Issue Date: May 27, 2013
Fine Chemicals Diversify
“The major part of fine chemicals is, and will always be, pharma,” says industry consultant Jan Ramakers. Nearly 70% of the roughly $100 billion-per-year market for fine chemicals is in active ingredients and intermediates for pharmaceuticals. In recent years, however, pharmaceutical markets have cooled off, and growth has slowed.
In response, ingredient suppliers are increasingly looking toward the 30% of fine chemicals going into agrochemicals, food, cosmetics, and electronics. These nonpharma markets are growing decently, with agricultural and flavor and fragrance chemicals among the healthier ones, says Ramakers, whose Scottish independent consulting firm tracks the fine chemicals industry.
Finding and working with new customers can be a challenge, but suppliers have good reasons—including growth opportunities, revenue stability, and capacity utilization—to look outside their comfort zone.
More and more, they are looking to agriculture. Agrochemical active ingredients and intermediates were a $7.7 billion market in 2012 that on average has been growing about 3% per year, according to Ramakers.
“We have ongoing demand in the pharma industry from the early stage up to industrial production,” says Udo Steinhauer, fine chemicals market director at France’s Novasep. “But a target of the company is to cover a larger part of the chemical industry through a more diversified customer portfolio.” Steinhauer joined Novasep in September 2012, about six months after new investors came in, to help develop its nonpharma business.
At present, about two-thirds of Novasep’s approximately $400 million in annual sales is to pharmaceutical customers, and one-third is in agrochemicals and other areas, Steinhauer says. The company already envisions a place for its synthesis and purification capabilities in making complex and high-purity molecules for electronics, cosmetics, and polymer additives. “We see a big potential for the company to grow in these markets,” he says.
Last year, the German fine chemicals company Saltigo realigned its activities to emphasize custom manufacturing for agrochemicals after its pharmaceutical business failed to meet certain targets. The company also handles some non-life-sciences projects and makes multicustomer products. Overall, its approach is bottom-up, rather than top-down. “We offer a toolbox of chemical reactions” to make customers’ molecules regardless of the end use, says Managing Director Wolfgang Schmitz.
This toolbox includes fluorination, chlorination, and phosphorus chemistries through sister businesses that are also part of Germany’s Lanxess, Schmitz says. Except for one unit that operates under the current Good Manufacturing Practices (cGMP) required for pharmaceuticals, Saltigo’s dozen large plants are suited for multipurpose manufacturing. To meet growing fine chemicals demand, it is spending about $26 million to expand isolation and filtration capacities in Leverkusen, Germany.
Saltigo supplies active ingredients and precursors for all three major agrochemical sectors—herbicides, insecticides, and fungicides. Although agricultural markets can be volatile because of regional, crop, and weather-related ups and downs, the overall trend has been up.
That wasn’t always the case. The agrochemical market in the 1990s and early 2000s was decidedly mixed, says Matthew Phillips, a consultant at the Scottish firm Phillips McDougall, but since 2006 the industry has experienced real growth. A key driver has been improving crop prices as a result of tight supply and growing demand, including the rapidly rising need for corn in the U.S. for ethanol production.
“The overall demand for crops, either for human or animal consumption, is increasing steadily year by year,” Phillips says. “Growth is not only being driven by volume but also by the increasing wealth of the farmer, which allows him to trade up to more advanced chemicals.”
The actual production of agrochemical compounds is relatively easy for custom manufacturers who are accustomed to making pharma chemicals. Most active ingredients call for similar chemistries and processing methods, although the production requirements, development cycle, and quantities of materials can differ.
Unlike pharmaceuticals, agrochemical active ingredients don’t have to be made under cGMP conditions, but custom synthesis firms still must maintain strict quality and purity standards. Because they are regulated products, little room exists for deviation in manufacturing, says David DeCuir, director of Albemarle’s fine chemistry services business. “For example, there are usually pretty stringent product specifications and rules for reactor cleanouts and the avoidance of cross-contamination.”
