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BUSINESS YEAR IN REVIEW CONT. PHARMACEUTICAL WOES. While custom manufacturers worked hard to meet the needs of drug producers, these customers also presented setbacks. For example, the delayed launch of an AstraZeneca product was a blow to Avecia since intermediates for the drug make up about 15% of its fine chemicals sales. However, analysts noted that Avecia was only one of several producers hit by such problems, and the risk continues as manufacturers and drug developers signed even more deals this year.
Consolidation among the larger companies has slowed, but Pfizer's surprise $60 billion bid for Pharmacia in July ignited speculation that it would start again. The transaction, which will create a new industry leader, is still undergoing regulatory review. Getting regulatory approval this year was biotechnology's biggest deal ever--Amgen's $13 billion acquisition of Immunex, which further cemented Amgen's position as the top biopharmaceutical producer. Roche obtained a significant position in the Japanese market by combining its subsidiary there with Chugai Pharmaceuticals; Roche owns 50.1% of the combination, now the fifth largest Japanese drug firm. In other cross-border transactions, Serono purchased the French genomics firm Genset, while Novartis acquired the Slovenian generic drug producer Lek. Bayer's pharmaceutical business became one of the most talked about during 2002. Liabilities and litigation related to the recall of its cholesterol-lowering drug Baycol, which cost it $1 billion in sales this year, dogged the unit. It put a series of new managers at the helm and finally conceded it may need a majority partner to help boost its fortunes. GlaxoSmithKline is often rumored to be the most likely suitor. Despite the bad taste left by Bristol-Myers Squibb's problematic deal with ImClone Systems, major drug firms also sought partnerships with small companies. The pairings in 2002 included Aventis and Genta, Glaxo and Gilead Sciences, Glaxo and Exelixis, Eli Lilly and Isis Pharmaceuticals, Lilly and Amylin Pharmaceuticals, Merck and Celera Genomics, Pfizer and Tripos, and Roche and Kosan Biosciences. Number two biopharmaceutical producer Genentech became a partner to a number of smaller firms, including Xenova, Seattle Genetics, and Dendreon. The desire to foster integrated drug R&D capabilities drove acquisitions and collaborative deals among smaller companies as well, especially the early gene sequencers, which now want to be drug developers. These genomics companies reached critical turning points in 2002, with new managers scaling back database licensing businesses and building R&D operations instead. An important deal that didn't happen was Merck's spin-off of Medco, its pharmacy benefits management business. Although it set a price for the stock offering, it ended up delaying the split because of market conditions. The planned move did bring Merck's sales and earnings into greater focus since the company reported separate results for its drugs and benefits management sides. It also brought unfavorable scrutiny on exactly how Medco was booking revenues. Merck wasn't alone in facing such scrutiny. Elan's bookkeeping came under fire and eventually led to a complete company restructuring. Schering-Plough was investigated both for possible insider trading violations and manufacturing problems, while regulators also looked into manufacturing issues at two Johnson & Johnson facilities. And several states sued Bristol-Myers over limiting access to generic versions of its anticancer drug Taxol. INDUSTRY FOCUS. Beyond economic and operational concerns, chemical companies faced several issues that have broad business ramifications. Not the least of these were post-Sept. 11 considerations of plant security and safety, corporate disclosures and ethics, wide-ranging litigation, and public perception of the industry. In June, ACC proposed a security code that will require companies to screen their facilities, assess vulnerabilities, identify and take steps to improve security, and obtain third-party verification. The code will become part of Responsible Care and makes enhanced security mandatory for all ACC members. The industry also set up a data-sharing center with the Federal Bureau of Investigation to exchange and analyze critical threat and incident information. The Synthetic Organic Chemical Manufacturers Association has been working on a counterterrorism proposal as well.
