Opportunity Knocks | March 12, 2007 Issue - Vol. 85 Issue 11 | Chemical & Engineering News
Volume 85 Issue 11 | pp. 22-23
Issue Date: March 12, 2007

Opportunity Knocks

Sigma-Aldrich finds success in its measured move into custom manufacturing
Department: Business
Pharmorphix added another niche segment to SAFC.
Credit: SAFC
Pharmorphix added another niche segment to SAFC.
Credit: SAFC

Scan the shelves of any chemist's lab and you're certain to find the Aldrich catalog. An organic chemist might have put it in next to "Vogel's Textbook of Practical Organic Chemistry," while in a physical chemist's lab, it could be nestled in with the "CRC Handbook of Chemistry & Physics." Sigma-Aldrich's indispensable reference has made the firm's name synonymous with research chemicals.

That kind of brand recognition can be both a blessing and a curse for a company that is trying to expand outside its traditional business. On the upside, the company is already well-respected and has strong ties with key customers. The downside is that those customers have a specific view of what the company does.

SAFC, the Sigma-Aldrich business that custom manufactures fine chemicals for pharmaceutical and other high-tech clients, has worked diligently to come out from the shadow of that ubiquitous catalog. It took several years of careful business planning and a strong dose of publicity, but SAFC finally appears to have established itself as a brand of its own.

Moreover, SAFC has managed to thrive at a time when many chemical companies serving the pharmaceutical industry have floundered. The unit has consistently achieved robust sales and profit growth, culminating last quarter with its best showing yet: SAFC pulled in fourth-quarter 2006 sales of $133 million, or organic growth of 15.0% over the fourth quarter of 2005. For all of 2006, the business reported almost $500 million in sales, or 12.7% growth including contributions from acquisitions.

Credit: SAFC
Credit: SAFC

The transformation has been swift. As recently as the late 1990s, Sigma-Aldrich's fine chemicals business was essentially opportunistic. When big pharma rang looking for a custom chemical or larger quantities of a catalog product, the company was happy to oblige, says SAFC's president, Frank Wicks. The company's sales team, however, was not exactly out pounding the pavement to compete for custom manufacturing projects.

In 2000, Sigma-Aldrich embarked on a five-year program to turn this ad hoc custom manufacturing and fine chemicals business into a formal one. It was a steady evolution that entailed revamping the company's internal capabilities to meet a different customer need and filling gaps in technology or capacity through acquisitions.

The business really came into its own in 2004, when Sigma-Aldrich purchased two companies-the drug development chemistry firm Ultrafine and the high-potency drug manufacturer Tetrionics-and then officially launched SAFC. The company has since refined SAFC's operations into four business units: SAFC Pharma, for active pharmaceutical ingredients; SAFC Supply Solutions, for customized raw materials; SAFC Bioscience, for cell-culture materials; and SAFC Hitech, for performance materials.

Though SAFC emerged from a strong foundation-when you make 45,000 different products, "you know about chemicals," Wicks points out-success in fine chemicals also required some marketing finesse. Indeed, prior to the acquisition of Ultrafine, Sigma-Aldrich wasn't getting out a clear message that it was more than just a research chemicals company. "It was unwrapping into a very good story, but it was poorly communicated," Wicks now acknowledges.

Soon after it took that "critical first step" to buy Ultrafine, SAFC embarked on a marketing campaign to let customers know it was committed to fine chemicals. In some ways, Wicks says, that effort to communicate its evolving fine chemicals capabilities to the outside world helped to define its strategy. "We were more focused internally once we were able to articulate that message on an external basis," he notes.

That message is finally coming across in the fine chemicals industry. Customers and competitors alike still remark that Sigma-Aldrich was just a research chemicals company until a few years ago, but there is also widespread acknowledgment that it has quickly emerged as a strong competitor in the marketplace.

SAFC has made several strategic moves that have contributed to its success, but the most important was to take a "homegrown" approach to growth, says Longbow Research analyst Dmitry Silversteyn. "They did not fall into the trap other companies did in the late '90s and early 2000s, when people thought the sky was the limit for contract manufacturing and made huge acquisitions," Silversteyn says. Those companies that did are now stuck with "high- priced, mismatched assets," he adds.

