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FINE CHEMICALS Peer reviewed article

Ian Grayson The madness of fi ne chemicals

IAN GRAYSON Member of Chimica Oggi / Chemistry Today’s Scientific Advisory Board Evonik Industries AG, c/o 20 Albert Street, Western Hill Durham, DH1 4RL, United Kingdom

INTRODUCTION small products and a completely different marketing structure. In the end the BP fi ne/ business was sold to the en, it has been well said, think in herds; it will be seen management buyout Inspec in 1992, and the Shell subsidiary joined that they go mad in herds, while they only recover Inspec a few years later. After several more sales and acquisitions, their senses slowly, and one by one” (1). When Charles the individual parts of these businesses are now divided between "M th Mackay wrote these words in the 19 century, he illustrated his several owners. A history of just one of these sites, in Hythe, United theme with many of the fi nancial bubbles and episodes of mass Kingdom, is given in Table 1. hysteria from earlier periods. Economists have since applied his ideas to subsequent fi nancial bubbles, for example the dot-com boom at the close of the 20th century. Mackay would surely have recognised the history of the fi ne chemicals over the last 20 years as a further example of “the madness of crowds." 22 Peter Pollak, in his excellent book on the fi ne chemicals industry (2) describes very well the facts and fi gures of the turbulence of recent years, but I think he misses the human element Table 1. History of ownership of the Hythe Chemicals Site. of the effects of these changes. Many of those who have lived through these times have come to terms with frequent changes of ownership and company THE RUSH INTO FINE CHEMICALS direction and strategy; indeed many have acquired collections of different business cards without ever changing their desks. Others This same pattern was later played out in the fi ne chemicals sector, have lost their jobs and had to move several times as a result of the sometimes involving the same players. Those companies that made seemingly inevitable belt-tightening which followed in the wake of the move into fi ne chemicals earlier appear to have made better this merger and acquisition activity. How much value has been lost and longer-lasting deals than later entrants. For example, DSM’s in the western fi ne chemicals industry over the last ten years, both in acquisitions of Andeno (1987) and Chemie Linz (1996) have been terms of the physical assets, laboratories, plant and products, and in more successful than the same company’s purchase of Catalytica terms of the human assets, the chemists, engineers and production (2000). DSM announced in 2003 the mothballing of primary operators who have worked in the fi ne chemicals industry? It is pharmaceutical at the Greenville, NC site, which diffi cult even to give an estimate from today’s perspective, following was part of the Catalytica acquisition. Those coming later to the fi ne the turbulent buying, selling and closing of plants, and the tangled chemicals race were not so fortunate. In what Pollak describes as web of ownership of the remaining production sites. the period of “irrational exuberance” which runs from about 1997 to 2001, many “traditional” chemical companies felt that they had to acquire a fi ne chemicals subsidiary, almost at any cost. This “rush to THE SPECIALITY CHEMICALS BOOM avoid being left out” is characteristic of a market bubble. By 1999- 2000, acquisitions appeared practically every month. In January Of course, this recent boom in fi ne chemicals was not the fi rst. 2000, an article in Chemistry in Britain (3) described the rapid sale of Around 1980 there was a rush into “specialities” (in those days the United Kingdom chemical companies to foreign owners. This article distinction between fi ne chemicals and speciality chemicals was was out of date almost as soon as it was printed. purchased more blurred than it is today). Large companies BTP (itself a relatively new group of companies) for a price equal to 28 such as Shell and BP branched out by acquisition of smaller times earnings per share, also in January 2000. Was this a desperate companies in the belief that there were opportunities in the effort by Clariant to expand in fi ne chemicals, following the failure of specialities sector that they, as large and effi cient companies, a rumoured bid for Laporte the previous year? The Clariant/BTP deal would be able to generate highly profi table business from. It was followed in quick succession the same year by Rhodia/ChiRex, turned out that a large corporation with a few major products DSM/Catalytica and Degussa/Laporte. The fi ne chemical mergers (large ) was not able to simultaneously manage of 2000 have become case studies for management students, for its core business together with smaller units operating with many example at INSEAD (4).

