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/speciality chemicals 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 industry 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 manufacturing 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. Clariant purchased more blurred than it is today). Large petrochemical 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 petrochemicals) 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). chimica oggi/Chemistry Today - vol. 30 n. 1 January/February 2012 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 fine chemical subsidiaries were still pharmaceuticals, agrochemicals, 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 outsourcing 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 pharmaceutical industry 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.