Vertellus Adds Chemistry Horsepower

Like the cars that scream around the Indianapolis 500 track a few miles from its headquarters, specialty chemical firm Vertellus is packing extra power under the hood these days.

Vertellus added considerably to its chemistry horsepower in the past six months by first acquiring U.K. fine chemicals maker Pentagon Chemicals and then Dow Chemical’s sodium borohydride business.

The deals brought facilities, chemistry capabilities, and product lines that Vertellus did not have before. The firm says the acquisitions will expand its offerings beyond the pyridine chemistry that has long dominated its portfolio.

Owned and bankrolled by Chicago-based private equity firm Wind Point Partners, Vertellus was formed in 2006 by the merger of U.S. pyridine producers Rutherford Chemicals and Reilly Industries. It is the world’s largest producer of pyridine and picoline.

The company’s annual sales today approach $800 million. Pentagon added about $60 million in sales, while the sodium borohydride business brought approximately $100 million. Vertellus doesn’t disclose profit figures but indicates that, even before the acquisitions, profits had been rising.

“It is always the goal to move into higher-margin products,” says Chief Executive Officer Rich Preziotti. He is hoping to boost the firm’s profit margin—the ratio of profits to sales—up from a “midteen” level today to about 20% in the next two years. Both acquisitions will help, he says.

Linda M. Hicks, Vertellus’s head of global technology, has seen huge changes at the firm, and she likes what she sees. “The two recent acquisitions mark a major step in the company’s strategy to diversify away from pyridine and picoline. We are transitioning the company,” says Hicks, a chemical engineer who, via Reilly, has been with the firm for 31 years.

Vertellus and Pentagon have some overlapping capability, such as anhydride chemistry, but Pentagon’s phosgene chemistry is new to the Indianapolis-based firm. The addition of phosgene know-how will allow Vertellus to broaden its range of pharmaceutical and agricultural chemicals, Preziotti says, including the production of active ingredients.

Prior to the Pentagon acquisition, Vertellus only made intermediates for these markets. “This was one of the attractions of Pentagon,” Preziotti says. “We have more tools in the kit.”

Meanwhile, the February acquisition of Dow’s sodium borohydride business provides Vertellus with a workhorse reducing agent for making intermediates used in two of the markets where Pentagon plays—fine chemicals for drugs and agriculture—as well as industrial products.

But sodium borohydride is not the cheapest reducing agent on the market. “It is a chemical that has value, but it is limited value as there are other reducing agents that could be cheaper and effective,” says Girish Malhotra, president of Epcot International, a fine chemicals consulting firm based in Pepper Pike, Ohio.

Moreover, although Vertellus’s decision to build on the strength of its pyridine and picoline franchise might be a good way to develop the firm’s drug ingredient business, Malhotra also warns that it’s not a foolproof approach.

“Vertellus might be the biggest producer of pyridine-picoline chemistries, but the question is, ‘Can they vertically integrate these chemistries in a way that really capitalizes on their technology?’ There are other companies in pyridine chemistries who can give them a run for their money,” Malhotra says.

Preziotti remains confident, however, that the two acquisitions will provide market openings as well as new technologies. “We have a diverse set of chemistry capabilities, and we are constantly working to develop new applications for our existing products,” he says.

In addition to building its fine chemicals activities, Vertellus also hopes to expand its business in additives for applications such as polymer modifiers and antimicrobial compounds for personal care products.

And in Vertellus’s legacy pyridine-picoline business, cost control is the name of the game. “Here the firm’s strategy is all about growing markets and all about maintaining cost advantage through yield improvement and cost reduction,” Preziotti says.

The acquisitions have reduced the share of Vertellus’s sales from pyridine and its derivatives—used notably to make the broad-spectrum herbicide paraquat—from 60% to about 40%. They have also pushed up the firm’s share of sales to customers in the life sciences to 65%.

Vertellus aims to do more acquiring, but not in the near term. “We’re taking a break right now to digest these acquisitions,” Preziotti says. “We’ve still got a lot of work to do.” But the plan is to make the company bigger, he adds.

The original creation of Vertellus in 2006 involved combining the entrepreneurial but decentralized Rutherford chemical business—then owned by Cambrex—with the centralized but conservative, family-owned Reilly. Vertellus has attempted to take the best of both cultures, Preziotti says.

Like many things at Vertellus, R&D has changed in recent years. There is now a higher sense of urgency to develop novel technologies, according to Hicks. “As a company, you can’t rest on your laurels. We have a much shorter window in which to turn over our technology,” she says.

Vertellus doesn’t have any blockbuster products coming through its R&D pipeline. Rather, “there are lots of niche new product opportunities such as new applications of existing products,” Preziotti says. The firm has between 20 and 30 research projects under way at any one time.

About 50 engineering and research scientists work in Vertellus labs in Indiana, Michigan, New Jersey, and the U.K. Additionally, the company has a global team of more than 70 quality-control experts, including analytical chemists.

The firm considers itself well-placed geographically for recruiting new scientists. Indiana universities on which it draws include Purdue and Notre Dame. The other major hirer of chemists in Indianapolis is pharma company Eli Lilly & Co. Although Vertellus has lost some good chemical engineers to the fracking and petrochemicals boom taking place along the Gulf Coast, it has been able to attract some scientists from Lilly.

One researcher to cross over is senior research scientist David Hay. At Lilly, Hay recalls, he would work on a narrow slice of a project and then hand it over to another department. But at Vertellus, he is involved from the beginning of a project to the end and even on to the plant stage when full-scale production begins. “It is both rewarding and thrilling to be actively involved in every step of the process,” he says.

Preziotti is hoping that, following the recent acquisitions, a slew of new products and chemistries will soon make their way to full-scale production. Whether by future acquisitions or in-house activities, Preziotti says he has every confidence that Vertellus will continue to grow and enhance its “capability under the hood.”