By avoiding transforming acquisitions and sticking to bite-sized purchases, SAFC isn't saddled with the costs that have plagued its competitors. Its approach has put the business in a better position to compete with lower cost manufacturers in India and China, Silversteyn contends.

SAFC maintained that bite-sized growth approach through a series of investments in 2006. In May, the company bought Honeywell's Iropharm pharmaceutical chemical plant in Arklow, Ireland, which filled a capacity gap and added commercial-scale simulated-moving-bed chromatography. A few months later, SAFC picked up Pharmorphix, which specializes in solid-form characterization.

Other moves included the completion of an expansion of the former Tetrionics facility in Madison, Wis., and the opening of a medicinal chemistry facility in Bangalore, India, that will work in tandem with the former Ultrafine chemistry development labs in Manchester, England.

Silversteyn says these investments underscore another strategic advantage of SAFC: its decision to participate in niche manufacturing and service segments where there is less competition and less pricing pressure.

In addition, SAFC has made a point of targeting new markets that can benefit from the combination of its decades of experience as a catalog company and its more recent foray into custom services for the life sciences industry. "We don't want to get too diversified, but we are looking at where there are faster growing markets where we have existing capabilities," Wicks notes.

One example is SAFC's mid-2006 launch of its Supply Solutions business, which supplies customized raw materials and services to the drug and diagnostics industries. This was a way to customize what it was already doing in its research business-that is, making and packaging many chemicals in small quantities, providing analytical services, and distributing goods across a global network. A separate move into diagnostics kits taps Sigma-Aldrich's expertise in meeting the stringent quality control requirements of the drug industry.

In line with that growth strategy, SAFC is expanding its business beyond life sciences and into the electronics industry. Just as in pharmaceuticals, manufacturing computer chips for digital cameras, MP3 players, and other new electronic devices involves a wide range of specialty materials.

Wicks says the company is stepping up its efforts at a time when the chemicals used to fabricate chips are becoming as sophisticated as the tools used in the process. "There is a need to find new compounds to meet the physical requirements for chips," he says, "and those who can develop those molecules are becoming more important than the tool manufacturers themselves."

SAFC Hitech, the business unit that provides high-purity materials and custom manufacturing to the electronics industry, accounted for just 5% of SAFC's sales last year. Wicks, however, is "very optimistic about this area. It's a marketplace that is growing at about 15% per year."

To that end, the company paid $60 million last month to buy Epichem, a British maker of organometallic precursor chemicals used in computer chip manufacturing.

In addition to broadening SAFC's product portfolio, Epichem provides key relationships with academia and industry. Furthermore, Wicks says, the business is easily integrated into the Hitech fold; SAFC can supply raw materials for Epichem from the same plants in which it makes intermediates for pharmaceutical customers.

SAFC has been expanding its internal Hitech capabilities as well. Last year, it spent $5.7 million to install a high-purity distillation facility and expand a production unit in Sheboygan, Wis. SAFC is now sinking another $5.3 million into the site to add a clean room and packaging facility. Between the purchase of Epichem and such internal expansions, the Hitech unit will have sales of more than $60 million this year, Wicks says.

Going forward, SAFC will continue to make targeted investments to fill some of the blanks in its rapidly growing operations. Highest up on Wicks's wish list is a flexible plant in a low-cost production region that can serve both its Hitech and pharmaceutical businesses. "We need to make a decision on the China/India question," he notes.

Other items on his list include disposable bag manufacturing capabilities for SAFC Biosciences and the capacity at SAFC Pharma to provide formulations for pharmaceutical customers conducting clinical trials.

Even without acquisitions, Silversteyn believes, SAFC can increase sales by 10-12% annually over the next several years, driven by double-digit growth in its active pharmaceutical ingredients business and near-double-digit growth in the biosciences division. Yet he also points out that SAFC is expanding from a relatively small base compared with some of the big players in the fine chemicals market. The company itself is targeting 10% organic growth plus 5% growth from acquisitions.

Despite an impressive track record, SAFC is not taking its success for granted. "There's not a sense that we've arrived," Wicks says. The marketplace's improved perception of the fine chemicals operations and the smooth integration of several businesses show "we can do this," he says, but only an internal "passion for taking it to the next level" will drive the business forward.

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