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New Management

Private equity firms are investing in the risky business of fine and pharmaceutical chemical manufacturing

by Rick Mullin
September 27, 2010 | A version of this story appeared in Volume 88, Issue 39

Credit: BluO
Rohner’s five-story pharmaceutical ingredients plant in Basel is now part of a German holding company.
Credit: BluO
Rohner’s five-story pharmaceutical ingredients plant in Basel is now part of a German holding company.

Aurelius, a German industrial holding company, recently made a high-profile addition to its diverse portfolio of businesses with the acquisition of a majority stake in the company Peter Deilmann Cruises, owner of the five-star ship Deutschland. “It is the Queen Elizabeth II of Germany,” says Dirk Markus, Aurelius’ chief executive officer.

The Deilmann line will be shuffled in with Aurelius’ other holdings, which include Sit-up Shopping, a U.K. home shopping network; Blaupunkt, a high-end auto electronics firm; and LD Didactic Group, a science publishing concern that also manufactures furniture. Another recent addition is Isochem, the pharmaceutical and fine chemicals manufacturing company that Aurelius purchased from France’s SNPE earlier this year.

Isochem’s change of hands from a state-owned explosives and chemicals conglomerate to a holding company with almost nothing in chemicals would have seemed unthinkable seven or eight years ago. The acquisition, however, is part of a trend that has seen TowerBrook Capital Partners purchase Clariant’s fine chemicals division, Archimica, in 2006, and BluO buy Rohner, a beleaguered Swiss contract chemical operation, in 2008.

Private equity and venture capital firms have become surprisingly active in buying fine chemicals divisions from larger European chemical companies that are scrambling to exit the money-chewing sector. These buyers have also picked up production assets from major pharmaceutical companies that in recent years have scaled back manufacturing.

Some industry watchers are skeptical of venture firms’ chance of success in the low-margin, high-tech business of contract chemical manufacturing, especially given the continued pressure from Indian and Chinese competitors. The classic private equity strategy of purchasing failing companies, turning them around, and selling them in three years or less, they say, is unlikely to work in the active pharmaceutical ingredient (API) market.

Buyers, however, say they aren’t married to pharmaceutical ingredients. Most have launched sales programs focused on building their new firms’ businesses in agricultural chemicals, electronic materials, and other markets. Some say they are eyeing nonpharma manufacturing plants for possible acquisition to complement their new businesses. And most say they are committed to holding on to their new ventures for more than three years.

Credit: Aurelius
Credit: Aurelius

Enrico Polastro, a consultant with Arthur D. Little Inc. in Brussels, says it is not surprising that private equity firms and “turnaround specialists” are investing in the sector, given the depressed valuation of the assets on the market. The problem is that these buyers generally require a steady flow of cash. “This is not always easy to have in fine chemicals, given business volatility and substantial capital expenditure requirements,” Polastro says.

Markus says Aurelius’ strategy is to turn around failing businesses, regardless of industry or market, and sell them if and when an opportunity presents itself. He notes, however, that Aurelius, which is traded on the Frankfurt Stock Exchange but is 40% owned by his and his partner’s families, holds on to assets for an average of eight years. He claims that Aurelius is in no rush to cash out Isochem.

“I don’t know if this industry is promising or not, to be honest,” Markus says. “It could be that overall the market is not good. But right now, most markets are not good.” What Aurelius sees is an immediate opportunity to implement an aggressive sales approach. In fact, Aurelius is close to purchasing a small contract manufacturing firm in Scotland that it would combine with Isochem, he discloses.

Isochem has particular potential for growth, Markus argues, given that it had been operating up until now as part of a state-owned conglomerate that was looking to concentrate on its core businesses of rocket fuels and explosives. “Isochem was in an excellent position, but it lacked direction,” he says. “Being a noncore asset of a state-owned French company doesn’t allow you to make fast decisions.”

Aurelius brought in Björn Schlosser to replace Thierry Malfroot as CEO of Isochem. But the company is retaining the rest of Isochem’s managers. Schlosser, who previously worked for Unilever and as an industry consultant, says the plan now is to try to strengthen Isochem’s nonpharmaceutical business. “This has been slightly neglected in recent years,” he says. “We are trying to achieve a good split of pharma and specialties.”

The company undertook a cost-cutting program that involved only a modest staff reduction of 20 jobs. Isochem’s headquarters will be moved from Paris to one of its four French manufacturing plants, most likely Vert-le-Petit. Schlosser says the company, with annual revenues of about $130 million, plans to keep all of its facilities, including its phosgene operation in Hungary.

