to chlorinated solvents and coatings chemicals. Nanomaterials will be an R&D focus, and Clariant wants to expand its silicones and polymers businesses, in some cases through partnerships, Alarcon said.

Price is a major pressure point, according to the Clariant executive, because much of what the company produces, such as glyoxal, is affected by the price of ethylene. Clariant has been increasing prices steadily since the beginning of 2004, with some success earlier this year. Alarcon said, however, that he hopes product innovation will provide some relief on raw material costs. "We are developing a new model for our business. We want to disconnect ourselves from the raw material."

Clariant intends to develop its specialties business outside pharmaceutical and agricultural markets, but Alarcon emphasizes that pharmaceuticals will remain important, despite the sale to TowerBrook. "We want to be selective and jump into projects where there is a clear fit for our chemistry," he said. "We don't want to perform multistep synthesis for the sake of multistep synthesis."

Saltigo, the custom manufacturing spin-off from Lanxess, itself an industrial chemicals spin-off from Bayer, has segregated pharmaceutical, agricultural, and specialty chemicals into separate business units. According to Uwe Westeppe, head of specialty chemicals, profit and loss responsibility now reside in the three business units. Operational support, however, such as information technology, is centralized.

This setup has helped keep operating costs down and allowed each business a higher level of strategic autonomy, Westeppe said. It also affords a look at how business is faring in each major market. In specialties, sales grew by about 5% last year to about $120 million, according to Westeppe, who is optimistic that custom manufacturing will play an increasing role in growth markets such as liquid-crystal display production and other electronics sectors.

Agricultural chemicals, according to unit head Uwe Brunk, "could be better." The $250 million-per-year business averages 8% annual growth. Getting ahead, he said, comes down to a constant influx of new business, which heightens the need for product innovation.

Saltigo's pharmaceutical unit, on the other hand, has experienced "significant double-digit growth," according to business head Wilhelm Stahl, and the firm plans to invest in an expansion of cGMP capacity. Stahl said Saltigo has been able to promote specialized capabilities in challenging areas such as high-energy and high- and low-temperature reactions, which most drug companies outsource. No longer being part of the drugmaker Bayer helps. "Companies avoided Bayer," Stahl said. "They didn't want to contract with their competitor."

Isochem, the fine and specialty chemicals operation of French state-owned SNPE, set up a separate pharmaceuticals operation after it was created in 2002. According to Xavier Jeanjean, commercial director for pharmaceuticals and cosmetics, the realignment has delivered positive results.

"We are over budget on both revenues and margins," Jeanjean said. "This is for two reasons. We have downsized our support functions and moved R&D closer to production." The company, which had been using a central R&D operation owned by SNPE in Vert-le-Petit, is establishing research at its own center nearby, where it will enhance its cGMP capabilities and add a kilogram-scale lab.

It is also setting up local R&D operations at two other pharmaceutical chemical plants in France. Dedicated R&D, Jeanjean said, is a key to succeeding in the contract fine chemicals sector. "It's about technical know-how, marketing, and good service to customers," he said. "We now have to be more innovative."

Isochem recently approved an expansion of its phosgene chemistry operation in Lockport, N.Y., enabling the firm to pursue isocyanate and acid chloride chemistry in the U.S. Until now, it needed to work with third parties, according to Jeanjean.

He said the company's successful year follows several years of building a stronger position in the market and is not necessarily a sign of a turnaround in contract manufacturing as a whole. "It's better than it was two years ago, but it's not back," Jeanjean said. "It's very fragile for the time being."

PCAS, another French firm, recently split the management of specialty chemicals and pharmaceutical intermediates/actives, according to Vincent Touraille, managing director of PCAS Pharma Synthesis. "We can better control costs by managing them as two activities," he said. It is also a more efficient way of managing R&D, according to Touraille.

The company also teamed up with French biotech firm Protéus to form PCAS Biosolutions, which combines the biotech's technology and PCAS's synthesis know-how for active pharmaceutical ingredients (APIs) and intermediates. Touraille described the partnership as a "launch pad" for new projects and the development of added-value products. He said PCAS has "two or three" contracts moving into Phase III clinical trials this year.

Dowpharma, the pharmaceutical contact manufacturing arm of Dow Chemical, is planning an expansion of its hydroformylation facility in Merefield, England. Ian C. Lennon, head of chemocatalysis, said hydrogenation is becoming more widely adopted in manufacturing APIs.

Given increased competition from producers in India, Lennon argued, Western contract manufacturing firms need to stake out a technological advantage. "The idea is to come up with the most cost-efficient means of making the intermediate in the fewest steps and as economically as possible," he said.

Chemspec's continued importance to the contract API sector brought Ralf Pfirmann, head of sales and marketing for Clariant's former pharmaceutical fine chemicals business, to Geneva. Sale of the business to TowerBrook was pending last month, and Pfirmann was meeting with customers in an unmarked room just off the exhibit space. At the time, the new company's name, Archimica, had not been announced.

Pfirmann said he was at Chemspec to assure clients of continuity. The new firm, under Chief Executive Officer Norbert Dietrich, who headed the business at Clariant, will be maintaining its assets in the U.S. and Europe and will pursue a partnership in China, a move that will be easier to make under its new ownership, according to Pfirmann.

Archimica will also be freer to pursue acquisitions, he said. Despite the continued difficult times in contract manufacturing, Pfirmann is bullish on the business' prospects outside the confines of a large chemical company. He notes that TowerBrook's strategy is to expand businesses that it buys in sectors such as telecommunications, health care, and energy. "It is clear we need to rebuild the industry," Pfirmann said. "And to rebuild the industry, we have to rebuild the companies. We believe we have an excellent starting point."

Pfirmann said the new company, with annual revenues of $250 million, will be the largest independent contract manufacturing firm dedicated strictly to the pharmaceutical market.

Chemspec included 400 exhibits—nearly half from Chinese firms—and attracted 5,000 visitors, according to its organizer, DMG World Media. DMG, which plans to launch a Chemspec for Latin America in Mexico City next year, has faced stiff competition in the fine chemicals sector from CPhI, a European pharma chemicals expo, and Informex, the U.S. custom chemicals event.

Following last year's sale of Informex by the Synthetic Organic Chemical Manufacturers Association, both shows are now owned by CMP Information. CMP announced recently that it will launch a European Informex next summer, a move seen as a clear shot across the bow of Chemspec.

With the heightened distinction between fine and specialty chemicals at Chemspec this year, it would seem that fine chemicals have, if anything, gained a higher profile at the event. "I was surprised," Isochem's Jeanjean said. "Generally Chemspec is not such an important show for pharmaceuticals, but we were very busy with lots of meetings this year. No big surprises, but a lot of interesting people were there. We will be back next year."