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FINE CHEMICALS

Many of the companies making these acquisitions described their and the necessity for big chemical companies to be involved in new capabilities in similar terms with showcase presentations at fine chemicals. There was an expectation that concentration on Informex or CPhI. They emphasised the number of new sites, the technology capabilities and specialised equipment would allow for variety of manufacturing scales available, and the new technologies differentiation in the industry, and that this would lead to increased which they had acquired, particularly chiral technologies. They also business. By 2001, the projected annual growth figures had fallen to described the breadth of their product pipelines of intermediates for 5 percent, but managers in the subsidiaries were still pharmaceuticals, , and other fine chemicals, which talking about positive future growth for their businesses, buoyed by had been acquired with the new sites. This was also the era of the restructuring and a concentration on new technologies, particularly “one-stop shop” concept, where fine chemical suppliers intended to chiral synthesis (8, 9). However the cosy relationship between the fine supply pharmaceutical companies with intermediates and APIs from chemical supplier and the pharmaceutical customer had started pre-clinical and early clinical lab quantities, through pilot plant scale to go sour. As Rob Bryant put it at a conference in 2001; “There is a and then to full manufacturing scale, by moving the products from crisis of confidence in pharmaceutical fine chemicals. Contracts have one site to another, as the demand increased. However, this was not been cancelled and relationships broken off. There are no partnerships the view of the major pharmaceutical companies, who had been in this industry, only master-slave relationships. There are no partnerships continually improving their process development and between lions and lambs” (10). The crisis occurred because of the departments over the previous ten years. coincidence of several factors, which were not realised at the time, either Back in the 1980s and early 1990s there was a seller’s market for by the large companies purchasing fine chemical companies, or by the pharmaceutical intermediates. At this time, the intermediate analysts. Some of these factors are listed below. manufacturers, then mainly small fine chemical manufacturers with 1. There was a realisation that the growth in new pharmaceutical APIs experienced development and production staff, often knew more was not going to continue, and the number of new drugs launched about the chemical process to make an intermediate than the each year dropped dramatically from 2001 onwards, only really pharmaceutical customer, and were able to suggest and implement recovering in 2005/2006 and 2009 (Figure 1). Together with a improvements and even changes in route relatively easily. This had number of well-publicised withdrawals of drugs in late stage clinical changed by the end of the century, as a buyer’s market developed. trials, this led to a re-evaluation of the size of the pharmaceutical The pharmaceutical companies expanded both their process outsourcing market, leading to the conclusion that there was development departments, which produced detailed technical production overcapacity in the fine chemicals industry. packages for their suppliers to implement, and their outsourcing 2. The fear of the millennium bug (another example of popular departments, which ranked and selected suppliers on the basis of mass hysteria) led pharmaceutical companies to increase complex questionnaires and evaluations, and then elected some their stocks of intermediates in 1999, because they feared companies to be “preferred suppliers”. This selection of outsourcing a breakdown of suppliers and transport systems in 2000. This partners was repeated as the final product moved through the occurred at the height of the merger exuberance, and so led clinical phases, and at each stage involved technical and quality to increased sales and profit margins for fine chemical suppliers. audits, as well as close scrutiny of the proposed pricing structure and When the predicted collapse of computer systems failed to delivery timeline. The big pharmaceutical companies were now very materialise, the pharmaceutical firms reduced their orders, and 24 much in control of their product development pipelines, and were depleted their intermediate stocks, leading to reduced sales not interested in the one-stop shop idea. Rather they wanted to for the newly purchased fine chemical subsidiaries of major establish preferably two or more suppliers for each key intermediate chemical companies during 2000, with a knock-on effect into at each stage of development, and were focussed on the three key subsequent years. aspects of cost, quality and delivery time for the intermediate or API 3. The dot-com bubble burst early in 2000, resulting in major stock at each stage. market falls, and a general disillusionment among investors in The big new fine chemical conglomerates found that their new high technology companies. This also had an effect on the share acquisitions took longer to integrate than they envisaged. Because performance of chemical companies, and led to a fall in the of the rapid growth of relatively young companies such as BTP and book value of their fine chemical subsidiaries. Inspec, their individual sites had not been fully integrated before they 4. As well as the merger and acquisition mania in fine chemicals, were acquired by bigger companies (Clariant and Laporte). It was there was an increase in mergers and consolidation in the a major task to harmonise operations with sites in different countries, pharmaceutical industry. With each merger, the pipelines of and with different histories and operating cultures, before setting out the individual companies were examined, and only the best to transfer products from one site to another. candidates were taken forward. This led to a reduction in the number of products in clinical trials, and a fall in the number of pipeline products for the fine chemical suppliers, who had THE NEW MILLENNIUM – DISILLUSIONMENT expected to manufacture these candidate APIs.

