Custom chemicals, the business of producing chemicals to special order, has become an evolutionary step in the development of companies in the fine chemicals industry. Hundreds of firms have graduated from dependence on commodity chemicals and simpler compounds to become fine chemicals companies with sophisticated technology.
This fine chemicals industry has acquired the abilities needed to forge close, long-term relationships with makers of performance chemicals - drugs, pesticides, food additives, cosmetics ingredients, dyes, and photographic chemicals. As producers of performance chemicals refocus on research and marketing, the fine chemicals industry has stepped in to produce compounds to their special order. And as the trend toward outsourcing spreads, custom producers are responding by mastering new technologies and creating organizations to prosper under the new order.
These efforts at repositioning have included mergers, acquisitions, joint ventures, strategic alliances, provisioning of technology portfolios, and new establishments in the U.S. One move is a grassroots start-up of custom production by a major chemical player: Dow Chemical has founded a business to be called Contract Manufacturing Services. In doing so, the company embarks explicitly on a type of business that it has offered informally for the past 10 years.
Perhaps the first thinker to recognize custom production as an integral step in the evolution of the fine chemicals industry is Peter Pollak, vice president and general manager for fine chemicals at Lonza, both in Fair Lawn, N.J., and in Basel, Switzerland. "If we evoke the evolution of the fine chemicals industry as a whole since the fifties, we note substantial changes in the overall business condition," Pollak says.
" In the first postwar phase, the development of the organic chemical industry (the term 'fine chemicals' did not even exist at that time) was completely supply-push driven. Starting from a portfolio of very basic organic chemicals such as acetic acid, ethylene oxide, hydrocyanic acid, or phenol, the industry tried to develop more advanced organic intermediates. That's the time [when] mostly dedicated plants for acetoacetates, CMC[ carboxymethylcellulose], and alkylphenols were built.
" As of the late sixties, specific requirements ... became the driving force for further expansion, and the shift toward demand-pull began. Typical examples for that period are fine chemicals used as key intermediates for classes of pharmaceuticals and agrochemicals, such as the side chains for penicillins and cephalosporins, and carbamates and triazoles for the respective classes of fungicides.
" This trend continued, and custom manufacture in the sense of producing very specific fine chemicals for specific drugs or agrochemicals was born." Pollak notes that before the age of partnering, fine chemicals firms pored over agrochemical and drug companies' patents, trying to guess what building blocks they might need, and making and offering those building blocks on speculation. "Nowadays it appears as if the days of our commercial development specialists' hassling to analyze patent applications of the life science industry and then proposing specific products to them are over," Pollak says.
" More and more, partnerships are developed between the life science industry, which has specific needs in terms of products and technologies, and the fine chemicals industry, which has the resources to respond to these demands. The relation between the life science and the fine chemicals industries is emerging from a simple vendor/purchaser level to a strategic partnership. This means, first of all, a much broader sharing of information, be it in terms of the commercial outlook for the new drug, or be it for cost transparency and joint cost improvement programs. It embraces single-sourcing and focuses resources of both partners on their core competencies."
But not every fine chemicals firm may be able to take the evolutionary step to custom production. Says John C. Wetzel, custom development manager at Ruetgers-Nease Corp., State College, Pa., "It has to be a mentality, not just filling equipment." Wetzel refers to the attitude of some producers that they can take on custom work whenever some production capacity becomes idle. That practice leaves open the possibility that the producer will back away from the custom work when demand for the producer's own products again needs the capacity.
Part of the mentality Wetzel cites is the coupling of some key technology with a general ability to carry out a wide variety of chemical reactions. The key technology is something that not every customer can do or wants to do. This might be phosgenation or chemistry at cryogenic temperatures. "You back up the key technology with a general ability, so the customer doesn't let his technology out to too many places," he says. This means that a multistep synthesis can go on under only one roof. Of competition from India and China in particular, he adds, "That means that the ownership of the customer's technology goes out of the country."
