Fine Chemicals: The Industry and the Business

FINE CHEMICALS

FINE CHEMICALS THE INDUSTRY AND THE BUSINESS

Peter Pollak, PhD Reinach, Switzerland

WILEY-INTERSCIENCE A JOHN WILEY & SONS, INC., PUBLICATION

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com. Wiley Bicentennial Logo: Richard J. Pacifico Library of Congress Cataloging-in-Publication Data: Pollak, Peter, 1934– Fine chemicals : the industry and the business / Peter Pollak. p. cm. Includes bibliographical references and index. ISBN 978-0-470-05075-0 1. Chemicals. 2. Chemical engineering. 3. Chemical industry. I. Title. TP200.P637 2007 660—dc22 2006052568 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

To Maria, Barbara, and Paolo

CONTENTS

ACKNOWLEDGMENTS PREFACE

PART I

xi xii

THE INDUSTRY

1. What Fine Chemicals Are

1 3

1.1

Defi nition

3

1.2

Positioning on the Value-Added Chain

5

2. The Fine-Chemical Industry

8

2.1

Fine-Chemical/Custom Manufacturing Companies

2.2

Contract Research Organizations

16

2.3

Laboratory Chemical Suppliers

20

3. Products

8

22

3.1

Small Molecules

22

3.2

Big Molecules

24

4. Technologies

27

4.1

Traditional Chemical Synthesis

27

4.2

Biotechnology

32

5. Facilities and Plants

40

5.1

Plant Design

41

5.2

Plant Operation

51

6. Research and Development 6.1

Objectives

57 58 vii

viii

CONTENTS

6.2

Project Initiation

60

6.3

Project Execution and Management

61

7. Cost Calculation

64

7.1

Investment Cost

64

7.2

Manufacturing Costs

64

8. Management Aspects

68

8.1

Risk/Reward Profi le

69

8.2

Performance Metrics and Benchmarking

71

8.3

Organization

73

Bibliography

76

PART II

79

THE BUSINESS

9. Market Size and Structure

81

9.1

Fine-Chemical Market Size

81

9.2

Market Breakdown by Major Applications

83

10. The Business Condition

86

10.1

Offer

87

10.2

Demand

89

11. Customer Base

93

11.1

Pharmaceutical Industry

11.2

Agrochemical Industry

101

11.3

Animal Health Industry

106

11.4

Other Specialty-Chemical Industries

108

12. Marketing

93

123

12.1

Organization and Tasks

123

12.2

Target 12.2.1 12.2.2 12.2.3

126 128 130 136

Products and Services Exclusives: Custom Manufacturing Nonexclusives: API-for-Generics Standard Products

CONTENTS

12.3

ix

Target Markets: Geographic Regions and Customer Categories

137

12.4

Distribution Channels

142

12.5

Pricing

144

12.6

Intellectual Property Rights

148

12.7

Supply Contracts

149

12.8

Promotion

152

12.9

Network and Contact Development

153

12.10

Key Account Management and Collaborative Relationship

155

Bibliography

158

PART III

159

OUTLOOK

13. General Trends and Growth Drivers

161

14. Globalization

163

15. Biotechnology

172

15.1

Small Molecules

172

15.2

Big Molecules (Biopharmaceuticals)

172

16. Ethical Pharmaceutical Industry/Custom Manufacturing

176

16.1

Restructuring and Outsourcing

177

16.2

R&D Productivity

179

17. Generics Industry/API-for-Generics

186

18. Agro Fine Chemicals

189

19. Contract Research Organizations

191

20. Conclusion: Who Is Fittest for the Future?

193

Bibliography

197

ABBREVIATIONS

199

x

CONTENTS

APPENDIX

203

A.1 Information Sources/Life Sciences

205

A.2 Checklist for New Product Evaluation

210

A.3 Product Schedule, Custom Manufacturing Product

212

A.4 Company Scorecard

214

A.5 Job Description for Business Development Manager

216

A.6 Selection Criteria for Outsourcing Partners

218

A.7 Checklist for Customer Visit

219

A.8 Outline for a Company Presentation

221

A.9 Overseas Expansion of Indian Fine-Chemical Companies

222

INDEX

224

NOTES: Exchange rates C1 = $1.245/CHF 1 = $0.804/£1 = $1.82

ACKNOWLEDGMENTS

I wish to acknowledge all individuals, both peers and customers from my present consulting activity, and colleagues from my former association with Lonza, who have helped me in conceiving, writing, and reviewing this book. I am particularly indebted to Rob Bryant (Brychem) and Ian Shott (Excelsyn), who have shared with me both their profound knowledge of and their ability to communicate with the industry. I am also very grateful for the valuable input, whether in providing data or in proofreading, that the following individuals have kindly provided: Vittorio Bozzoli, Ron Brandt, Uli Daum, Peter Demcho, Erich Habegger, Wouter Huizinga, Mario Jaeckel, Myung-Chol Kang, Dr. Masao Kato, Christine Menz, Hans Noetzli, H. Barry Robins, and Carlos Rosas. Without this invaluable assistance from these friends and colleagues, I would not have been able to embark on this ambitious undertaking.