The year 2001 marks the start of the change in fortunes for the fine chemicals industry. The last of the major acquisitions were being completed, and new plants were still being constructed (at least one European manufacturer presented virtual tours of their new plant – still under construction – at Informex 2001). At the same time, industry analysts were changing their story. The change in sentiment can still be followed, for example in the archives of Chemical & News. In 1998, the talk was of increasing outsourcing in pharmaceuticals, and an annual growth rate of 10 percent in the industry (5). At the same time, the emergence of one-stop shops, for example Catalytica, was highlighted (6). By 2000, it was reported that outsourcing had “suffered an abrupt slowdown” and that the 10 percent growth figure was not holding up (7). However, the mergers were still continuing through 2000, and there were new entrants in the fine chemicals Figure 1. New Drug Launches 1996 – 2010 (11) sector. Manufacturers were talking about healthy order books,

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A belief in the effect of technology Dow, Akzo Nobel and Cambrex all made major investment in the Another factor in the development of the fine chemicals industry in production of biologics (14). Even in 2003, some small molecule the 1990s and early 2000s was a rise in the number of new chemical manufacturers were warning about a potential bubble, similar to and processing technologies coming out of universities, start-up the one in fine chemicals (13) and this was indeed the case. For companies, and the fine chemical manufacturers themselves. , “the product is the process”, and there is a Often these were touted as solutions, which would improve the long lead time for construction of plant, a need for fresh validation efficiency of the fine chemicals industry, even though manyhad at each scale operated, and dedication of plant equipment for not been tested beyond the laboratory bench. Of the chemical an individual process. The quick change between products usual in technologies, chiral chemistry (which included asymmetric chemical conventional fine chemical plants is simply not possible for biologics. , , and more efficient resolution techniques), At the same time, biological processes were being improved to ionic liquids, supercritical fluids and fluorous chemistry were all run more concentrated, so that the foreseen capacity crunch hailed as contributing to the future profitability of fine chemicals. began to disappear. From a maximum production yield of 50 mg/l Not only were the purchasers of fine chemical companies excited in CHO cells (Chinese Hamster Ovary) in 1986, typical yields of 500 by the technologies that they had acquired together with their mg/l were being routinely discussed in 2002. Today Lonza claims new subsidiaries, but pharmaceutical companies were also production yields of 10 g/l. Between 2005 and 2007, several big using in-house technology capabilities as one of the areas with manufacturers either mothballed or sold their which to rank intermediate suppliers. In addition a variety of new manufacturing capabilities (among them DSM, Dow and Cambrex) processing technologies were promoted, many aimed at very fast as they realised that the potential products did not materialise, or or very exothermic reactions, which actually only comprised a small took longer than expected to bring to commercialisation (15). Those proportion of the reactions run by fine chemical manufacturers. manufacturers remaining in the area of contract biopharmaceutical Some of the processing techniques included micro-reactors, manufacturing, principally Lonza and , were spinning disk reactors, oscillatory flow reactors, high throughput both early entrants in the field, Boehringer having its own in-house experimentation systems, and equipment for performing reactions products as well as contract production, and both had sufficient at extremes of temperature and pressure. The purchasers of these market penetration to weather the peaks and troughs of the industry. new technology capabilities were keen to stress their chemistry and engineering expertise in developing these chemistries on a larger The fall-out and recovery scale, but were held back by several factors. The major one was the By 2004, the shake-out of the fine chemicals industry was underway. basic conservatism of the pharmaceutical industry, which does not Those companies who had paid large sums to acquire fine change routes quickly, particularly when the costs of implementation chemicals at the height of the boom were writing down the value of of the new technology, its impact on the final API quality, and the their assets, mothballing plants, and implementing restructuring and costs of