Agrochemicals follow a discovery and development path similar to the one for pharmaceuticals but with about three years lopped off. And development costs are about a third of the amount required for bringing a new pharmaceutical to market.
In agrochemicals and pharma, developers face similar uncertainties with regard to whether molecules will succeed. In both cases, they screen thousands of compounds in the discovery stage for every one that makes it through approval and onto the market.
“The agrochemical industry launches products faster than pharma does, and the quantities of materials are comparably higher than those for a pharma molecule,” Schmitz says. For Saltigo and some other contract firms, these quantities are a good fit for their larger-scale assets.
Although they make larger amounts of product, contract manufacturers must accept lower profit margins on agrochemical ingredients than they do on pharmaceuticals. The cost of goods as a percentage of the selling price is much higher for an agrochemical than for a pharmaceutical, Phillips points out.
One result of this cost structure is that companies selling generic agricultural chemicals can’t make inroads by dramatically lowering prices. That there won’t be severe price erosion when a patent expires is good for agrochemical companies that develop and launch the original products. In fact, many originators continue to make their off-patent products, which in turn can mean ongoing business for custom manufacturers. Their customers still seek price concessions but less so than for off-patent pharmaceuticals, suppliers say.
Although there is a market for generics, “the patent cliff is nowhere near as steep in agrochemicals as it is in pharma,” says Nigel L. Uttley of England-based Enigma Marketing Research. Uttley’s research shows that fully 42% of agrochemical active ingredients are off-patent but still sold as proprietary products by their originators. Only about 30% of agrochemical actives now sold have patent protection, and the rest are generic. Between 2002 and 2017, 137 agrochemical active ingredients will lose patent protection, Uttley says.
Despite good prospects overall, agrochemicals have a downside for fine chemicals suppliers. The number of active ingredients on the market has declined—displaced by new technologies such as seeds genetically engineered to resist pests or withdrawn because developers have opted not to pay to register them. Enigma tracks about 1,200 active ingredients, Uttley says, but only about 500 have any commercial significance.
Unlike for human health, “a lot of the needs in the agrochemical industry have been met,” Uttley says. As a result, instead of new active ingredients, agrochemical firms have put their efforts into developing new mixtures, formulations, and delivery routes. These new products can help them extend or generate patent protection and maintain market share.
Moreover, fewer companies are doing R&D, because, as in the pharmaceutical industry, consolidation has reduced the number of players. The six companies in the top tier—BASF, Bayer, Dow Chemical, DuPont, Monsanto, and Syngenta—each have annual crop protection chemical sales in excess of $3 billion.
“The top six agrochemical companies have about 70% of the market,” Uttley says. Japanese firms actually generate more new active ingredients than European and U.S. firms, but they are mostly small companies, he adds. And the active ingredients that come from Chinese firms tend to be only minor variations on existing ones.
The supplier side mirrors this limited customer base. Although hard numbers aren’t available, a smaller number of custom manufacturers serve the $45 billion-per-year agrochemicals sector than the nearly $1 trillion pharma industry, according to suppliers and consultants. Among those serving both markets, Schmitz assumes that just a “handful of Western-based contract manufacturers are certain to be around for the long run.”
Albemarle’s DeCuir concurs. In North America, “there are not many fine chemicals firms that participate in the agrochemical industry in a big way,” he says. Several factors limit involvement. “Agrochemical companies like to manufacture themselves, and there are few new products each year,” he says. “The opportunity in pharma may be bigger.”
Custom manufacturers regularly bemoan the lack of new chemical entities (NCEs) coming through the pharmaceutical pipeline and being approved. Yet the drug industry hit a 16-year high of 39 in 2012. In agrochemicals, just eight NCEs emerged last year, according to Phillips McDougall. “The trend in new products coming to the market is actually one of decline,” Phillips explains.
