New strategies, new allies for a new era
Staff -- Purchasing, 11/4/2004 2:00:00 AM
Specialty chemicals are a diverse group of products with some very inviting opportunities and more than a few risks. In order to exploit these opportunities and sidestep the pitfalls, specialty chemical makers are carefully tailoring and shaping their business strategies. In particular, they are acquiring and divesting businesses and technologies, building new facilities, offering new services, expanding their R&D and forming partnerships with other firms.
Among the fastest growing sectors in specialty chemicals—defined as products with specific and unique performance characteristics—are active pharmaceutical ingredients, nanomaterials and enzymes, according to SRI Consulting, which reports annual expansion rates of 5% or more for these product classes. Also showing vibrant activity, says the firm, are dyes and pigments for the inks and toners in laser and inkjet printers, high-performance thermoplastics, and radiation-curable coatings. On the other hand, SRI identifies six specialty chemical industries with growth rates of 1% or less: pesticides, textile chemicals, lubricating oil additives, synthetic dyes, rubber-processing chemicals and mining chemicals.
In the burgeoning pharma area, specialty chemical suppliers are keen to attract and retain their customers from the initial drug discovery phase through commercial production. As a result, many of these suppliers are making acquisitions that can fill out their roster of services. For example, Sigma-Aldrich Fine Chemicals, St. Louis, Mo., this year acquired two smaller companies—Ultrafine, based in Manchester, U.K., and Tetrionics, located in Madison, Wisc. David Feldker, vice president at Sigma-Aldrich Fine Chemicals, says the deals were the culmination of a four-year gap analysis at the company to find out which of its pharma services needed augmenting. Absorbing the smaller firms, he adds, "added to our current API (active pharmaceutical ingredient) and advanced intermediates manufacturing capabilities, which gave us better penetration into those markets."
Outside drugs, there have been other important specialty chemical acquisitions this year. One is Degussa's purchase of amino-acid producer Agroferm Hungary from its former owner, Japan's Kyowa Hakko Co. The move bolstered Degussa's already strong position in amino acids for animal nutrition. Additionally, Ciba Specialty Chemicals bought Finland's Raisio Chemicals, a supplier of paper chemicals. Ciba hopes the purchase will enable it to expand its operations in this segment into Scandinavia and Russia.
Specialty chemical manufacturers are also on the prowl for technologies to acquire. Lonza, for one, sends out scouts with the mission of buying or licensing outside technologies, says Peter Oprandi, vice president of supply chain management at the Fair Lawn, N.J.-based company. The aim, he adds, is to strengthen Lonza's line of germicidal additives for cleaning and disinfecting solutions.
On the chopping block
Conversely, companies are playing to their strengths and are quick to cut operations in areas where they are second-tier players. Specialty chemicals giant Clariant, for instance, announced its plan, in the summer of 2003, to prune businesses outside its core competencies of masterbatches, performance and process chemicals, textile chemicals and coatings. The firm has made good on that promise by several divestitures in the past few months. They include the sale of its electronic materials business unit, and its share of an agrochemical company.
Some cutbacks are also occurring in production capacity. Crompton, for example, announced in August that it would sharply curtail capacity of two grades of chemicals it sells into the rubber tire market. Explaining the move, the company blamed a run-up in raw materials costs, which Crompton chairman and CEO Robert L. Wood said has made the rubber chemical products unprofitable.
But capacity expansions vastly outnumber cutbacks. And the buildups are usually keyed to current growth markets that companies are targeting. Simon Medley, vice president for fine chemicals at BASF in North America, cites three recent investments that will enhance BASF's position in fine chemicals. In August, he says, the company started up a 40,000 metric tons/year production plant for citral, a building block for vitamins A and E, carotenoids, and a variety of aroma chemicals. The unit, located in Ludwigshafen, Germany, replaced an existing 10,000 metric tons/year citral plant. BASF is also expanding its Shreveport, La. facility that produces prescription-strength ibuprofen tablets. And a new 100,000 metric tons/year vitamin B2 plant in Gunsan, Korea is BASF's first in that country to produce under the strict GMP (good manufacturing practice) rules required by most regulatory agencies worldwide.
Most of the larger participants in specialty chemicals are also striving to become full-service suppliers, especially in the drug discovery and development area. However, advises Feldker, "you have to be cautious about claiming you can do everything for everyone in the marketplace." Typically, he notes, "people want to know what you're really best at." Feldker says Sigma-Aldrich's fine chemicals unit has built up its reputation in APIs and intermediates through acquisitions and investments in personnel and equipment. Often, he says, a company can leverage its strengths to expand its services. For example, Feldker notes that Sigma-Aldrich has long had a secure position supplying chemicals to the research community. "What we've been able to do," he says, "is take those relationships and expand them into development and manufacturing."
Much of the research in specialty chemicals, especially in pharmaceutical development, is done under contract. But in their noncontract pharma R&D, chemical producers are aligning their efforts with market trends. For example, Medley notes that there is a shift toward newer classes of active ingredients which are poorly soluble or consist of large molecules. He says that BASF is working with drug formulators to develop new excipients (inert ingredients that form the bulk of tablets, capsules or creams) that can be used with these newer ingredients.
Another trend in biopharmaceuticals is an increased demand for ingredients of nonanimal origin. Driving this demand are fears over BSE and other diseases that could potentially be passed from animals to humans. Feldker says Sigma-Aldrich's recent acquisitions have given it the capability to produce synthetic versions of trypsin, cholesterol and other large molecules that are usually derived from animals.
Outside pharmaceuticals, specialty chemicals R&D is less tied to advanced technologies. At Lanxess, the new spinoff from Bayer that sells polymers, performance chemicals and chemical intermediates, the development of new products from scratch will be "more the exception than the rule," company executive Ulrich Koemm told a press conference last June. Instead, he said, the company will stress more efficient production processes and improvements of its existing products. (Lanxess declines to discuss details of its current specialty chemicals research.)
Deals with rivals
To move products out of the laboratory and into the commercial pipeline, many specialty chemical companies have formed partnerships with other firms, sometimes even their rivals. For example, earlier this year Lonza signed a comarketing and collaboration agreement with another firm, RNA-Tec, of Leuven, Belgium, involving a class of synthetic compounds called RNA-oligonucleotides. Both companies have technical expertise in and market ambitions for these compounds, which stimulate the immune system to fight cancer, allergies, respiratory diseases and other disorders. But the firms concluded that cooperation, which would speed up entry of these products into the marketplace, would benefit both partners.
A lot of factors have to be weighed in deciding whether to partner with another company in the same business, notes Lonza's Oprandi. "At the end of the day, you're still competing with them," he says. Collaboration makes sense only when both parties have complementary strengths, Oprandi advises. "Sometimes," he says, "we find we have the marketing and sales know-how and our partner has the know-how to make something more efficiently. So it's a good match."
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