licensing the IP surrounding the new technology are all not redundancy plans. The question remains: had these companies not well defined. Secondly, the chemical manufacturers themselves been purchased during the boom of the 1990s would they have underestimated the time and costs required to implement the remained competitive during the early 2000s with the decline in technology over their multiple fine chemical sites, and to scale-up the number of new drugs on the one hand and the rise of Asian from laboratory to production scale. This was a particular problem competition on the other? I believe that some of these companies, 25 for new processing technologies, as the downturn in demand had had they remained independent, would have been able to led to an over-capacity in conventional manufacturing plant. As weather the storm and, by being able to be more flexible and a result, many of these technology innovators have disappeared operate in other areas of fine and speciality chemicals outside the from the market, or have been absorbed into lab supply companies pharmaceutical field, could have avoided the worst of the cost- or engineering firms. The world’s first commercial supercritical 2CO cutting and actually be in a better position to withstand the Asian plant, operated by Thomas Swan, is now idle because its operating competition. This would have resulted in the retention of jobs and cost is higher than that of conventional manufacture in the Far East. plants, particularly in Europe. Continuous processing using micro- and meso-scale flow reactors Several large companies exited the fine chemicals market during is only now becoming more widespread in the pharmaceutical the 2000s, mostly by sales to venture capital groups at knock-down industry, and consequently also in the fine chemicals industry, 10-15 prices compared with their original purchase cost. Clariant, Rhodia, years after its introduction at the laboratory scale. The fine chemical Great Lakes, Eastman, Avecia, to mention but a few, are no longer companies who survived the turbulent years have recognised that active in fine chemicals, and concentrate on other market sectors. possession of a new technology is not in itself a route to profit, but only Some have been sold to Indian companies, keen to get a foothold the successful implementation of the technology for the manufacture in the West, with variable results. The deals between Piramal – of a product at scale will bring improvements to the bottom line. Avecia, Shasun – Rhodia, Dr. Reddy’s – Dow, Dishman – Solutia, and Dishman – C6 Solutions (formerly Hickson and Welch) all occurred in Biopharmaceuticals – an example of a mini-boom the period 2005-2008. At the time of these acquisitions, the purchasers As the expectations in fine chemicals were failing to materialise, spoke of the desire to obtain new product pipelines from western around 2000 – 2001, another opportunity appeared, which manufacturers, and of the acquisition of proprietary technology. created a mini-boom as manufacturers flocked in. This was the However, they were not able to manage their acquisitions effectively area of biopharmaceuticals, particularly monoclonal antibodies from a distance and, particularly with the cost differential between and similar products made by mammalian cell culture. Already Indian and European manufacture, some of the manufacturing in 2002, there was talk of a capacity crunch, fuelled by the higher assets have been closed down. The effects of this Indian “mini- than expected sales of Enbrel () and the number of bubble” have been well summarised in a recent article (16). other potential biopharmaceutical blockbusters in the pipeline The survivors of the boom and bust have restructured their assets, (12). Major chemical manufacturers, who already had assets in sold plants which did not fit in with their long term strategy, and small molecule fine chemical manufacture, either purchased, or now claim to be fitter than ever to succeed in the fine chemical considered buying biopharmaceutical manufacturing facilities market. DSM, Evonik, Lonza and Saltigo all see their combination of in the expectation of large future rewards, as the number of assets, technologies, and market approach as key to their success. biopharmaceutical APIs rose and the number of new small molecule Some, such as Lonza and Evonik, have responded to the threat of drugs fell. Industry analysts predicted the annual growth rate in Asian competition by establishing manufacturing facilities in China. biopharmaceuticals to be greater than 15 percent, compared with All have low-cost country sourcing strategies for intermediates and 6-7 percent for small molecule drugs (13), and Lonza, DSM, Avecia, raw materials to remain a competitive edge. Keeping ahead of the