xi

PREFACE

This book provides an insider’s perspective of the status of the fine-chemical industry, as well as its outlook. It covers all aspects of this dynamic industry, with all of its stakeholders in mind, viz. employees, customers, suppliers, investors, students and educators, media representatives, neighboring communities, public officials, and anyone else who has an interest in industrial context. Safety, health, environmental, and regulatory issues are discussed only briefly, as the related subjects are extensively covered in the specialized literature. The main raison d’être of the fi ne-chemical industry is to satisfy the product and process development needs of the specialty chemicals, especially the life science (primarily pharmaceutical and agrochemical) industry. Sales outside the chemical industry remain the exception. The fi ne-chemical industry has evolved mainly because of the rapid growth of the Anglo-Saxon pharmaceutical industry, which traditionally has been more inclined to outsourcing chemical manufacturing than the continental European one—and the increasing complexity of the drug molecules. The roots of both the term “fi ne chemicals” and the emergence of the industry as a distinct entity date back to the late 1970s, when the overwhelming success of the histamine H 2 receptor antagonists Tagamet (cimetidine) and Zantac (ranitidine hydrochloride) created a strong demand for advanced intermediates used in their manufacturing processes. The two drugs cure stomach ulcers, thus eliminating the need for surgical removal of ulcers. As the in-house production capacities of the originators, Smith, Kline & French and Glaxo, could not keep pace with the rapidly increasing requirements, both companies outsourced part of the synthesis to chemical companies in Europe and Japan experienced in producing relatively sophisticated organic molecules. Also, the fledgling generics industry had no captive production of active pharmaceutical ingredients (APIs) and purchased their requirements. Moreover, the growing complexity of pharmaceutical and agrochemical molecules and the advent of biopharmaceuticals had a major impact on the evolution of the fi ne-chemical industry as a distinct entity. Custom manufacturing, respectively its counterpart, outsourcing, has remained the Königsdisziplin (i.e., the most prominent activity) of the fi nechemical industry and “make or buy” decisions have become an integral part of the supply chain management process. The fi ne-chemical industry has its own characteristics with regard to R&D, production, marketing, and fi nance. The total turnover of the largest companies, respectively business units does xii

PREFACE

xiii

not exceed a few hundred million dollars per year. The fi ne-chemical industry supplies advanced intermediates and active substances, frequently on an exclusive basis, to the pharmaceutical, agrochemical, and other specialtychemical industries. Further distinctions are batch production in campaigns, high asset intensity, and above-industry-average R&D expenditures. The industry is still located primarily in Europe. Custom manufacturing prevails in northern Europe; the manufacture of active substances for generics, in southern Europe. As of today, the majority of the global $75 billion production value of fi ne chemicals continues to be covered by captive production, leaving a business potential of $45–$50 billion for the fi ne-chemical industry . . . on top of the inherent growth of the existing business. Despite this huge business opportunity, the fi ne-chemical industry is challenged by overcapacity and intense competition. As a result of early riches, many chemical companies sought relief from their dependence on cyclical commodities by diversifying into higher-value-added products, like fi ne chemicals. At present, the industry is going through two interconnected changes. In terms of geography, Far Eastern “high-skill/low-cost” companies are emerging as serious competitors. In terms of structure, the chemical conglomerates are divesting their (often lossmaking) fi ne-chemical businesses. They are becoming mostly privately owned pure players. Although the demand has not grown to the extent initially anticipated, fi ne chemicals still provide attractive opportunities to well-run companies, which are fostering the critical success factors, namely running fi ne chemicals as core business, making niche technologies—primarily biotechnology—a part of their business and developing assets in Asia.