The number of new agrochemical active ingredients introduced per year has steadily decreased from the most recent high of 19 in 1997. Excluding China, “there are 28 new active ingredients in the development cycle, or within five years of introduction, whereas back in 2000 there were 70,” Phillips says.
Not only are fewer companies involved in basic agrochemical R&D, but many among them have shifted focus. “As a whole, the industry is spending more in seed and trait R&D than it is on crop protection,” Phillips says. He believes that today’s stricter regulatory environment is another hurdle to launching products.
“Altogether, the barrier to entry is getting harder all the time, and that has a negative impact on R&D,” he says. “The major companies, with fewer products coming to the market, are devoting a higher level of R&D expenditure than they were in the past to the defense of products when they go off patent.”
Although the number of products is on the decline, consultants and suppliers say agrochemical companies seem to be outsourcing more. “Agrochemical companies do a lot of development and scale-up work internally and then go externally for manufacturing purposes,” DeCuir says. As a result, contract manufacturers often do less process development work than they would for a drug product.
Phillips agrees about the trend toward more outsourcing but cautions that it’s a matter of where. “China has become a major manufacturing base for the major agrochemical companies,” he says. At the same time, rising environmental regulation and labor costs in China are resulting in some movement of manufacturing to other countries, he believes.
FMC’s $1.8 billion-per-year agricultural products business has a very clear-cut outsourcing strategy. It has contract manufacturers make all of its active ingredients, as well as intermediates and some formulated products, says Marty Kisliuk, global supply chain and manufacturing director. “We do all of our own research, process, and analytical development, and the intellectual property belongs to us,” he emphasizes.
FMC began moving in this direction about 15 years ago. In 2008, it completed the transition when it closed its last agrochemicals plant, in Baltimore, and began sourcing everything from partners in low-cost manufacturing locations, such as Asia. “We saw an opportunity, grabbed it, and it’s been very successful,” Kisliuk says.
Key to the effort has been putting energy and effort into effective communication, according to Kisliuk. “We do go through a pretty detailed and exhaustive checklist, and we start slow and test the relationship,” he says. “It takes time to build it, and we look for long-term partners.”
Although costs may be rising in China and other once-cheap locations, they’ve risen everywhere, and Kisliuk doesn’t think that the gap between manufacturing in-house and sourcing externally has closed much.
Syngenta draws on a mix of contract manufacturing relationships and in-house active ingredient production at company sites in Switzerland, China, India, the U.S., and the U.K. Notably, in 2010, the firm agreed to invest about $65 million to help significantly expand synthesis capability at the Leverkusen site of longtime partner Saltigo.
Although Syngenta and Saltigo won’t say more about this relationship, it clearly demonstrates the importance of contract manufacturers to agricultural chemical firms, and not just ones in Asia.
“Our customers need companies to support them, and they will strive for a mix of Asian and Western suppliers,” Saltigo’s Schmitz says. In agrochemical and other areas, Asian competitors have improved, especially with regard to safety, health, environment, and quality. “We take the top performers very seriously, and strong competition makes sure that you do not become too complacent,” he says.
“Our customers want to have a stable group of strategic suppliers that are reliable and sustainable sources for years to come,” Schmitz continues. Saltigo, meanwhile, strives for a broad customer portfolio including the big agrochemical companies as well as small and midsized firms.
Whereas agriculture is an expanding market for Saltigo, some custom manufacturers already active in the field are looking to other nonpharmaceutical markets for growth.
Only about 10% of the custom manufacturing business at Germany’s WeylChem Group involves making pharmaceutical intermediates; about 50% is in agrochemicals. “Our five-year plan is to grow more in the polymer and specialty markets,” says Andreas Maier, managing director of WeylChem International, which oversees the marketing activities of the group’s five companies. The group created a polymers business about a year ago to produce intermediates, additives, and specialty monomers.