Another factor in the equation is quality of service. "We know projects are going to last three to five years," Wetzel says. "So we do a good job, because we want the repeat business." Asked why three to five years is the window for most custom chemical projects, Wetzel smiles. "If the project is still alive when it gets into our plant, we know that the customer is already thinking of building a plant," he says. And what of sharing production experiences after the customer has taken the project in- house? "We do think of new data to collect," he replies. "We share intellectual property."
If the successful custom producer does have to have a certain mentality, Wetzel says that the firm doesn't have to be very large, even when faced with today's stringent regulatory requirements. "It's a level playing field, because small and large firms have to comply, and generally independently of the volume of production. [Regulation] increases the lead time for everyone. It can take one to one-and-a-half years to get a project into the plant.
" The lower overhead at small firms means that they can be more flexible," he goes on. "There are fewer layers of management, even if there is more regulatory work and fewer people."
More insights on the current climate of custom production have been expressed by H. Robert Koch, director of chemical porfolio management at Hoffmann-La Roche, Nutley, N.J., and Raimund Miller, director of commercial development at Lonza, Fair Lawn, N.J. In short, Koch is a buyer of custom production, and Miller is one of those who would happily supply it. The two presented their views to "Purchasing Day," a daylong seminar put on last September by the Drug, Chemical & Allied Trades (DCAT) Association in Teaneck, N.J., about managing custom chemical relationships.
" Why outsource?" Koch asked. "Even without health care reform, HMOs [health maintenance organizations], and hospital buying groups, outsourcing of bulk pharmaceuticals and their intermediates would be a reality."
More production in-house would consume a lot of Koch's company's assets and management time nowadays. "Processes are longer and chemistry more sophisticated," he pointed out. "A current pipeline product will require $50 million to $100 million in inventories before it is even approved by the Food & Drug Administration (FDA). Technology and FDA's requirement for validated facilities, equipment, processes, and cleaning make facilities more expensive."
The fine chemicals industry, where there is such a ferment of activity in its custom production segment, is an ill-defined field. The lack of an agreed-upon definition makes it hard to evaluate its worth in dollars and cents. Chemical industry analyst Enrico T. Polastro contributed to understanding the industry at the Fine Chemicals Conference '95 organized in London last November by Performance Chemicalsmagazine. Polastro, who works in the Brussels office of Arthur D. Little International, said fine chemicals are" products sold on purely a specification base at high prices in relatively limited volumes."
By this Polastro means that they are bought solely on their chemical identity and purity. But defining "high price" or" relatively limited volumes" is tougher. If Polastro takes more than $4.00 per kg (roughly $2.00 per lb) as high price, he comes up with a value of $60 billion a year for worldwide sales of fine chemicals. But at greater than $10 per kg (about $4.50 per lb), the market contracts to $30 billion.
Polastro himself prefers the $30 billion estimate at $10 per kg and up. Under that scenario, the North American demand is $9 billion per year, with production of only $7 billion. European demand is $12 billion annually, and production $15 billion. The difference is exported or used captively. Japanese demand is $6 billion yearly, and production $7 billion. For the rest of the world, a shadowy figure made uncertain by how to gauge India and China, Polastro puts production at $4 billion to $5 billion, and demand at $5 billion to $6 billion.
Divided according to consuming industries, drugs take 55% of the worldwide output, agrochemicals 20%, food additives 6%, flavors and fragrances 6%, and dyestuffs and colorants 5%, while 8% goes to "others." Divided another way, according to custom production and off-the-shelf sales, custom is $6 billion per year worldwide, Polastro said. The drug industry orders $3 billion worth made to special order, while agrochemicals take $1.5 billion. Divided by geography, Polastro said, U.S. firms in all industries order $3 billion worth of custom production yearly, Europeans $2 billion, and Japanese $1 billion.
