Fine chemicals and custom manufacturing executives have started the year with a sense of guarded optimism. Although business in 2011 improved considerably for many of them compared with 2010, they aren’t placing bets on the year ahead. As a buffer against future risks, many suppliers have been broadening their offerings through acquisitions.
“The market is going up, there is money available, and everyone is kind of being more careful,” industry consultant James Bruno tells C&EN. But the reality is that there needs to be consolidation, even though it would likely result in job cuts. “There are not enough projects and too much capacity. If there are 50 manufacturers out there and you only need five, something has got to give,” he says.
Companies with some of the biggest booths at the annual Informex USA trade show, held last month in New Orleans, were there promoting businesses newly diversified via acquisitions. Among those that completed major deals last year were Lonza, which acquired Arch Chemicals, and Solvay, which purchased Rhodia. Many exhibitors told C&EN that business seemed brisker among the nonpharma customers than the pharmaceutical ones.
That was the case at SAFC, Sigma-Aldrich’s fine chemicals division, which reported $728 million in sales for 2011. The division’s 9% organic growth was driven by double-digit gains in cell culture media and electronic materials, according to SAFC President Gilles Cottier. And electronic materials will contribute again to growth in 2012, particularly after new capacity comes on-line at the company’s Hitech plant in Taiwan.
SAFC came to Informex with the news that it had just completed its $350 million purchase of BioReliance, a Maryland-based testing services business, from Avista Capital Partners. BioReliance had sales of $110 million in 2010, and it reported double-digit growth in 2011. It provides biologics, toxicology, and animal health testing to life sciences customers.
The acquisition complements Sigma-Aldrich’s already successful cell culture media business, which sells to the biopharmaceutical industry, pointed out Peter Lawson, health care analyst at Mizuho Securities USA, in a recent report to clients. The addition also “improves Sigma’s ability to capture growth from biological drugs production,” he added.
By 2014, eight of the top 10 drugs in the world will be biologics, according to market research and International Monetary Fund data Cottier presented. “By combining the strengths of the two companies, we can become a more significant solution provider to our customers,” he told C&EN. “We now play in the entire workflow of the development and manufacturing of biologic drugs. Where BioReliance supplies the service, we supply the products that go along with them.
“There is complementarity to leverage across a deeper and broader base of contacts at our customers,” Cottier pointed out. He also sees a fit between BioReliance’s specialized services and SAFC’s focus on products that are “tough to make, tough to handle, and not easy to replicate.” And the acquisition is consistent with a strategy to target segments of the fine chemicals space that are growing faster than the global economy as a whole, he added.
The market for outsourcing is growing, but customers don’t want to outsource to just anybody, Cottier explained. “They want to outsource to a quality and financially strong supplier that is going to be there in the long run and who is able to come up with new ideas to help them improve their supply chain. We think there is going to be vendor consolidation in the supplier base, and we want to be one of the consolidators.”
When it comes to outsourcing, big pharma firms are “starting to come back into the Western world,” having found that the cost of going elsewhere may not have been as attractive as once thought, Mark C. Griffiths, chief executive officer of Carbogen Amcis, told C&EN. However, this shift back won’t be easy, “because a lot of us have worked hard to redesign our businesses and not rely on big pharma,” he added. “We used to rely a lot on big pharma, and it nearly killed us.”
To increase the services it offers to small and medium-sized customers, Carbogen Amcis recently acquired the French firm Creapharm Parenterals. The contract development and manufacturing business specializes in liquid, semisolid, and injectable aseptic dosage forms for preclinical and early-stage clinical trials. It also has experience handling highly potent compounds, which is a core business for Carbogen Amcis.
Entering the drug product formulation area made sense as the next service to offer after drug substance manufacturing, and Creapharm was a “super fit,” Griffiths said. The 12-year-old firm employs 16 specialists at a site in Riom, France, that operates under current Good Manufacturing Practices (cGMP). “It wasn’t a huge burden to take on board from an organizational perspective, and it has loads of flexibility.” With space and capital available, Carbogen Amcis plans on adding solid dosage form capabilities there later this year.
Other capacity is becoming available from India’s Dishman Group, the parent of Carbogen Amcis. According to Griffiths, Dishman has decided for now to keep its manufacturing site in Shanghai, despite delays and other hurdles working with Chinese regulators. The company had considered selling the facility (C&EN, Feb. 13, page 21).
To free up capacity at its other plants, including one opened in early 2010 in Bavla, India, Dishman and Carbogen Amcis plan to move some niche oncology generics to the Chinese facility. They also hope to get the plant reviewed by the Food & Drug Administration or a similar regulatory agency in preparation for exports.