An issue for EPA has been that ACC represents only about 1,000 of the 15,000 chemical sites of concern. During 2002, EPA developed site security guidelines that might have become mandatory under a new Clean Air Act regulation, but later backed a voluntary program under which the agency will assist and encourage companies to develop antiterrorism measures. The Department of Justice also released a guide offering vulnerability assessment methodology. While not connected to terrorism, a few accidents that occurred during the year fueled safety worries in general. Although the industry had few fatal accidents in 2002, the U.S. Chemical Safety & Hazard Investigation Board released studies in which it found serious gaps in regulations to prevent accidents. Incidents it said were avoidable included a March 2001 explosion that killed three people at BP's Augusta, Ga., plant. In addition, the consequences of past tragedies persisted. Survivors in Bhopal, India, now want Dow, as the acquirer of Union Carbide, to pay for the consequences of Carbide's 1984 chemical leak there. Groups also protested a possible lowering of still-outstanding charges against former Carbide executives. In France, repercussions lingered from the deadly September 2001 explosion at TotalFinaElf's Toulouse fertilizer plant. While the cause of the accident is still unknown, the plant's metropolitan location has led authorities to rethink the placement of chemical operations. For example, neighboring SNPE was allowed to reopen part of its nearby plant, but not a critical phosgene unit. The consequences were even wider for SNPE, which ultimately revamped its entire phosgene-related production worldwide and decided to close a Texas site. Chemical producers confronted several legal challenges. DuPont was found liable for illnesses allegedly related to pollutants in Pompton Lakes, N.J., although it is appealing the ruling. Similarly, Solutia was in a protracted battle all year over polychlorinated biphenyl contamination in Anniston, Ala. Interested parties are still debating a cleanup settlement reached between the company and the government. On an even larger scale, more than 250 defendants initially faced a massive asbestos lawsuit in West Virginia, but only Dow's Union Carbide subsidiary remains after the others settled. A jury found Carbide liable for worker exposure; a new phase of the trial, including possible damages, will begin next year. And, 18 years after settling, Dow and 12 other firms may face an agent orange-related lawsuit if the U.S. Supreme Court decides it can go ahead. Making several chemical producers look bad were a rash of price-fixing allegations, fines, and antidumping investigations that arose during 2002. According to the World Trade Organization (WTO), chemicals were involved in nearly one-third of all antidumping probes--34 out of 104--initiated worldwide in the first half of 2002.
Chemical producers, like other major companies after the Enron and WorldCom accounting scandals, had to address public and shareholder anxiety about corporate disclosures and ethics. In August, chemical executives joined those from other industries in supplying sworn statements to certify company financial statements. During this tumultuous year, chemical companies, through ACC in the U.S. and the European Chemical Industry Council (CEFIC) in Europe, began initiatives focused on improving public perception and communicating with outside parties. These convictions, along with others on sustainable development, innovation, and globalization, moved to an international stage at the World Summit on Sustainable Development in Johannesburg in late August. REGULATION SHIFTS. Internationally, U.S. and European governments battled over European Union trade sanctions wanted in response to U.S. tax breaks for companies with foreign sales. ACC estimates that this tax break saves chemical makers $500 million to $750 million per year. WTO supported the EU's position to seek more than $4 billion in duties. However, big commodity chemicals were not on the EU's recent list for retaliatory duties. Debate continued over Europe's plan for registering, testing, and labeling chemicals. The European Commission, the administrative arm of the EU, now expects to produce draft regulations by next spring instead of by the end of this year. The impact of the policy on world markets, international trade, production, and employment is predicted to be considerable and reach well beyond the chemical industry. The costs for testing alone have been estimated between $1.4 billion and nearly $7 billion. While EU environmental commissioners believe the new regulations and the resulting replacement of hazardous chemicals by safer ones will stimulate innovation and new markets, industry has been less enthusiastic and optimistic. Calling the system the regulations would create "largely unworkable," ACC and CEFIC said it could lead to the withdrawal of a quarter of their products from the EU market. In the U.S., chemical producers believe the short-term outlook might be brighter. Although the effects are yet to be fully seen, Republican control of the Congress gained in late 2002 could bring some legislative changes. Many GOP initiatives passed in the House of Representatives this year, only to be stalled later in the Senate. However, legislative success is not a sure thing, especially since the new GOP majority in the Senate is slim.