To narrow their focus on the custom aspect of this fine chemicals industry, producers are making organizational and technological innovations. For example, the business director of Dow's newly founded Custom Manufacturing Services group, Margaret R. (Maggi) Walker, fully realizes that the company will have to work to establish its credibility.
" We have an experienced staff," Walker says, "a small army of people dedicated to this business today. We have the focus of a small company with access to the considerable resources of a very large company. We can leverage Dow's core capabilities and experience in both R&D and manufacturing. Dow has nearly 100 years as a corporation dealing in chemicals and in the management and handling of chemicals."
As for the details of providing services, Walker says: "We do not intend to be all things to all people. We will be focused on developing key strategic customer relationships. We will provide a 'one-stop shop' of process development, analytical services, and experience that will enable our customers to produce their products more cost- effectively, more efficiently, and more productively."
Elsewhere in custom production, DSM of Heerlen, the Netherlands, has bought a 70% share in Chemie Linz of Linz, Austria, from the parent firm OMV. Chemie Linz, which also has offices in Ridgefield Park, N.J., will make a good fit with DSM's Andeno fine chemicals subsidiary in Venlo, the Netherlands, and Saddle Brook, N.J., in providing custom production over a broader range of technologies than either of the two companies has fielded so far. DSM has not yet decided whether to operate Chemie Linz as a separate subsidiary or to merge it with Andeno.
In addition, Sepracor of Marlborough, Mass., has joined Sterling Organics of Dudley, England, to form a company to be called ChiRex. The firm will combine the proprietary enantioselective chemistry of Sepracor with the large production capacity of Sterling Organics.
Robert L. Bratzler of Sepracor says his company and Sterling Organics will locate the headquarters of their joint venture ChiRex, "somewhere in the Boston area." Bratzler, who has been president of Sepracor's fine chemicals arm SepraChem, will be chairman and chief executive officer. ChiRex's president will be Alan Clark of Sterling.
Ownership of ChiRex will be divided roughly one-third each among Sepracor, Sterling, and public investors. Sterling will contribute its new research and development center, new pilot plant, and established production plant with 200,000 gal total reactor capacity, operating in Dudley under current good manufacturing practices and ISO 9002.
Sepracor will contribute rights to six proprietary enantioselective technologies. Two of them are the catalytic asymmetric epoxidation of olefins and asymmetric ring-opening of epoxides by trimethylsilyl azide, both invented by organic chemistry professor Eric N. Jacobsen of Harvard University. A third is the catalytic asymmetric dihydroxylation of olefins invented by organic chemistry professor K. Barry Sharpless of Scripps Research Institute, La Jolla, Calif.
Among technologies invented in-house at Sepracor are enzyme-mediated resolutions of racemates and fractional crystallization of diastereomeric salts of racemic acids with enantiomeric amines. The amines are proprietary to Sepracor. The company has also invented an asymmetric reduction of ketones to secondary alcohols by diborane catalyzed by an enantiomeric oxazaborolidine.
In another new enterprise, Cambrex of East Rutherford, N.J., has formed an alliance with Oxford Asymmetry of Abingdon, England, to put together an integrated chemical development program ranging from initial discovery to commercial-scale production. Oxford's portfolio includes enantiomeric technologies and the capacity to produce in small amounts, whereas Cambrex has the capacity to produce drug intermediates and bulk active compounds in ton quantities.
Spokesmen for the two firms argue that customers can save on product development time, especially for drugs, by keeping the same supplier through phases of drug discovery, preclinical testing, clinical trials, and marketing after product launch. As a part of drug discovery, Oxford Asymmetry has established a subsidiary called Oxford Diversity, which will offer combinatorial chemistry.
In the combinatorial approach, investigators use polymer supports to make minute amounts of large numbers of combinations of structurally related compounds in arrays called libraries. They then screen the entire array for physical, chemical, or biological activity or a property of some kind, with an indicator to reveal particular active molecular combinations. The first libraries were oligopeptides. The concept has since been extended to small-molecule organic and inorganic compounds.