“It’s a cGMP-designed plant, and we will manufacture what we would call an ‘FDA-magnet’ product so that we can get an FDA inspection,” Griffiths said about the Shanghai plant. “The facility was never designed or built to manufacture material for Chinese use,” he added.
Other sites are changing hands, with private equity firms among those snapping up assets in the sector. After the acquisition of the European firms Rohner, Novasep, and Isochem by private equity investors, Germany’s Chemie Uetikon was acquired last November by Equistone Partners Europe, a private investor spun off from Barclays Private Equity. According to Heinz Sieger, CEO of Chemie Uetikon, the new owner is studying the acquisition of a second fine chemicals firm to merge with Chemie Uetikon.
Chemie Uetikon is the first foray into chemicals for investors that have been involved in successful turnarounds in other industries, including apparel, Sieger said. He noted, however, that Chemie Uetikon, which rebounded from the recession with sales that grew 30% last year, is far from a failing company. Instead, Equistone sees an opportunity to take advantage of the need for consolidation in the fine chemicals sector.
According to Sieger, Chemie Uetikon’s previous owners, a Swiss holding company, put the business on the market in an effort to focus on its three other businesses: paper manufacturing, blister packaging for pharmaceuticals, and zeolites.
Likewise, multi-industry investor Bridgepoint agreed to acquire the German specialty chemicals firm CABB from AXA Private Equity in March 2011. Then in August, CABB acquired Finland’s KemFine from the private equity firm 3i. The back-to-back purchases are evidence of the commitment by the company’s owners to grow the business, said Andreas Veit, director of sales and marketing for CABB’s custom manufacturing business.
CABB’s custom business is also investing to raise capacity at its Swiss and Finnish sites. “It’s important to have sufficient critical mass, not only for the whole company but for each operating site,” explained Ulf Björkqvist, general manager for strategic development at CABB. It’s difficult for small companies or sites to support all the needed functions and services such as quality, environment, health, and safety, he added.
CABB supplies chemical building blocks based on chlorine and acetic acid. Some 60% of its sales are of custom-manufactured products. About 40% of this business is in agrochemicals, with the rest divided among pharma, flavors and fragrances, and other specialty areas. “We’d rather address the complete chemical industry than concentrate on one single part,” Veit said about efforts to be less vulnerable to economic cycles. “We are not driven by the markets but rather by the technology we can offer to our customers.”
Looking for geographical expansion, Fabbrica Italiana Sintetici (FIS), an Italian pharmaceutical chemicals firm, announced at Informex that it is in the process of acquiring Delmar Chemicals, a privately owned company in Montreal that specializes in process optimization, scale-up, and small-scale cGMP synthesis of pharmaceutical chemicals. With sales of $290 million and 25% growth in 2011, FIS is on track for similar growth this year, according to Laura Coppi, the firm’s newly appointed general manager of sales and marketing.
Coppi, who has held R&D management positions with companies including Zambon, DavosPharma, Wyeth, and Archimica, noted that she has known Delmar for nearly two decades. And FIS and Delmar have partnered for several years, she added. The Italian company’s $1.6 million lyophilization expansion, completed in 2010, is based on technology transferred from Delmar.
Acquiring the Canadian firm will give FIS its first manufacturing facility in North America, Coppi noted. Delmar’s pilot-scale manufacturing complements FIS’s kiloscale and larger production in Vicenza, Italy. It will also strengthen the company’s process development firepower, which Coppi sees as key to growth. “In our world, enriching the pipeline is the key to success, given the mortality rate of projects,” she added.
Meanwhile, Albemarle also has been on the acquisition trail and came close to making deals last year, according to David W. DeCuir, director of the company’s fine chemistry services division. “We lost out on two at the last minute—not quite at the altar, but certainly in the church,” he said. With low debt and cash on hand, the company is financially well positioned and actively looking again.
As a stopgap measure, Albemarle plans to expand its existing capacity, DeCuir said. But the company’s custom services business is very “North American-centric,” and an ideal acquisition would provide geographic diversity as well as new technology, such as manufacturing of high-potency products. Indian firms present a likely possibility, because Albemarle has no physical presence in the country, he added.
DeCuir hopes to double his division’s sales in the next two years, mimicking what it did in the past two to reach $750 million in 2011 sales. On the basis of Albemarle’s project pipeline alone, he claims, this growth is possible; an acquisition would be on top of that. The business doesn’t focus just on pharma or agrochemicals, but also makes lubricants, explosives, electronic chemicals, adhesives, and some flavors and fragrances, DeCuir explained. “I think we are successful because we cast a wide net.”
With reporting by Rick Mullin