1. Kilogram laboratory Alphora Research, Mississauga, Canada

2. Cell culture laboratory Lonza, Slough, UK

3. HPAI plant Helsinn, Biasca, Switzerland

4. Simulated moving-bed (SMB) pilot plant Saltigo (Lanxess), Leverkusen, Germany

5. Pilot plant (detail view) Siegfried, Zofi ngen, Switzerland

6. Peptide plant, HPCL column Lonza, Braine, Belgium

7. Launch plant Lonza, Visp, Switzerland

8. Launch plant Lonza, Visp, Switzerland

9. Fermentation pilot plant, airlift fermenter Lonza, Slough, UK

10. Biocatalysis pilot plant Degussa, Hanau/Wolfgang, Germany

11. Pharmaceutical fi ne-chemical plant Hikal, Bangalore, India

12. Pharmaceutical fi ne-chemical plant Hikal, Bangalore, India

13. Biologics plant Lonza, Portsmouth NH, USA

14. Biologics plant Lonza, Portsmouth, NH, USA

15. API plant Boehringer-Ingelheim, Ingelheim, Germany

16. Phosgenation plant Orgamol, Evionnaz, Switzerland

PART I

THE INDUSTRY

CHAPTER 1

What Fine Chemicals Are

1.1

DEFINITION

The basic principle for defi nition of the term “fi ne chemicals” is a three-tier segmentation of the universe of chemicals into commodities, fi ne chemicals, and specialty chemicals (see Figure 1.1). Fine chemicals account for the smallest part, about 4–5% of the total $1.8 trillion turnover of the chemical industry (see Section 9.1). Commodities are large-volume, low-price, homogeneous, and standardized chemicals produced in dedicated plants and used for a large variety of applications. Prices are cyclic and fully transparent. Petrochemicals, basic chemicals, heavy organic and inorganic chemicals (large-volume) monomers, commodity fibers, and plastics are all part of commodities. Typical examples of single products are ethylene, propylene, caprolactame, methanol, BTX (benzene, toluene, xylenes), phthalic anhydride, poly (vinyl chloride) soda, and sulfuric acid, Fine chemicals are complex, single, pure chemical substances. They are produced in limited quantities (<1000 metric tons per year) in multipurpose plants by multistep batch chemical or biotech(nological) processes. They are sold for more than $10 per kilogram, based on exacting specifications, for further processing within the chemical industry. The category is further subdivided on the basis of either the added value (building blocks, advanced intermediates, or active ingredients) or the type of business transaction (standard or exclusive products). As the term indicates, exclusive products are made exclusively by one manufacturer for one customer, which typically uses them for the manufacture of a patented specialty chemical, primarily a drug or agrochemical. Typical examples of single products are β-lactames, imidazoles, pyrazoles, triazoles, tetrazoles, pyridine, pyrimidines, and other N-heterocyclic compounds (see Section 3.1). A third way of differentiation is the regulatory status, which governs the manufacture. Active pharmaceutical ingredients and advanced intermediates thereof have to be produced under

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

3

4

WHAT FINE CHEMICALS ARE

fine chemicals commodities

single pure chem. substances . . .

produced in dedicated plants high volume / low price

specialities single pure chem. substances

mixtures

produced in multipurpose plants formulated low volume (<1000 mt) high price (>$ 10/kg)

undifferentiated

few applications many applications

undifferentiated

sold on specifications sold on specifications “what they are”

sold on performance “what they can do” 2004

Figure 1.1

Defi nitions.

current Good Manufacturing Practice (cGMP) regulations. They are established by the (US) Food and Drug Administration (FDA) in order to guarantee the highest possible safety of the drugs made thereof. All advanced intermediates and APIs destined for drugs and other specialty chemicals destined for human consumption on the US market have to be produced according to cGMP rules, regardless of the location of the plant. The regulations apply to all manufacturing processes, such as chemical synthesis, biotechnology, extraction, and recovery from natural sources. All in all, the majority of fi ne chemicals have to be manufactured according to the cGMP regime. A precise distinction between commodities and fi ne chemicals is not feasible. In very broad terms, commodities are made by chemical engineers and fi ne chemicals by chemists. Both commodities and fi ne chemicals are identified according to specifications. Both are sold within the chemical industry, and customers know how to use them better than do suppliers. In terms of volume, the dividing line comes at about 1000 tons/year; in terms of unit sales prices, this is set at about $10 /kg. Both numbers are somewhat arbitrary and controversial. Many large chemical companies include larger-volume/lower-unit-price products, so they can claim to have a large fi ne chemicals business (which is more appealing than commodities!). The threshold numbers also cut sometimes right into otherwise consistent product groups. This is, for instance, the case for active pharmaceutical ingredients, amino acids, and vitamins. In all three cases the two largest-volume products, namely, acetyl salicylic acid and paracetamol;

POSITIONING ON THE VALUE-ADDED CHAIN

5

L-lysine and D,L-methionine, and ascorbic acid and niacin, respectively, are produced in quantities exceeding 10,000 tons/year, and sold at prices below the $10 /kg level.

Specialty chemicals are formulations of chemicals containing one or more fi ne chemicals as active ingredients. They are identified according to performance properties. Customers are trades outside the chemical industry and the public. Specialty chemicals are usually sold under brand names. Suppliers have to provide product information. Subcategories are adhesives, agrochemicals, biocides, catalysts, dyestuffs and pigments, enzymes, electronic chemicals, flavors and fragrances, food and feed additives, pharmaceuticals, and specialty polymers (see Chapter 11). The distinction between fi ne and specialty chemicals is net. The former are sold on the basis of “what they are”; the latter, on “what they can do.” In the life science industry, the active ingredients of drugs are fi ne chemicals, the formulated drugs specialties (see next chapter). Electronic chemicals (see Section 11.4) provide another illustrative example of the difference between fi ne and specialty chemicals: Merck KGaA produces a range of individual fi ne chemicals as active substances for liquid crystals in a modern multipurpose plant in Darmstadt, Germany. An example is (trans,trans)-4[difluoromethoxy)-3,5-difluorophenyl]-4′-propyl-1,1′-bicyclohexyl. Merck ships the active ingredients to its secondary plants in Japan, South Korea, and Taiwan, where they are compounded into liquid crystal formulations. These specialties have to comply with stringent use-related specifications (electrical and color properties, etc.) of the Asian producers of consumer electronics such as cellular phones, DVD players, and flat-screen TV sets.

“Commoditized” specialty chemicals contain commodities as active ingredients and are interchangeable. Thus, ethylene glycol “99%” is a commodity. If it is diluted with water, enhanced with a colorant, and sold as “superantifreeze” in a retail shop, it becomes a commoditized specialty. Note: Sometimes fi ne chemicals are considered as a subcategory of specialty chemicals. On the basis of the defi nitions given above this classification should be avoided.)

