Author/s: Samuel K. Moore
Competition for outsourcing deals, particularly in the fast-growing pharmaceuticals sector, is further stratifying the custom manufacturing industry, according to attendees at the CW Fine and Custom Chemicals Conference and Expo in Baltimore last month.
Large fine chemical firms are becoming as important a customer group as pharmaceutical firms for smaller, niche fine chemicals suppliers. Conference speakers say the large fine chemical companies are beginning to control the flow of contracts to niche producers.
Christian Leemann, business director/bulk pharmaceuticals and intermediates at Algroup Lonza, estimates that the leading 30-40 fine chemical companies compete to make about 15 new pharmaceuticals and pesticides every year. Leemann says that lopsided ratio is accelerating consolidation. "Custom synthesis is still considered a cottage industry," he says. "But size does matter." He suggests $200 million/year as the minimum size for a company to be competitive in fine chemicals for life science.
Cameron Reid, president of Reddy-Cheminor (Hyderabad, India), says consolidation dominates India's fine and custom chemicals industry. "The future of the industry is M&A, and those that are not candidates will become extinct," Reid says.
Major toll and custom producers, particularly those involved in manufacturing for the pharmaceuticals industry, are adding to their capabilities. AlliedSignal has been expanding its newly acquired plants at Arklow, Ireland and Freeport, the Bahamas. At Freeport, Allied is installing a cryogenic reactor to attract drugs business.
Catalytica continues its efforts to become a single source for pharmaceuticals customers. James Cusumano, chairman of Catalytica, says he wants to double sales to $1 billion in the next five years through organic growth and acquisitions. The company recently strengthened its formulation capabilities, adding sterile dosage lines at Greenville, NC. Catalytica also plans to add to its biotechnology and fermentation capabilities (CW, April 21, p. 25).
Mergers and acquisitions have beefed up other custom manufacturers. Dow has pushed Hampshire Chemical, which it purchased two years ago, to aggressively pursue custom contracts, says Leo J. Thielman, leader/corporate development and market research at Hampshire. Thielman says that before the acquisition, Hampshire merely responded to customers seeking suppliers. "We tended to be reactive," he says. "Now we are consciously trying to partner with companies in pharmaceuticals, agrochemicals, and personal care at early stages."
Other recent M&A deals include Laporte's purchase of Inspec last year and this year's purchase of Haltermann by Ascot (London)-parent of Chemoxy International and Pentagon Chemicals.
Still, custom manufacturers intent on building broad technology platforms stress that opportunities remain for a "second tier" of niche suppliers. Leemann says these suppliers will have a regional customer base and will take work outsourced by the industry leaders as these bigger players shift toward services such as process development. Edward Richman, president of Richman Chemicals (Lower Gwynedd, PA), says this model also benefits firms such as his that specialize in outsourcing management.
Small suppliers say they have always benefitted from subcontracting. "We've had some opportunities to do pharmaceutical intermediates on a spot basis," says Frank LaMonica, general manager for custom producer Cymer (Decatur, TN). "We mostly come in to get people out of a jam."
Specialized niche chemistries help small manufacturers survive among giants, according to Val Krukonis, president of Phasex (Lawrence, MA), which specializes in supercritical fluids extraction. Krukonis says there is no danger of large companies getting into his field because it is too small.
Bob Kopki, contract manufacturing manager at Mobil Chemical, says this does not mean large companies cannot compete in custom manufacturing. He says his division acts as a small, entrepreneurial business. "In that regard, we're not all that much different [from smaller companies], though I suspect our equipment is bigger."
Mobil and Lubrizol are among the giants using their excess capacity to form custom manufacturing ventures. Mobil is offering to toll a variety of products, including esters and olefins, at Edison, NJ; Beaumont, TX; and Amsterdam. Lubrizol is tolling organic specialties at Painesville, OH.
More producers may follow. Mallinckrodt Baker (Phillipsburg, NJ) may parlay its analytical chemistry skills into a fine and custom chemicals business, says Herman J. Mitchell, senior business manager/chromatography products. Eui-Won Choe, technology consultant for petrochemical and pharmaceutical intermediates maker ISU Chemical (Seoul), says ISU is looking for a joint venture partner to market its services in the U.S.
Neil A. Burns, v.p./marketing at Pilot Chemical (Red Bank, NJ), says Pilot will commission expansions at its Lockland and Middletown, OH plants by third-quarter 1999. The expansion will triple the company's detergent sulfonation capacity and double its oil solubles sulfonation capacity. Burns adds that Pilot will have to establish manufacturing in Europe within a year-either on its own or through a jv-to keep up with its global customers.