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competition is also evident in the new trends being rapidly introduced by fine chemical companies, following the direction taken by their pharmaceutical customers. These include the manufacture of high potency active ingredients, new and improved final API forms, and the introduction of improved process control, with acronyms such as PAT (Process Analytical Technology) and QbD (Quality by Design). Future developments may include an increase in the number of continuous processes being developed, and a move from first generation metal-catalysed processes to second generation biocatalytic ones, as shown by the example of Merck’s Januvia () (17).

TODAY AND TOMORROW Figure 3. Attendance at CPhI, 1990 - 2010 It is difficult to estimate the size of the fine chemicals industry, because much of the market remains captive, and some analysts Looking to the future, I believe that the future of the remaining blur the dividing line between fine and speciality chemicals on the western fine chemical companies remains solid, though not one hand and bulk pharmaceuticals and finished drug products as rosy as in the boom years of the 1990s. The key players on the other. In pharmaceutical small molecule drugs, the cost of have all established themselves as reliable partners of major the bulk API is low compared with that of the final formulated drug pharmaceutical customers, maintain preferred supplier product. Figure 2 shows today’s market size for fine chemicals and for relationships with key customers, and have a balanced the merchant market for fine chemicals as a proportion of the world portfolio with products in other areas of fine chemicals outside chemical market (2). The merchant market for pharmaceutical fine pharmaceuticals to maintain diversity. Smaller companies are chemicals, at $ 23 billion, is also very small compared with the world holding their positions with their flexible approach and fast pharmaceutical market of $ 835 billion (2). Analysts also seem to response. All realise, however, that you are only as good as predict a faster market growth than the historic reality. One estimate your last success and failure to deliver on time and in full, or a gives the fine chemical market size in 2006 as $ 80 billion, compared failed quality audit, can have devastating results on customer with $ 56 billion in 1999 (18). Pollak, in the first edition of his book in relations and the chance of future business. All companies 2007, gives a market size of $ 75 billion compared with the $ 85 to $ 90 continue to watch developments in the Far East, and have billion estimate for 2010 (2). Historically, this translates to an average strategies to maintain competitiveness in quality, efficiency growth rate of 4-5 percent over the periods 1999-2006 and 1999-2010, and marketing expertise. It is still a difficult marketplace to far from the >10 percent which is still sometimes predicted by analysts. operate in. New entrants should consider the lessons of the past, and read carefully the disclaimer given at the end of all 26 investment prospectuses: “The value of your investment can go down as well as up, and you may not get back the amount that you invested”. The opinions expressed in this article are the author’s own, and do not necessarily represent those of any present or past employer. The author thanks Peter Pollak for his helpful comments during the preparation of this article.

REFERENCES AND NOTES

1. C. Mackay, Extraordinary Popular Delusions and the Madness of Crowds, National Illustrated Library, London (1852). Figure 2. Approximate Market for Fine Chemicals (from (2)) 2. P. Pollak, Fine Chemicals: The Industry and the Business, Wiley, Hoboken NJ (2011). 3. J. Brophy, Chemistry in Britain, 36(1), p. 22 (2000). Some of the lower than expected market growth may be due to 4. L. Capon, Acquisition Wave in the Fine Chemicals Industry, available product replacement in the West. Fine chemical companies are at; http://www.insead.edu/facultyresearch/faculty/personal/lcapron/ transferring their production capacity to new molecules as the older teaching/course.cfm 5. S.C. Stinson, Chemical & Engineering News, 76(3), p. 49 January 19 (1998). products become generic and their production moves to the Far 6. S.C. Stinson, Chemical & Engineering News, 76(28), p. 57 July 13 (1998). East. There has not been a large increase in production capacity 7. S.C. Stinson, Chemical & Engineering News, 78(7), p. 91 February 14 in the last 10 years among western fine chemical companies – (2000). the increase has come from the eastern companies, principally in 8. S.C. Stinson, Chemical & Engineering News, 79(4), p. 77 January 22 (2001). India and China. The industry remains very fragmented: the top 20 9. S.C. Stinson, Chemical & Engineering News, 79(28), p. 65 July 9 (2001). companies account for only 20 percent of the total fine chemical 10. R. Bryant, quoted in ref. 8. sales, and this list now includes seven Asian companies (2). 11. A.I. Graul, J.R. Prous, Drug News Perspect., 18(1), p. 21 (2005); A.I. Graul, Another measurement of the state of the fine is the E. Cruces, Drugs of Today, 47, p. 27 (2011). attendance at trade fairs such as Informex and CPhI. These started 12. A.M. Rouhi, Chemical & Engineering News, 80(7), p. 84 February 18 (2002). from very small affairs in 1985 and 1990, respectively, and have now 13. A.M. Rouhi, Chemical & Engineering News, 81(7), p. 55 February 17 (2003). 14. R. Mullin, Chemical & Engineering News, 81(4), p. 27 January 27 (2003). grown to be major events, with many thousands of visitors. A graph 15. R. Mullin, Chemical & Engineering News, 84(7), p. 58 February 13 (2006). showing the growth of both exhibitors and visitors to CPhI is given in 16. S. Houlton, Chemistry & Industry, (18), p. 16 September 26 (2011). Figure 3 (19). The effect of the down turn after 2000 can be clearly 17. A.A. Desai, Angew. Chem. Int. Ed., 50, p. 1974 (2011). seen in the number of visitors. The graph does not, however, show the 18. A.M. Thayer, Chemical & Engineeering News, 86(4), p. 31 January 28 origin of the ever increasing number of exhibitors. In 2010, 44 percent (2008). of these came from the Far East. 19. P. Pollak, personal communication.

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