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Business

Sigma-Aldrich's New Five-Year Plan

The firm's SAFC fine chemicals group has set itself apart and is in position for growth

by Rick Mullin
February 20, 2006 | A version of this story appeared in Volume 84, Issue 8

Customer Focus
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Credit: Sigma-Aldrich photo
Nagarkatti's market intelligence laid the groundwork for a second business reordering.
Credit: Sigma-Aldrich photo
Nagarkatti's market intelligence laid the groundwork for a second business reordering.

Three years before Jai Nagarkatti's elevation on Jan. 1 to the position of chief executive officer at Sigma-Aldrich, he and Frank Wicks switched jobs. Nagarkatti, who had spearheaded the formation of Sigma-Aldrich's fine chemicals operation, moved to research chemicals, the bread-and-butter catalog business for which the firm is best known. Wicks, who headed the catalog business, went to fine chemicals.

This managerial cross-pollination sought to put Nagarkatti's customer-focused approach to work in the more off-the-shelf part of the business and bring Wicks's organizational skills to bear on a division that had been heavily restructured, according to executives at the company. It also gave Nagarkatti firsthand experience with the rest of the company he now leads.

The fine chemicals business was launched as part of a five-year plan begun in 2000 by former CEO David R. Harvey. Under the plan, Sigma-Aldrich divided its activities into three distinct businesses—laboratory chemicals, fine chemicals, and biotechnology. By 2003, the firm had managed to reach the financial targets it set for itself: 12% annual sales growth and 20% return on equity. This was achieved largely through the internal process and efficiency improvements associated with the reorganization, Nagarkatti says.

But by the end of 2004, the gains were deemed unsustainable. The company, had, in effect, managed to get a fine and pharmaceutical chemicals operation into shape and distinguishable from its catalog business just as the fine chemicals market started to nosedive, Nagarkatti acknowledges.

The research chemical side, representing 75% of revenue, was also taking a hit because of the economic downturn and limited government funding for research. But the fine chemicals business was a bigger concern during 2003-05. "A market we were used to seeing grow at 4-5% was actually growing at best at 1-2%," Nagarkatti says. "We decided that we could not just depend on the market coming back. We needed to start looking at how we want to run our business differently, take market share, and grow."

Last year, while running research chemicals, Nagarkatti took the lead in cuing the company up for another five-year plan. A team of 10 employees interviewed about 650 customers and reviewed internal business processes. "Our customers told us they were not spending much," says Nagarkatti. "They were trying to consolidate vendors, and they were trying to consolidate purchases."

The survey indicated that further reorganization was necessary, he says, but it also provided a blueprint. The team had determined that Sigma-Aldrich's research chemical customers fell into three distinct categories: "economic buyers" that made bulk purchases and required little support, biotech researchers who required a relatively heavy level of service, and a group in between. Then there were fine chemicals customers interested in small- and large-molecule contract manufacturing.

On the basis of this intelligence, the company realigned its research chemical and biotech businesses into three groups: research essentials, research specialties, and research biotech. Commercial-volume cell-culture medium and other pharmaceutical-related biotech businesses were moved to the fine chemicals group, which was newly segmented into four businesses: pharma, bioscience, high tech, and specialties.

The reshuffle followed a major acquisition last year: the JRH Biosciences division of CSL Ltd., a close rival to market leader Invitrogen in commercial-volume cell-culture medium, for $370 million. The deal boosted Sigma-Aldrich's standing with the pharma community and expanded its fine chemicals division to 25% of overall company revenue.

Fine chemicals had already embarked on a significant transformation under Wicks. In 2004, Sigma-Aldrich launched it as a division called SAFC, a move accompanied by a major branding campaign intended to differentiate the division from catalog sales. SAFC had recently completed two other acquisitions: Tetrionics, a specialist in high-potency actives, and Ultrafine, a drug development firm with early-stage pharmaceutical chemical production and process development expertise.

Nagarkatti's plan had other elements, including increasing the firm's sales, manufacturing, and distribution coverage globally. He says Sigma-Aldrich's business in Asia and elsewhere has grown twice as fast as it has in the U.S. and Europe over the past five years, with most of the growth occurring in India, China, and South Korea. The company will be on the lookout for acquisitions and partnerships in the region, he says. A $10 million laboratory in Bangalore, India, dedicated to pharmaceutical chemical process development, is scheduled to open by midyear.

