The symbolism was obvious, as was the irony, when Isochem’s dinner party set out from the Quay Henri IV in Paris in late November on board Yachts de Paris’ Victoria. The guests boarded at a dock on the River Seine directly across the street from the palatial, one-time headquarters of Isochem’s former parent company, state-owned SNPE.
With SNPE retrenching to its original business in fuels and explosives, the grand headquarters on the quay is being converted into luxury condominiums with a view of the Île Saint-Louis. Meanwhile, Isochem is setting sail as a private company after its acquisition in 2010 by the German venture capital group Aurelius.
On board the Victoria, Xavier Jeanjean, Isochem’s sales director, expressed an exuberance shared by many on the cruise. No longer operating in the doubly lethargic milieu of a state-owned conglomerate, Isochem is now a midsize fine chemicals firm free to chart its own course, Jeanjean said. Debt-free after being acquired by Aurelius, Isochem may be in a stronger position to invest for growth than are some of its competitors in France.
“Now Isochem management is driving the boat,” Jeanjean said. “We have built our own strategy to do what we have to do. We are moving fast.”
Isochem’s fortunes have shifted drastically since the 1990s when it was considered the most stable French supplier of active pharmaceutical ingredients (APIs) by virtue of its government backing. But SNPE decided to exit fine chemicals at about the same time that other large companies such as Eastman Chemical and Dow Chemical divested floundering pharmaceutical chemical divisions. The process took much longer for the French government, however—nearly 10 years.
During that time, Isochem operated in a kind of suspended animation as other French companies followed courses of development—some changing hands through venture capital acquisitions or leveraged buyouts—that now seem plausible options for Isochem.
In the fine chemicals industry, French companies are seen as distinct from the small, family-owned firms that dominate in Italy and the larger, more technically specialized companies in Germany and Switzerland. The French firms operate globally, but they make up an almost closed community in which executives may have worked at more than one of them and the spirit of regional competition is palpable.
One of the country’s stalwart players is specialty and fine chemicals supplier PCAS, which in 1992 found itself in much the same position as Isochem does today. PCAS had previously changed hands for nearly a decade, passing from Stauffer Chemical to Unilever to ICI, and finally to AkzoNobel, developing businesses in pharmaceuticals, photographic chemicals, fragrances, and performance fine chemicals. Then Dynaction, a French holding company, financed a leveraged buyout.
“When Dynaction came, the door opened for acquisitions,” says Vincent Touraille, PCAS’s chief executive officer. And a string of them ensued, all targeting pharmaceutical businesses. PCAS purchased Expansia, the API-manufacturing wing of Beaufor Ipsen in France; Leiras Fine Chemicals, a division of Schering in Finland; VLG Chem, an Aventis API facility near Paris; and St-Jean Photochemicals, an electronic chemicals firm in Quebec.
Operating from headquarters in the Paris suburb of Longjumeau, PCAS opened sales offices in China and New Jersey and formed a partnership with and subsequently acquired Proteus, an enzymatic reaction specialist. Most recently, PCAS formed a joint venture with Nanosyn, a contract research firm near San Francisco.
Pharmaceutical chemicals currently account for about 62% of the business at PCAS, where sales reached about $208 million in 2010. The company’s other three businesses—fine performance chemicals; fragrances, flavors, and cosmetics; and new technologies, including materials chemistry—each make up about a third of the remainder. The nonpharma part of the business took a hit in 2009 when the company laid off about 75 employees in the face of falling profits. Touraille says the firm has since rehired with the return of profitability in those businesses most affected by the recession.
In the 20 years since being acquired by Dynaction, PCAS has amassed a variety of pharmaceutical technologies, including directed-evolution biotechnology, process development services, and discovery research, according to Christian Moretti, PCAS’s chairman. The company targets a particular range of products and type of contract, he says.
“There are a lot of big groups that come to us because we are very good at developing a process to between 1,000 tons and 1,500 tons,” Moretti says. “We are comfortable with that. Once the project goes above that, the customer takes it back. We are interested in this kind of project. It’s a win-win.”
Another French mainstay is Paris-based Axyntis. It was formed in 2007 when David Simonnet, a former head of Isochem, and other French fine chemicals industry executives teamed with private equity firm Argos Soditic to acquire the fine chemicals and dye businesses of Orgasynth.
Unlike PCAS, Axyntis did not go on the acquisition trail. The company, owned 15% by its managers, has been investing in research, according to Simonnet, its CEO. He notes that Axyntis has increased the number of APIs it produces from 15 at the time of the Orgasynth acquisition to 50.
Although other French suppliers have higher sales and more plants around the world, Axyntis is the largest custom API supplier operating in France, Simonnet says. “We are very close to one another in terms of capabilities. But from the criteria of number of plants cGMP-qualified, total vessels, and number of inspections by French health authorities, we are the leading company.” Axyntis has increased its number of employees by 50% since 2007, and the firm expects sales to grow 40% in 2011 to $91 million, nearly recouping its loss of sales over the previous two years.