1.2

POSITIONING ON THE VALUE-ADDED CHAIN

An example of the value-added chain extending from commodities through fi ne chemicals to a pharmaceutical specialty is shown in Table 1.1. The product chosen is Pfi zer’s anticholesterol drug Lipitor (atorvastatin), the world’s top-selling drug with sales of $12 billion in 2004. The value-added chain extends from a C1 molecule, methanol (left side of the table) all the way to a C33 molecule, atorvastatin. The structure of compound III in Table 1.1 is as follows:

6

100

100

Producers

Customers

Manufacturing steps

1

2

D, C

50

5

M, B

1

10

200

8 × 10 25

100 6

1.00

10

157.17

C 7H11NO3

(I)

15

M, B

1

5

300

200

1

269.34

C14H 30NO4

(II)

Intermediates

Millions

1a

20

b

+2

F&P

1a

1a

M, B

400

80,000

N/A

N/A

N/A

Lipitor

Specialty

400

2,000

1

558.65

C 33H 35FN2O5

(III)

API

Active pharmaceutical ingredient (API). Patentholder; several generic producers preparing for launch. Note: Figures are indicative only. Key: B, batch; C, continuous; D, dedicated; M, multipurpose. Also: (I) Ethyl(R)-4-cyano-3-hydroxy butanoate, “hydroxynitrile” (II) tert-Butyl(4R,6R)-2-[6-(2-aminoethyl)-2.2-dimethyl-1.3-dioxan-4-yl]acetate (III) 2-(4-Fluorophenyl)-β,δ-dihydroxy-5-(1-methylethyl)-3-phenyl-4-[(phenylamino)carbonyl]-1H-pyrrole-heptanoic acid.

a

D, C

32 × 10

Production (metric tons/year)

Plant type

0.2

Price indication ($/kg)

b

>50

>100

Applications

6

60.05

32.04

Molecular weight

C 2H4O2

CH4O

Molecular formula

Acetic acid

Methanol

Commodities

Fine Chemicals

Example for the Value-Added Chain in the Chemical Industry: Lipitor (Atorvastatin)

Example

Parameter

Table 1.1

POSITIONING ON THE VALUE-ADDED CHAIN

OH O

OH

7

O O−

N

Ca2+

N H F

2

(III)

Methanol and acetic acid are typical commodities, namely, low-price/multiusage products manufactured in large quantities by many companies. Under the heading “fi ne chemicals,” three examples of fi ne chemicals used for the manufacture of atorvastatin are listed, namely, the advanced intermediates ethyl 4-chloro-3-hydroxy butanoate and tert-butyl (4R,6R)-2-[6-(2aminoethyl)-2.2-dimethyl-1.3-dioxan-4-yl] acetate, respectively, and the API, atorvastatin, itself. As long as the latter, 2-(4-fluorophenyl)-β,δ-dihydroxy-5(1-methylethyl)-3-phenyl-4-[(phenylamino)-carbonyl]-1H-pyrrole-heptanoic acid, is sold according to specifications, it is a fi ne chemical. In the pharmaceutical industry, the chemical synthesis of an API is also referred to as primary manufacturing. The secondary manufacturing comprises the formulation of the API into the final delivery form. The API is compounded with excipients that confer bulkiness, stability, color, and taste. Once atarvastatin is tableted, packed, and sold as the anticholesterol prescription drug Lipitor, it becomes a specialty. The price difference between the API and the package sold in the drugstore is very substantial: Lipitor’s retail sales price is more than $80,000 per kilogram.

CHAPTER 2

The Fine-Chemical Industry

Within the chemical universe, the fi ne-chemical industry is positioned between the commodity and specialty chemical industries. They are their suppliers and customers, respectively. Among the latter, the life sciences, especially the pharmaceutical industry, prevail (see Section 9.2). A large variety of enterprises, laboratories, and institutes in both the private and public sectors are providing contract research and manufacturing services along the drug supply chain (see Figure 2.1). Fine-chemical/custom manufacturing (CM) companies account for the largest share of the industry, followed by contract research organizations (CROs) and laboratory chemical suppliers. Fine-chemical/custom manufacturing companies (discussed in Section 2.1) are active in process scaleup, pilot plant (trial) production, and industrialscale exclusive and nonexclusive manufacture; contract research organizations are discussed in Section 2.2, and laboratory chemical suppliers are discussed in Section 2.3. Note: As both contract research organizations and laboratory chemical suppliers provide primarily service businesses, their revenues are excluded from the total size of the fi ne-chemical business, as discussed in Chapter 9.

2.1

FINE-CHEMICAL/CUSTOM MANUFACTURING COMPANIES

Fine chemicals are produced either in-house by pharmaceutical or other specialty chemical companies for their captive needs, or as sales products by fi ne-chemical companies. The latter account for about one-third of the total production value of $75 billion, and obviously for the totality of the trading volume (see Table 9.2). In business transactions, custom manufacturing (CM) prevails over straight trading of standard products. More than 1000 companies worldwide are involved in fi ne-chemical R&D, production, and sales. Only a minority have been founded with the specific Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

8

FINE-CHEMICAL/CUSTOM MANUFACTURING COMPANIES

Discovery

Development

Distribution

product driven

service driven

Target Identification

Production

9

Chem. Library Comb. Chem. HTS

Lead Ident./ Character.

Laboratory

Figure 2.1

Lead Dev.

Clinical Trials Production

Early intermediat.