Although agrochemicals is a good business, “we want to have a bit more balanced portfolio,” Maier says. Despite a desire to diversify, WeylChem isn’t turning down the opportunity to expand a plant in Frankfurt to make an undisclosed product for a large agrochemical customer.
Among WeylChem’s core chemistries are bromination, chlorination, fluorination, and phosgenation. Halogenated compounds are particularly popular as agrochemicals—about 30% contain fluorine. Handling hydrogen fluoride is becoming a lost art, Maier points out. “We are one of the last companies in the Western Hemisphere to still have some of these technologies.”
Opportunities in pharmaceuticals and agrochemicals are relatively easy to identify, but they can be difficult to capture because of the limited number of projects and fierce competition to win them, he explains. In other custom synthesis areas, it may take more effort to find new clients, but manufacturing their products can be “very quick and straightforward” compared with the more regulated sectors, Maier says.
Like WeylChem, France’s Isochem has embarked on a diversification strategy. About three years ago, soon after getting new owners, it began looking to expand outside pharma and agrochemicals, Sales Director Xavier Jeanjean explains. About 55% of its business is with the drug industry, and much of the remainder involves the production of an agrochemical at a dedicated plant. Isochem specializes in hazardous chemistries such as high-pressure hydrogenation and phosgenation.
Last year, Isochem acquired a small U.K.-based company called Wychem for its technology and access to new customers. Wychem focuses on aromatic chemistry and makes intermediates in volumes ranging from 1 to 1,000 kg. “They have a lot of inquiries, and that may help us to have contacts with new customers and to produce bigger quantities for them,” Jeanjean says.
Outsourcing is not as frequently practiced outside the drug and agricultural industries, but firms do come to contract manufacturers for specialized chemistries or to obtain relatively small quantities of material before deciding whether or not to invest in manufacturing themselves. “We are very flexible in terms of capacity and can make the first quantities and up to 100 metric tons,” Jeanjean says of Isochem.
Large chemical companies are more accustomed to outsourcing than smaller ones, Novasep’s Steinhauer adds. Large firms “have huge capacities, but when it comes to scaling up small products that are maybe less than 100 tons they often outsource,” he says. “If the product remains a specialty, production can stay with us over many years.”
With less need for process validation or trial results, nonpharma and non-ag custom manufacturing projects can move from the kilo lab to pilot scale and then to production in months rather than years. Because the time frame is shorter, “you have a much more intensive exchange of information,” Steinhauer says. Customers outside pharma also have a “more hands-on mentality,” he adds. “The relationships are similar, but process development is a bit more open and flexible.”
Although competition is growing from manufacturers in countries such as India and China, Steinhauer sees it mostly for large-volume, low-cost products. Customers still look to Western suppliers to make complex and niche products. “Specialty chemicals still have an important and growing role in Europe and the states,” he says.
Novasep wants to expand in some of these niche markets, including electronics, cosmetic active ingredients, and polymer additives. It also has found growing interest for its services in processing biobased products. For example, customers that have developed lab-scale processes are looking for purification services so they can go through initial testing, sampling, and product development, he says.
Albemarle also has seen more projects arising from renewable-product companies. Having produced a building block via a fermentation process, “customers often want to derivatize that chemical into something of higher value,” DeCuir says. This area is a good fit for Albemarle because it’s equipped to manufacture products at the thousands-of-tons scale.
In late 2012, the company completed an expansion of its Tyrone, Pa., facility. “It was specific for one customer and one product,” DeCuir says. “Their demand was expanding, and we needed to expand to keep up.” Now under way is a broader $30 million expansion of infrastructure and reactor capacity at the site. “When finished, we will have a 40–50% expansion,” he adds.
“We have had a lot of growth outside the pharma industry,” DeCuir says. “We are not just agrochemicals and pharma. We try to cast a wide net and look for customers that want long-term production of their products on the outside and where our technology and manufacturing match up well, regardless of the market.”
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