Oxford Asymmetry was originally founded in 1991 to commercialize enantioselective technology developed by organic chemistry professor Stephen G. Davies of Oxford University. One recent addition to the firm's armamentarium for custom work is Davies' general synthesis of &bgr;-amino acids.
The method hinges on 1,4-addition of the lithium salt of either enantiomer of (&agr;-methylbenzyl)benzylamine across an &agr;,&bgr;-unsaturated ester. Hydrogenation of the resulting N-&agr;-methylbenzyl-N-benzylamino ester frees up the amino group with coproduction of toluene and ethylbenzene. An example of this technique is synthesis of the antifungal drug (1R,2S)-cispentacin from tert-butyl 1-cyclopentenecarboxylate.
Under the Cambrex-Oxford program, Cambrex will invest $3 million in Oxford Asymmetry research. For its own part, Cambrex is putting $15 million to $20 million into new facilities at its Zeeland Chemicals subsidiary in Zeeland, Mich., and its Salsbury Chemical subsidiary in Charles City, Iowa. Cambrex recently started up a plant in Charles City that expands its FDA-approved production capacity. Pilot plants are planned for both Charles City and Zeeland. And the company plans a facility in Charles City to handle transition from small- to commercial-scale production.
The new plants will commercialize technologies and products developed at Oxford Asymmetry. Zeeland has been the center for Cambrex's enantioselective syntheses, but work has been limited until now to resolutions of amines with mandelic acid and of acids with&agr; -phenethylamine.
Eastman Chemical Co., Kingsport, Tenn., has acquired Peboc of Llangefni, Wales, from the British drug firm Solvay Duphar. Eastman has also bought the Hong Kong-based fine chemicals producer Pen-Tsao-Materia-Medica-Center. The Peboc acquisition gives Eastman added capabilities in amino acid building blocks, coupling reagents, and peptides, which the company can bring to bear on custom projects. The Hong Kong deal gives the company a fine chemicals facility in Asia.
These facilities are part of Eastman's long-term goal of globalization. In addition to the Hong Kong headquarters and plant, Pen-Tsao has offices in Hamburg, Germany; Prague in the Czech Republic; and Shanghai. "Custom chemical manufacture is a regional business," explains Carl M. Lentz, who is business manager for fine chemicals in Kingsport. "This lets us serve the three major markets."
Of the Hong Kong plant, Bruce E. Moore, president of Eastman Chemical Asia Pacific, says, "We will be making capital improvements to the on-site wastewater treatment facility, based on our ability to very successfully treat similar wastes at our U.S. plant sites." Indeed, the $85 million wastewater treatment plant in Kingsport is unique. While most wastewater treatment plants are in-ground, the Kingsport unit is supported by 2,400 concrete piers 7 feet above ground, with complete redundancy of equipment and instrumentation.
Like Cambrex in its link to Oxford Asymmetry, Chiroscience in Cambridge, England, is moving to acquire new technology. The company has licensed both the DuPHOS line of asymmetric hydrogenation, hydrocyanation, and hydroformylation catalysts of DuPont, and the asymmetric catalysts invented by organic chemistry professor Barry M. Trost of Stanford University for asymmetric nucleophilic substitutions on derivatives of allylic alcohols.
Chiroscience has sublicensed the DuPHOS catalysts to Strem Chemicals, Newburyport, Mass., for sales of less than 25 g. Thus the catalysts will be available to researchers outside commercial licensing agreements. For both the DuPHOS and Trost catalysts, Chiroscience will license clients to use them in their own production plants, license custom chemical producers hired by clients, or arrange custom chemical production using the catalysts for clients.