Advanced intermediates

Pilot Plant

Scale-up

Regular Production

Formulation

Distribution

API

Technology transfer

Large scale Production

Drug development stages. (Source: Lonza.)

intent to produce fi ne chemicals (e.g., ChemDesign, USA; Divi’s Laboratories, India; F.I.S., Italy; Hovione, Portugal; SIMS, Italy). Some have developed from forward integration from fertilizers and chemical commodities (e.g., BASF, Germany; Lonza, Switzerland) from noble metals (e.g. Degussa, Germany), or from backward integration from pharmaceuticals [e.g., Fermion, Finland; Saltigo, Germany (formerly Bayer Fine Chemicals); Siegfried, Switzerland; Zambon, Italy]. DSM, The Netherlands and UBE, Japan trace their activities back to coal mining, Dottikon Exclusive Synthesis, Switzerland, and SNPE (France) to explosives. Others have emerged from diversification (e.g., Daicel, Japan; Novasep Synthesis, France). Several large pharmaceutical companies market fi ne chemicals as subsidiary activity to their production for captive use [e.g., Abbott, USA; Bayer Schering Pharma, Boehringer-Ingelheim, Germany; Johnson & Johnson, USA; Merck KGaA, Germany; Pfi zer (formerly Upjohn), USA]. Fine-chemical companies vary substantially in size. The largest ones have sales of more than $500 million; the smallest ones, a few million $ per year (see Table 2.1). The leading companies are typically divisions of large, diversified chemical companies. The majority are located in Europe, particularly along the axis Amsterdam (The Netherlands)/Basel (Switzerland)/Florence (Italy) and in the United Kingdom. In terms of size, resources, and complexity of the chemical process technologies mastered, the fi ne-chemical companies can be broadly divided into three categories:

10

THE FINE-CHEMICAL INDUSTRY

Table 2.1

Structure of the Fine-Chemical Industry Sales ($ million)

Type

N

Big

∼10

>250

Divisions of large publicly owned enterprises; >3 sites, total reactor volume >500 m 3 ; short-term profit maximization Large in-house capabilities (R&D, manufacturing, marketing) Growth by acquisitions

Medium

∼50

100–250

Publicly or privately owned “pure players”; quick, focused decisions; long-term profit optimization Adequate technology toolboxes, 1–2 sites in the home country, limited global marketing organization Growth by reinvesting profits

<100

Focus on niche technologies (azide chemistry, halogenations, phosgenation, peptide synthesis, HPAI a) Typically privately owned

Small

a

>500

Characteristics

High-potency active ingredients. •

The top tier consists of approximately a dozen large, multinational companies. With the exception of Lonza, they are divisions of major chemical companies and have sales exceeding $250 million per year. Their custom manufacturing business is backed up by a backward-integrated “catalog product” portfolio. They have extensive resources in terms of specialists, plants, process knowledge, international presence, and other assets. Their manufacturing plants spread over many different locations. Many of the big players, such as Clariant (now Archimica), Degussa, DSM, and Rhodia Pharma Solutions (now part of Shasun Chemicals & Drugs), have grown to their present size through massive acquisitions. Examples of acquisitions are listed in Table 2.2. This acquisition spree has completely changed the list of the largest players. In the cases of Cambrex, Clariant, Degussa, and Rhodia, the purpose of the acquisition was to increase the presence in the fi nechemical business, deemed offering better profit and growth than their traditional activities. Rhodia, for instance, although claiming to be a fi ne-chemical company, was primarily a large manufacturer of the APIs for the two largest-volume painkillers, namely, acetyl salicylic acid and N-acetyl-p-aminophenol. The acquisition of ChiRex enabled Rhodia to enter the market for more advanced intermediates and custom manufacturing. DSM had pursued two strategic goals; to be fully integrated in the synthesis of semisynthetic penicillins and to have a manufacturing base in the United States.

FINE-CHEMICAL/CUSTOM MANUFACTURING COMPANIES

Table 2.2

Acquisitions by Major Fine-Chemical Companies

Acquirer

Acquired Companies a

11

Cambrex (USA)

Bioscience, USA; Bio Whittacker, USA; CasChem, USA; Conti BPC, B; Heico Chemicals, USA; Irotec, Ireland; Nepera, USA; Nordic Synthesis, S; Profarmaco, I; Salsbury Chemicals, UK; Seal Sands Chem., UK; Zeeland Chem., USA

Clariant (Switzerland)

BTP, UK; comprising Archimica, I; Hexachimie, F; Lancaster Synthesis, UK; Nipa-Hardwicke, USA; PCR, USA

Degussa (Germany)

LaPorte Fine Organics, UK, including Inspec, UK, Shell Fine Chemicals, UK, Technochemie, De

Dowpharma (USA)

Angus Chemical, UK; Ascot, UK; Chirotech, UK; CMS plant, UK; Collaborative BioAlliance, NY, USA; Haltermann, De; Hampshire, USA; Mitchell Cotts, UK

DSM (The Netherlands)

ACF Chemie, NL; Andeno, NL; BMS Regensburg, De; Catalytica, USA; Chemie Linz, Au = Austria; Deretil, E = Spain (Espana); Gist-Brocades, NL; La Plaine, Switz.; Wyckoff, USA

Novasepb (France)

Dynamit-Nobel Special Chemistry, De; Finorga, F; Séripharm, F

Rhodia (France)

ChiRex, formerly Sterling Organics, UK; gsk’s plant in Annan, UK; Chambers Works, USA; Malvern, USA

a

Less common country abbreviations used in this and some other tables in the book: Au, Austria; B, Belgium; De, Denmark; E, Spain; F, France; NL, The Netherlands; S, Sweden. b Novasep is part of Rockwood Specialties Group (USA).