Growth, Simonnet says, will accrue from the cultivation of new markets and the introduction of new products. “In this business, the business you lose, you don’t recover it usually,” he says. Axyntis, he adds, has also benefited from the addition of new services through an alliance with Kiralya, a French liquid-phase chromatography services firm.
François Baduel, head of fine chemicals at Axyntis and another former Isochem executive, notes that the company’s growth also stems from riding out the recession without cutting back. “We didn’t lay off anyone,” he says. “We kept our capacity up.” The company hired 20 people this year, including Rabiaâ Berkous, the new head of North American business. Berkous is a former business development manager at Novasep, another French firm that grew rapidly after a leveraged buyout.
In Novasep’s case, rapid growth stemming from a string of nine acquisitions has led to trouble. The company was launched in 1996 as a small group specializing in continuous chromatography. It acquired Prochrom, which solidified its lead position in chromatography, in 1999 and then went on to amass businesses in both separations services and API manufacturing. With its acquisition of Seripharm from Aventis, Novasep began manufacturing paclitaxel, a cancer drug.
The company merged with Rockwood Holdings in 2004, combining its businesses with those of Rockwood Holdings’ Dynamic Synthesis unit. The Rockwood businesses included Dynamit Nobel Special Chemistry, Rohner, and Finorga—which are German, Swiss, and French companies, respectively.
Rohner was divested shortly after the deal. Two years later, a management buyout led by the Dutch firm Gilde Buy Out Partners and France’s Banexi Capital Partenaires set Novasep on its own again, and the firm continued to make acquisitions, including Henogen, a biopharma firm.
The company issued bonds in 2009 to support its buying spree. But because of an increase in interest rates to about 10%, it ended up saddled with more than $500 million in debt. In December 2011, Novasep completed a refinancing through which ownership passed to bond holders including the U.S. investment funds Tennenbaum, Silver Point, and Pimco. The refinancing brought the company’s level of debt down to $196 million, according to Jean Blehaut, business development director.
In the midst of the refinancing, Minafin, parent company of the French API firm Minakem, proposed a merger with Novasep. The deal was rejected by Novasep’s shareholders. Blehaut says such a transaction would have tipped the balance of API production and separation services toward APIs at Novasep, where chromatography is still the key offering.
Despite reports to the contrary in the French press and elsewhere, Blehaut says, Novasep has not lost contracts in recent months. In fact, he says, the company has extended a contract with Gilead Sciences that was reported among the accounts it lost.
Frédéric Gauchet, president of Minafin, says his firm was “invited” by the French government to investigate prospects for the merger. “In France, it’s rather complicated,” he says. “When a significant company is in trouble here, it becomes a political issue.”
Minafin was formed in 2004 by Gauchet and a partner who bought SEAC, a fine chemicals division of the Australian firm Nufarm, in Beuvry-la-Forêt, France. Minafin went on to acquire Chemtec Leuna at the former East German Leuna site from U.S.-based Schenectady International.
In the face of such change, Isochem executives say their firm has managed to keep pace with its French competitors by relying on its specialized chemistry expertise, most importantly in phosgenation. The firm operates four manufacturing sites in France and one in Hungary.
Pushing off into the turbulent French waters, the company is well-known by drug industry customers. The challenge ahead, says Björn Schlosser, a former Aurelius executive who was named Isochem’s CEO after the acquisition, is transforming the company from being a part of a large, diversified group into a profitable midsize company.
“This means a leaner cost structure and a customer orientation. It means a change in management,” he says. The firm will also continue to deal with concerns such as the loss of patent protection on pantoprazole, a treatment for acid reflux that Isochem supplies to Nycomed. Pantoprazole accounted for only about 10% of the company’s $130 million in 2010 sales, compared with about 25% of sales five years ago.
Schlosser contends that Aurelius will give Isochem time to develop into its own company. If another API producer had bought the firm, he says, layoffs and cutbacks would have been likely as part of a consolidation. “For Isochem, it’s good that Aurelius is not looking for synergies. They are giving us time and funding to develop ourselves.”
J. Paul Madeley, managing director of Synth-Isis, a U.K. pharmaceutical chemicals consulting firm, notes that the acquisition by Aurelius will afford Isochem some stability after an extended period of instability as SNPE sought a buyer. “SNPE’s sale of noncore assets led to uncertainty and changes in focus,” he says. “Also, governments changed, which meant that the management of SNPE would change, so Isochem was pulled in different directions.”
On the other hand, France seems more supportive of the pharmaceutical chemicals industry than other countries in Europe, Madeley says, noting that the number of manufacturing sites in France has remained constant despite the changes of ownership. In contrast, the number of sites in the U.K. has declined, he says. And Isochem, which has maintained its reputation for reliability, is in a good environment for growth, according to Madeley.
Schlosser already sees Isochem making headway under its own sail. Although he will not divulge planned investments other than an expansion of phosgenation capacity at its Vert-le-Petit site, he says Aurelius has about $200 million to invest in its businesses and will direct some of it toward Isochem. Perception of the firm is of great concern given the recent changes, but Schlosser sees improvement on that front.
“There was more of a bad view of the company a year ago, directly after the takeover,” he says. “I get the impression now that some of the competitors are looking with more respect and interest in what is going on.”