Custom chemical manufacturing: coping with adversity
Beleaguered suppliers try to regain the edge with niche products, research partnerships, expanded services and Asian production deals.
By Gordon Graff -- Purchasing, 3/4/2004 2:00:00 AM
Suppliers of custom chemical manufacturing products and services faced a bruising 2003, with depressed sales and earnings for many sectors of the business. But leading players hope that their ongoing strategies—switching to specialized and high-value products, adding full-service capabilities, partnering with other firms, and building new facilities in Asia—will begin to pay off in 2004.
The custom and contract chemical manufacturing business over the past few years "has been marked by overcapacities, increased pricing competition and the growing presence of offshore producers," says Peter Nagler, president of Degussa's exclusive synthesis and catalysts unit. "Certainly," he adds, "a determining factor has been the lower number of drug approvals."
The adverse conditions in the industry have claimed at least one high-profile casualty—Lonza CEO Markus Gemuend , who announced in January, 2004 that he was stepping down from that post in the wake of disappointing earnings. "The last 18 months have been particularly difficult as the custom manufacturing business remained under pressure," said Lonza chairman of the board Sergio Marchionne when Gemuend's resignation was disclosed.
In response to hard times, contract manufacturers are focusing more and more on niche products, sometimes forming alliances with, or even buying, outside companies in order to bring the needed expertise in-house. Avecia Pharmaceuticals, for example, has for the past two years invested in such technologies as immobilized chiral reagents, encapsulated palladium-based catalysts, and biocatalysts for synthesizing chiral reagents. In the biocatalysts effort, the company has signed an R&D agreement with Germany's IEP GmbH, a specialist in bioreduction technology and chiral hydroxyl compounds. Of key importance in today's custom chemical market is "clearly differentiated technology that adds value," notes Peter Jackson, Avecia's vice president for pharma products. He adds that the company is seeking manufacturing and development partners with expertise in small molecules and biotechnology.
Biocatalysts, which often allow less complex syntheses and lower production costs than conventional chemical catalysts, are also a target of DSM Pharma Chemicals. The firm, headquartered in Sittard, Netherlands, recently disclosed a collaborative agreement with biocatalyst specialist Diversa Corp., San Diego, Calif. for discovery and development of biocatalysts, which will be used to synthesize pharmaceutical intermediates. DSM says it has already developed more than 25 industrial-scale production processes using enzymatic catalysts.
A hot area of contract chemical manufacturing today is chiral catalysts. These allow preferential syntheses of the pharmaceutically active isomers of drug molecules and block production of their inactive mirror-image isomers. One of the most recent developments in this field is a partnership, disclosed in January, between Chiral Quest Inc., a U.S. developer of chiral molecules, and a Dutch company, Avantium Technologies, which scales up processes for the chemical and life science industries. Under the pact, Chiral Quest's chiral catalysts will be used by Avantium in its high-throughput experimentation and simulation technology.
In their drive for specialization, some contract manufacturers have shed operations that are either commodity-oriented or which demand high levels of investments that are best directed elsewhere. A case in point is Clariant, which last year said it would concentrate all its efforts on surface and color technologies, its traditional strengths. Simultaneously, the firm announced that it was putting its cellulose ether and electronic materials businesses on the auction block, and closing four agrochemical plants.
Clariant has been actively developing advanced excipients (inert substances that aid delivery of active drug ingredients) using a high-pressure mixing process called microfluidization. The company says its excipient work, being carried out in Italy, is aimed at new types of coatings that will allow acid-sensitive drugs to pass through the stomach unaffected, or keep irritating drugs from being released in the stomach.
To entice their customers into long-term relationships, custom manufacturers have for the past several years been acquiring the capabilities to be full-service suppliers, providing everything from basic research and scale-up services to cGMP manufacturing. The trend continues. GFS Chemicals Inc., a Columbus, Ohio-based manufacturer of inorganic chemicals, organic specialty intermediates and analytical reagents, has just enlarged its capacity to handle anhydrous materials with the completion of a 400 sq. ft. facility for drying and packaging moisture-sensitive materials used in electronics, batteries, pharma, biotechnology and agriculture.
In the past, "people would buy an inorganic salt from a supplier and then send it someone else to have it dried to their specifications," says Steel Hutchinson, president of GFS. But the new facility, he adds, "allows us to provide customers with a kind of soup-to-nuts service" that includes not only manufacturing and drying reagents, but also packaging them in pre-weighed, moisture-proof containers that are ready for use in production reactors. Such pre-weighed packages are growing in popularity in electronics, pharma and chemical processing, Hutchinson says, because traces of moisture, which can reduce reagent potency, can be absorbed by anhydrous chemicals as they are transferred from conventional bulk containers.
Rhodia Pharma Solutions is also expanding its service offerings. The company has just consolidated its North American pharmaceutical development services at its 101,000 sq. ft. Chamber Works site in Salem County, N.J. Among the advantages of the move, says Rhodia, will be to feature in one location capabilities that the firm did not previously offer in North America and to expand its early-phase process chemistry services. Some of these newly centralized capabilities include phosgenations, hydrogenations, cryogenic processing, larger-scale processing, and other services that used to be carried on at other locations.
As for the challenge from lower cost Asian producers of pharmaceutical ingredients, some North American firms are opting to align themselves with the competition rather than fight it. The latest company to move in that direction is JFC Technologies, Bound Brook, N.J., a researcher, developer and manufacturer of pharmaceutical and personal care products. The company broke ground at the beginning of January for a pharmaceutical manufacturing unit in NingBo, China. Equipment in the new facility, which is due for start-up by the second quarter of 2005, will range in scale from 500 gallons to 1,500 gallons. Jamie Schleck, president and CEO of JFC told a press conference at the recent Informex meeting in Las Vegas that the new unit "will enable our customers to leverage the low-cost operation structure of China while maintaining a Western-style commitment to cGMP."
Regardless of whether all these initiatives bear fruit sooner or later, custom chemical manufacturers say several developments bode well for the immediate future. Some late-phase drugs are soon likely to move through the FDA approval process, which should improve business, notes Degussa's Nagler. Also promising for custom manufacturers, he adds, are the growth of "virtual" pharma companies—firms with proprietary products or technologies but no manufacturing infrastructure.
This year should see "a return to growth" in the contract manufacturing sector, predicts Thomas E. D'Ambra, CEO of Albany Molecular Research, Inc., an Albany, N.Y. custom chemical manufacturer. He bases the forecast on a "greater than anticipated" demand for contract services that began in late 2003, which he says was caused by "an improving climate for our customers, an overall strengthening of drug discovery and development initiatives, and an end of the year customer budget surplus." Nonetheless, D'Ambra cautions that underselling by overseas rivals and mounting cost pressures on customers will create "an increasingly competitive environment for many of our services."
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