Most of these acquisitions, however, have not met the anticipated synergistic effects. They have become a heavy burden for Clariant and Rhodia, both of which had paid high-earning multiples. An example in point is Clariant. It acquired BTP—already a rather heterogeneous conglomerate of small companies in its own right—for $1.7 billion in 2000. At a P/E, (price/earnings) ratio of 28 and a P/S (price/sales) ratio of 3.4, this could not exactly be considered a bargain. Clariant had to write down virtually the total acqusition price in the following years—until it sold its pharmaceutical fi ne-chemical business to the fi nancial investors TowerBrook (UK) for about $100 million in 2006. Also the construction of a CHF 100 million plant for nonanoyloxy benzenesulfonate, an exclusive detergent additive for P&G, which never went onstream, did not add to the glory. •

The second tier consists of several dozens of midsized companies. They include both independents and subsidiaries of major companies. A number of these companies are privately owned and have grown entirely by reinvesting the profits. European examples are F.I.S. and Poli Industria Chimica, Italy; Hovione, Portugal; and Orgamol (now part of

12

THE FINE-CHEMICAL INDUSTRY

•

BASF), Switzerland. The portfolio of the midsized companies comprises both exclusive synthesis and API-for-generics, and sales are in the range of $100–$250 million per year. Finally, there are hundreds of small independents with sales below $100 million per year.

Each category accounts for approximately the same turnover, namely. about $5 billion. All big and medium-size fi ne-chemical companies have cGMP-compliant plants that are suitable for the production of pharmaceutical fi ne chemicals. With the exception of biopharmaceuticals, which are manufactured by only a few selected fi ne-chemical companies, primarily Boehringer-Ingelheim, Lonza, and Nicholas Piramal (formerly Avecia), the technology toolboxes of all these companies are similar. This means that they can carry out practically all types of chemical reactions. They differentiate on the basis of the breadth and quality of the service offering. Most of the medium-size fi ne-chemical companies are located in Europe, particularly in France, Germany, Italy, the United Kingdom, and Switzerland. Italy and Spain, where international drug patent laws were not recognized until 1978 and 1992, respectively, are strongholds of API-for-generics (see Section 12.2.2). Midsize fi ne chemical companies have traditionally performed better than large ones. Because of their inherently more attractive offering, this situation will be accentuated in the future. In contrast to midsize and small fi ne-chemical companies, the large ones are characterized by •

•

•

•

•

Lack of Economy in Size. Fine chemicals are manufactured in discrete campaigns in multipurpose plants. The reactor trains of these plants are similar throughout the industry. Regardless of the size of the companies, their main constituents, the reaction vessels, have a median size in the 4–6 m3 bracket. Therefore, the unit cost per m 3 per hour does practically not vary with the size of the company. A Dichotomy between Ownership and Management. The company’s shares are listed on stock exchanges, and their performance is scrutinized by the fi nancial community, which has a short-term view. Complicated Business Processes. Customer complaints, for instance, are difficult to handle in a straightforward manner: Before the big company can determine in which plant the defective batch had been produced, the small company would have settled the complaint. A Heterogeneous Portfolio of Small Companies, Accumulated over Time through M&A Activities. The key functions, such as production, R&D, and M&S, are located on different sites, often in different countries. A Cohabitation with Other Units.

FINE-CHEMICAL/CUSTOM MANUFACTURING COMPANIES

13

Also, customers do not want to depend to much on single, large and powerful suppliers (where they do not know “who is in charge”). Most of today’s best-known fi ne-chemical companies, such as Cambrex, Clariant, Degussa, Dowpharma, DSM, and Rhodia (see Table 2.2), are subject to the abovementioned characteristics. Customers prefer to do business with midsize companies, because communications are easier (they typically deal directly with the decisionmaker)—and they can better leverage their purchasing power. Lonza’s custom manufacturing business, apart from biotech, is still mainly concentrated on the original Visp, Switzerland site in terms of production and R&D, and therefore has conserved a number of advantages that are typical of midsize companies. The small fi ne-chemical companies have only limited capabilities and often specialize in niche technologies, such as reactions with hazardous gases (e.g., ammonia/amines, diazomethane, ethylene oxide, halogens, hydrogen cyanide, hydrogen sulfide, mercaptans, ozone, nitrous oxides, phosgene). Their small size, however, is not necessarily a disadvantage. As most fi ne chemicals are produced in quantities of not more than a few 10 tons per year in multipurpose plants, there is little or no economy of size (see Section 5.1). On the contrary, small and midsize companies have an advantage in terms of responsiveness and flexibility. As the owners typically are the major shareholders, their shares are not traded publicly and fluctuations in their fi nancial performance are more easily coped with. The minimum economical size of a fi ne-chemical company depends on the availability of infrastructure. If a company is located in an industrial park, where analytical services; utilities, safety, health, and environmental (SHE) services, and warehousing are readily available, there is practically no lower limit. New fi ne-chemical plants have come onstream mostly in Far East countries over the past few years (as of 2006), but their annual turnover rate rarely exceeds $25 million. A list of the major fi ne-chemical companies and their sales development from 2002 to 2004 is shown in Table 2.3. A ranking of the 12 companies according to the size of their fi ne-chemical business is not possible because each of them has a different defi nition of the term “fi ne chemicals.”