There will also be a heightened effort to improve operational efficiencies. Nagarkatti says Sigma-Aldrich has taken $70 million in costs out of its operations over the past five years.

As part of the new five-year plan, which took effect in July 2005, Sigma-Aldrich has set a goal of 10% annual sales growth. "In markets that are likely to grow 2-3%, we are targeting 7% internal growth and 3% growth by acquisition," says Nagarkatti.

The company reported 8% organic sales growth for 2005, but the JRH acquisition brought reported sales growth to 18% Nagarkatti says the plan is "gaining traction."

SAFC, in particular, is logging real mileage. Not counting acquisitions, the division's sales grew roughly 15% in 2005. With acquisitions, the figure is 65%. By Wicks's estimate, SAFC has risen to number 10 in the fine and contract chemicals market, up from 25 three years ago.

The future looks bright, according to Wicks, partly because of its strong new standing in cell culture. Although the company had been producing research quantities prior to the acquisition of JRH Biosciences, it was not equipped to take on the commercial market, which is benefiting from growth in protein-based therapeutics. It now has commercial-scale operations in Denver, Pa.; Lenexa, Kan.; and Andover, England.

The small-molecule pharma chemical side of the business is at a crossroads, however. The company, with manufacturing plants in Gillingham and Manchester, England; Madison, Wis.; and Buchs, Switzerland, is at the point where it will need to invest in large-scale manufacturing.

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Credit: Sigma-Aldrich photo
Wicks
Credit: Sigma-Aldrich photo
Wicks

"Today, I can take anybody from preclinical up to Phase II," Wicks says. For some clients, he points out, the company can produce materials for Phase III trials. SAFC can, for example, produce commercial volumes of high-potency actives, thanks to a recently completed $12 million expansion at the former Tetrionics site in Madison. Still, he and Nagarkatti say they will have to broaden large-scale capabilities very soon to accommodate current customers.

Wicks hastens to add that such moves should not shift the company's weight significantly toward commercial-scale manufacturing. "I'm not trying to grow the SAFC business by being only a manufacturer of commercial drugs," he says. "It's one of the options I want to be able to provide. You can't live on it, because if you do, somebody will pull a project back in-house, leaving you with a lot of large kettles."

According to Wicks, the company has looked at a dozen sites in the U.S. and Europe and hopes to announce an acquisition in the months ahead. He says the target is a facility with about 100,000 L of production capacity, made up of a collection of smaller vessels.

SAFC's high-tech division—which produces fine chemicals for nonpharmaceutical applications, including coatings and electronics—is also primed for growth. Here innovation is key, Wicks says. The firm recently spent $3 million upgrading its plant in Sheboygan, Wis., to accommodate the expected growth.

Although it is hard to measure the direct impact of the branding push, Wicks says it was a key component of the leap from single-digit growth prior to the launch of SAFC to double-digit growth in 2005. The company's most recent effort to improve the market perception of SAFC is adopting the name Supply Solutions for its business in organic raw materials.

Wicks says SAFC is poised to increase its share of revenue contribution to Sigma-Aldrich. "If we do it right, and pick the right areas," he says, "we think we can grow faster than the research part of the business."

Dmitry Silversteyn, a stock analyst with Longbow Research, sees SAFC as a strong player in a beleaguered field. "It is one of the better performing businesses of its type in the fine chemicals and contract manufacturing arena," he says. "There is growth and high profitability."

Silversteyn says Sigma-Aldrich has done a better job of managing acquisitions than its peers have. "A lot of deals unraveled, with acquirers admitting that they made a mistake," he says. "Larger corporations—the Europeans such as Clariant, Rhodia, DSM, even Degussa—have seen their companies' overall performance suffer because of the shortcomings of their contract fine chemicals operations. That has not been the case with Sigma-Aldrich."

Overall, the company continues to generate cash, thanks in part to its success in e-business, Silversteyn says. He notes that Sigma-Aldrich had been pronounced dead on the Web when competitors such as SciQuest and Chemdex emerged in the late 1990s; instead, the company prevailed.

Nagarkatti clearly relishes beating the odds on the Web as well as in fine chemicals. "If you look at the fine chemicals market today, people are exiting the business," he says. "One could ask, 'Why is it that we are getting into this situation while people are getting out?'"

The trick, he says, is diversity: having the technological wherewithal, financial strength, and customer focus necessary to serve customers in various markets. "Not just pharma but biopharma and high tech," he says. "That's why we continue to invest and feel positive about it."

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