The DuPont catalysts are based on either enantiomer of the ligands 1,2-bis(trans-2,5-dialkyl-1-phospholano)benzene, where the alkyl groups are methyl, ethyl, propyl, isopropyl, or benzyl. When complexed with rhodium, for example, DuPHOS catalysts mediate asymmetric hydrogenation of acetaminoacrylic esters to derivatives of nonnatural &agr;-amino acids. In particular, hydrogenation of methyl N-acetyl-&agr;-cyclohexylideneglycinate yields methyl N-acetyl-l-cyclohexylglycinate. This is a case of making a nonproteinogenic amino acid with &bgr;-branching.
The Trost catalysts are based on diamides of 2-diphenylphosphinobenzoic acid with enantiomeric 1,2-diamines or diesters of chiral 1,2-diols. Trost himself has used the diamide with trans-1,2-diaminocyclohexane to convert the dimethyl dicarbonate of a meso-2-cyclohexene-1,4-diol to an enantiomeric 4-azido-2-cyclohexen-1-ol. The azidoalcohol derivative is 10 synthetic steps from pancratistatin, which is a promising anticancer drug. Use of the methyl carbonate derivative of allylic alcohols is advantageous, because the group falls apart irreversibly to carbon dioxide and methanol after nucleophilic displacement.
Alan Shaw, sales director at Chiroscience, suggests that the Trost catalysts might lead to synthetic organic routes to enantiomeric substituted &bgr;-hydroxy-&dgr;-valerolactones that are cheaper than presently used fermentation routes. These lactones are intermediates in producing the "statin" class of serum-cholesterol-lowering drugs.
In yet another example of the evolution of the industry, SNPE and Rhone-Poulenc, both of Paris, have formed a joint venture whereby the two firms will use phosgenation technologies of both to produce chloroformates, acid chlorides, and organic carbonates and isocyanates at the Rhone-Poulenc plant in Institute, W.Va. SNPE has previously had only a sales office in Princeton, N.J., and the Institute plant gives it a foothold in U.S. production. But while phosgenation is always a prime candidate for companies to source outside, the joint venture has no plans to do custom phosgenation at first.
Meanwhile, First Mississippi Corp., Jackson, Miss., has unbundled Quality Chemicals from its subsidiary, First Chemical Corp., and is managing it as a separate subsidiary. Quality Chemicals specializes in custom production of drug, agrochemical, and photoactive intermediates and bulk active compounds, and setting it up semiautonomously will allow even more intense focusing on custom projects.
That unbundling focuses Quality Chemicals more tightly on custom production. Carl (Bill) Arnold, sales and marketing manager, estimates that 90% of Quality's sales are custom. And even the number of customers for the company's catalog product, diphenyl isophthalate, has shrunk - to one. Though Quality's headquarters is in the same building as that of First Chemical and the parent First Mississippi Corp. in Jackson, Arnold says that Quality has more independence in such matters as capacity expansion. This became apparent when Quality got approval directly from First Mississippi to add two distillation towers to its plant in Tyrone, Pa. Of being so heavily dependent on custom production, Arnold says: "It's a risky business. Times are good now, but there have been times that were not so good. To succeed in custom production, you have to get in with both hands."
The management of Newport Synthesis, Dublin, led a buyout of their company from U.S.-based Systemed in April 1995. "Now we're a completely Irish company," notes Mary Collins, who is chief of process chemistry at Newport and one of the three manager-owners. In particular, the company is freer to make decisions on capital investment, and this showed when the firm recently installed a second and third cryogenic reactor.
And Borregaard Fine Chemicals of Sarpsborg, Norway, has established its first U.S. sales office in Bridgewater, N.J. Peter A. Demchko, who is marketing vice president, will develop custom production projects as well as sell the company's established slate of intermediates in North America.
As these industrial regroupings show, relationships between the makers and users of custom chemicals are evolving from those between traditional sellers and buyers toward more strategic partnerships. Even more such arrangements can be expected in the future, as the fine chemical industry continues to master important new technologies.
[ACS Home Page]
[ACS Publications Division Page]