Thus, the impressive size of BASF’s Fine Chemical Division is due to a BASF-specific defi nition of the term “fi ne chemicals.” In fact, the division, which is part of the business segment “Agricultural Products & Nutrition” produces large volume aroma chemicals (a.o. 40,000 metric tons/year of citral) and vitamins (A, B2 , C and E), as well as several lines of specialty chemicals (a.o. excipients and personal care products). Fine chemicals as defi ned in Section 1.1 account for about e150 million ($190 million) in 2006, after full consolidation of the Swiss Fine Chemical company Orgamol, acquired in 2005. BASF holds a leading position in ibuprofen (made in USA), coffein and pseudoephedrin (made in Germany). BASF forecasts a further increase to e500 million ($625 million) within 10 years which should make it the third largest fi ne-chemical company.

14

THE FINE-CHEMICAL INDUSTRY

Table 2.3 Leading Fine Chemical Companies (Resp. Divisions), Development of Sales 2002–2005 Sales ($ million) Company

Division or Business Unit

2005

2004

2003

2002

427a

455

596

N/A

2154

2232

2297

2453

Akzo Nobel

Diosynth

BASF

Fine Chemicals

BoehringerIngelheim

Fine Chemicals Biopharmaceuticals

174 682

174 488

169 349

185 277

Clariant

Life Science Chemicals

710

809

822

1033

Degussa

Exclusive Synthesis & Catalysis

417

430

447

N/A

DSM

Life Sciences DSM Pharma Products

1906 600

2343 576

2444 529

2801 670

Lonza

Exclusive Synthesis Biotechnology

418 287

371 111

398 273

454 315

Merck KGaA

Life Sciences & Analytics

1023

964

954

N/A

Novasep Group

Novasep Synthesis

260

N/A

N/A

N/A

Saltigo

Saltigo

Shasun Chem. Siegfried a b

b

277b

N/A

463

234

Formerly Rhodia Pharma Solutions

208

294

309

324

Siegfried Ltd.

226

233

270

291

Author’s estimate. Lanxess, third-party sales only.

None of the 12 companies (resp. divisions) listed is a pure player in fi ne chemicals. Considering only fi ne chemicals as per the defi nition of this book, their market share varies between a few tenths of a percent for BASF (!) and 90% for Siegfried. Custom manufacturing typically accounts for more than half of total sales; the balance are standard products, primarily API-forgenerics. The European and US pharmaceutical industry is the major customer base. Clariant and Saltigo also have substantial sales of fi ne chemicals for agrochemicals. The performance of the 12 companies listed in the period under review (2002–2005) has been lackluster at best. With the exception of Boehringer-Ingelheim and Merck, all businesses had lower sales in 2005 as compared with 2002. Boehringer-Ingelheim did remarkably well with its biopharmaceuticals business, and Merck Darmstadt profited from a very strong demand for active ingredients for liquid crystals, where it holds the number one position (see Section 11.4). Because of the high incidence of fi xed costs, profits were even more affected (see Figure 8.1). Businesses grown by acquisi-

FINE-CHEMICAL/CUSTOM MANUFACTURING COMPANIES

15

tions during the “irrational exuberance” of the late 1990s suffered most. Thus, Rhodia Pharma Solutions sales eroded by 35% between 2005 and 2002 and in several years losses incurred. Midsize and small fi ne-chemical companies were also impacted by the slump in demand for new pharmaceutical fi ne chemicals. By and large, they fared better than did the large companies, which have a number of disadvantages. (For instance, a business development manager, who moved from a big to a small fi ne-chemical company, stated that “At my previous employer, it took me three trips to the USA and one to Italy just to determine, which step should be produced at which site.”) Selected small and midsize fi ne-chemical companies are described here: •

•

•

Europe: Austria (Loba Feinchemie), Belgium (Omnichem), Czech Republic (Interpharma, Synthesia), Denmark (Polypeptide), Germany (Evotec AG, Pharma Waldhof, Rütgers Chemicals, Solvay Fluor), Finland (Fermion,1 KemFine), France [Calaire Chimie, Isochem (Group SNPE), Orgasynth, PCAS, Simafex, Sipsy], Hungary (Chinoin, Gedeon Richter1), Israel (Chemada, Chemagis), Italy (Dipharma, Erregierre, F.I.S., Flamma, Recordati,1 (Zambon1), Latvia (Olainfarm), Norway (Borregaard), Poland (Polpharma), Portugal (Hovione), Spain, [Esteve Quimica,1 Medichem, Uquifarma (Yule Catto)], Sweden (Dupont Chemoswed), Switzerland [Bachem, Dottikon Exclusive Synthesis, CF Chemie Uetikon, CILAG (J&J), Dottikon ES, Helsinn,1 Siegfried], Turkey (Atabay), United Kingdom (Avecia F.C., Contract Chemicals, Excelsyn, Robinson Brothers). North America: USA (Albany Molecular Research, AMPAC Fine Chemicals, Codexis, Dixie Chemical Group, Dowpharma CMS, Honeywell Life Science Chemicals, SAFC, Synthetech), Canada (Delmar). Far East: China (Zhejiang Huayi Pharmaceutical, Zhejiang Hisun Pharmaceutical), India (Cipla,1 Divi’s Laboratories, Dishman, Hikal, Jubilant Organosys, Nicholas-Piramal, Ranbaxy1), Suven Japan (API Corp., Daicel F.C., Kuraray, Nippoh, Nippon Gohsei Sumitomo F.C., Takasago, UBE F.C.), South Korea (Samchully, SK Energy & Chemicals; Taiwan, Scinopharm, Syn-Tech).