Global warming continued to be an issue for the Bush Administration, which has refused to join international efforts to reduce greenhouse gas emissions. Meanwhile, most industrialized countries have made progress toward meeting CO2 emissions reductions under the Kyoto protocol, although Russia and Canada may be delaying or moving away from ratification. In other venues, climate talks failed to make much progress, and debates continue on whether to adapt to climate change or reduce emissions. TECHNOLOGY ADVANCES. The chemical industry continues to develop new processes and products for competitive advantage, to serve as vehicles to growth, and to address regulatory and environmental concerns. In 2002, the number of collaborations between chemical producers and biocatalysis firms was evidence of the latter. Several projects involving the use of renewable resources and other green chemistry initiatives advanced as well. Cargill Dow opened its polylactic acid plant to make plastic derived from corn. The company signed a deal with Maxygen subsidiary Codexis to develop a novel biosynthesis of the lactic acid raw material from renewable sources. Cargill Dow also won one of the 2002 Presidential Green Chemistry Challenge Awards for its polylactic acid process. Shell, meanwhile, purchased a stake in Iogen Energy, which operates one of the world's largest ethanol-from-biomass facilities. But Dow decided to exit its World Ethanol joint venture, which makes ethanol in a traditional corn fermentation unit, and is selling its interest to partner Archer Daniels Midland, effective January 2005. Several companies won Department of Energy funding--totaling about $80 million and to be matched by industry--for research into making ethanol and other chemicals from biomass. Biorefinery projects were the major winners--DuPont, Diversa, and partners will get $18.3 million, while ethanol maker High Plains Corp. and Novozymes got $17 million, and Cargill Dow and Shell got money to work with Iogen on a pilot-scale unit. The related field of agricultural biotechnology was quiet for most of the year with no major upsets and--according to estimates from the Department of Agriculture, Monsanto, and others--a slight increase in planted transgenic crop acreage. However, the development of green plants as pharmaceutical factories faced a setback when one such corn prototype was found mixed in with soybeans. Prodigene, which was involved in the accidental contamination, pledged increased diligence, as did the "biopharming" community. Dow--in collaboration with Epicyte Pharmaceutical--and Prodigene scaled up production of such crops during 2002.
Chemical companies participated in advancing the emerging areas of fuel cells and nanotechnology. Shell Hydrogen, Johnson Matthey, and Mitsubishi established Conduit Ventures, a venture-capital firm hoping to raise $100 million to fund start-up companies specializing in fuel cells and related technologies. Air Products & Chemicals, DuPont, Süd-Chemie, UOP, Celanese, BP, and BOC invested individually in fuel-cell ventures during 2002. Like others dabbling in nanotechnology, NextGen Partners, an investment group backed by several large chemical firms, put capital into at least three small companies. BASF, Baxter, Rohm and Haas' Rodel unit, Sumitomo, Toray Industries, and Mitsubishi have made direct investments either internally or through alliances with several small nanotechnology developers. Although the electronics materials industry is still going through difficult times, chemical companies saw promise for growth. Many major firms--including Sumitomo, Bayer, Degussa, Dow, BASF, Praxair, and DuPont--invested in ventures or capacity expansions to produce new materials. A particularly hot area was organic light-emitting diodes for new display technologies. Electronic materials--as the basis for computers, home electronics, and communications--clearly suffered with the bursting of the Internet bubble and the global economic slowdown in 2001 and 2002. Still, as in other markets, companies have been positioning themselves for a turnaround and return to prosperity as economic conditions hopefully improve in coming years. Previous Page 1 | 2 | 3 |
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Still, the chemical industry is seeing opportunities for a legislative agenda more suited to its interests. An energy policy, including greater U.S. independence, may finally move forward, but energy issues are again expected to overlap with environmental concerns. It's also anticipated that Republicans will move to moderate laws on clean air, clean water, and wildlife. EPA, for example, has already released a new source review rule relaxing existing regulations. 
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