Credit: ICIG
Credit: ICIG

Rohner was acquired by Arques, a German private equity firm, in 2006 from Novasep, the French custom synthesis provider. In 2008, Rohner and four other Arques holdings were spun off as BluO, a new company headed by founding members of Arques (C&EN, Feb. 8, page 34). Markus Zoellner, chief operating officer of BluO, a group with holdings as diverse as Aurelius’, describes a situation quite different from that of Isochem’s.

Rohner primarily consisted of a modern five-story manufacturing plant that lost a big customer in the early 2000s. Arques cut the staff in half, shuttered older facilities, and put the main plant to work on general contract manufacturing, pharma and nonpharma, targeting customers beyond the local drug companies that made up Rohn­er’s customer base. The firm then brought in a new CEO, Thomas Rosatzin, a Ph.D. organic chemist who had been chief operating officer of Induchem, a Swiss cosmetic chemicals firm.

BluO also has a business model of purchasing underperforming companies, turning them around, and selling them, Zoellner says. “But at the moment, we are not in a position to sell Rohner,” he adds, largely because of the economic downturn. Meanwhile, BluO executives have their eye on a second Swiss contract producer.

Another private investment firm, International Chemical Investors Group (ICIG), is focused exclusively on chemicals. The company, which began making acquisitions in 2005, currently runs four chemical divisions, including Corden Pharma, an API manufacturing group amassed from acquisitions of AstraZeneca pharmaceutical chemical plants in Germany and Italy and a Bristol-Myers Squibb facility in Italy. Overall, ICIG has about $900 million in annual sales.

API manufacturing is a risky business, says ICIG Managing Director Achim Rie­mann, largely because of overcapacity and pressure from China and India. Likely returns would be unattractive for a publicly traded company. “But we have no quarterly analysts’ meeting at which we have to justify why we are in a business with 5 or 6%” in earnings before interest, tax, depreciation and amortization, he says.

For ICIG, the real hook is the opportunity to build businesses from parts of underperforming companies. “It is all about consolidation,” Riemann says. “When you look at the API sector in Europe in particular, there is probably an overcapacity of 50 to 60%.”

And much of that overcapacity is at major pharmaceutical companies’ manufacturing sites. Aesica, a U.K.-based contract manufacturer, got its start with a management buyout of a BASF site in Cramlington, England. Aesica CEO Robert Hardy, who led the buyout, arranged financing from Lloyds TSB and its private equity arm.

The company has gone on to purchase other U.K. facilities from Abbott Laboratories and Merck & Co. Aesica has grown quickly, nearly tripling in size since 2004 through acquisitions that have come with lucrative contracts from the seller. But Hardy notes that the company’s Queensborough plant, which it purchased from Abbott three years ago, is now doing one-third of its business with other customers. “And that is by gaining business,” Hardy emphasizes.

The key to success is management experience—the right kind of experience, according to Hardy. “You need management that understands the industry—the outsourcing services model, not just pharmaceuticals,” he says. “Keeping a management team that has basically stayed in big pharma and not manufacturing is not a good strategy. You just have to operate in a different way from the original parent company.”

Although the newcomers are united by the guiding principle of custom manufacturing services, they acknowledge that it’s a challenge to amass all the elements for success. They are also well aware that the business didn’t work out for Clariant, SNPE, Dow Chemical, Rhodia, and other diversified chemical companies that invested in the custom manufacturing business in the 1990s and exited by the mid-2000s.

In fact, one of the newcomers that recently entered the arena has already exited. The private company PRWT Services, which established Cherokee Pharmaceuticals with the 2008 acquisition of a Merck plant in Riverside, Pa., sold the facility back to Merck earlier this month, citing the challenging business environment (C&EN, Aug. 16, page 24).

Although Merck’s buyback of the Riverside plant hardly marks a reverse trend, it does illustrate the contradictory nature of deals in the contract manufacturing of pharmaceutical fine chemicals, an industry in which trends are famously difficult to predict.

Jan Ramakers, president of Ramakers Fine Chemical Consulting Group, believes it’s safe to predict that private equity will remain active in the sector for the foreseeable future. “There are deals pending right now and a lot of companies interested, with opportunities from contract divisions being sold and big pharma selling plants,” he says. “The business is not all that fantastic, and you could easily lose money, but it will continue to attract investment.”


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