Fine Chemicals: Optimism Prevails Over Uncertainty

The fine chemicals sector is showing strength going into 2013. Manufacturers of active pharmaceutical ingredients are optimistic about the year ahead. Agricultural chemicals are on track for another good year, and some industrial fine chemicals manufacturers, especially electronics industry suppliers, see a particularly strong 2013.

There is, however, an air of wait and see regarding investments in the sector. That is due to the volatile regulatory and tax landscape in the U.S. at year’s end. “We had a strong, but not a record-breaking, year,” says Lawrence D. Sloan, CEO of the Society of Chemical Manufacturers & Affiliates, a trade association. “Members are doing reasonably well considering all the uncertainty.”

The society’s members, primarily small fine and specialty chemical companies, are concerned about changes in taxation, according to Sloan. He notes that many companies are “S corporations” according to the Internal Revenue Service’s tax code, where income taxes are paid by individual shareholders rather than the corporation. With the bill passed earlier this month to avert the fiscal cliff, family-owned companies with profits of more than $450,000 will see their taxes increase. That could lead firms to put off hiring and making investments, Sloan says.

Although the fiscal cliff agreement extends R&D tax credits until the end of 2013, it also pushes off decisions on federal spending cuts, leaving manufacturers to guess which areas of the economy Congress and the President will protect or leave vulnerable to the budget knife, Sloan points out.

Still, company executives agree that 2013 will be an up year for fine chemicals. At Cambrex, CEO Steven M. Klosk says he is cautiously optimistic. In 2012 the company signed what may turn out to be the largest contract in its history. The deal, with a drug company, should bring in an estimated $20 million in revenue this year and continue into 2014. Business in the U.S. will likely be stronger than in Europe in 2013, Klosk says, although both regions should benefit from a return of outsourced manufacturing from China and India.

The return of work from Asia is a significant factor in a turnaround at Ampac Fine Chemicals, according to the company’s president, Aslam Malik. So is the demand for more complex chemistry. Ampac has been installing semiworks—facilities that produce quantities between pilot and full-scale commercial output—Malik says, to boost its business in high-value, low-volume chemicals.

David Ager, principal scientist at DSM, says his company is looking forward to a good year in pharmaceutical contract manufacturing, especially for products in early-stage development. “There is funding, and it’s full steam ahead,” he says.