A comprehensive list of about 1400 fi ne-chemical companies (including traders) can be found in the “event catalog” of the CPhI exhibition (see Appendix A.I). A category of mostly European and American small fi ne-chemical companies do not have manufacturing plants and concentrate on research and process development (see next chapter).

1

Also active in production of fi nished drugs.

16

THE FINE-CHEMICAL INDUSTRY

2.2

CONTRACT RESEARCH ORGANIZATIONS

Contract research organizations (CROs) provide services to the life science, especially pharmaceutical, industries along product development. Whereas the production sites of CMOs are multipurpose plants, allowing for the production of tens to hundreds of tons of fi ne chemicals, it is the laboratory bench and patient population for CROs. An overlap exists with regard to pilot plants (100 kg quantities), which are part of the arsenal of both types of enterprise. Firms that offer their services along the whole lifecycle are referred to as contract research and manufacturing (organizations) (CRAM, discussed at the end of this chapter). Within this segment of the fi ne-chemical industry, one distinguishes between “chemical” and “medicinal” CROs. The latter are also known as clinical research organizations. The offerings of the latter comprise more than 30 tasks addressing the clinical part of pharmaceutical development at the interface between drugs, medicinal devices, physicians, hospitals, and patients. Examples are the clinical development and testing of lead new drug compounds, ADMET (absorption, distribution, metabolism, excretion, and toxicity) studies, development of diagnostic kits, and devising and executing complex marketing programs for launching new drugs. The leading “medicinal” CROS are behemoth in comparison with their chemical peers. Leading US companies are Cardinal Health (sales $75 billion), Omnicare ($5.2 billion),Quintiles Transnational ($1.9 billion), Covance ($1.2 billion), Charles River Laboratories (formerly Inveresk) ($1.1 billion), PPD ($1.0 billion), and Parexel ($0.5 billion). All these companies have rudimental capabilities for synthesizing PFCs at best. The tasks of “medicinal” CROs in early drug development are summarized In Table 2.4. As each successive step in the new product development process becomes progressively more expensive, the challenge for them is to identify promising drug candidates early on (see Section 16.2). In contrast to the “medicinal” CROs described above, “chemical” CROs basically perform two tasks centring around the drug substances: •

•

Small sample preparation. For synthetic PFCs, this means synthesizing either a large amount of very small samples (“libraries”) obtained by combinatorial chemistry, or regular-size PFC samples for the use as drug candidates (respectively for their synthesis), for preparing impurities, metabolites, and other compounds. For natural PFCs it involves product extraction, purification, and characterization. Process development, namely upgrading “quick and dirty” laboratory procedures for sample preparation to economically and ecologically viable industrial-scale manufacturing processes (see also Chapter 6).

It is estimated that there are about 50–100 “chemical” CROs in developed countries, either standalone companies or divisions of larger chemical com-

CONTRACT RESEARCH ORGANIZATIONS

17

Table 2.4 Tasks of “Medicinal” Contract Research Organizations Discovery Steps

CRO Tasks

Target identification; then target validation

Identification and characterization of targets, in particular bioinformatics, genomics, proteonics, protein expression and purification, structural biology, and computer modeling

Primary screening

Select, obtain, or synthesize several lead compounds; assay and analytical method development

Lead compound identification

Confi rm the activities of the selected lead compounds; make a decision on the lead compounds to be developed further

Secondary screening

See above

Lead optimization

Application of early ADMET predictive techniques, structure–activity relationships and medicinal chemistry; testing of homologs

Clinical trials

Phase I, II, and III trials a with increasing numbers of human volunteers

a

For defi nitions of phases I–III, see Table 12.2.

panies, with a widely differing degree of width and depth of their offering. The defi nition of “chemical” CRO is somewhat fuzzy. Some of them (e.g., Albany Molecular, USA; and Galapagos, Belgium) also provide “medicinal” CRO services, while others are forward-integrated to contract research and manufacturing companies (see text below). The size of this niche market therefore cannot be determined exactly. The typical history of a CRO begins with a chemist working on a thesis and trying to make some pocket money by preparing samples for a life science company. Gradually, the chemist’s part-time job develops to a full-time activity. Colleagues are employed, and a CRO company is founded. Most “chemical” CROs are privately held and have revenues of $10–$20 million per year or less, adding up to a total business in the range of $1–$1.5 billion. Major customers for CRO services are the large global pharma(ceutical) companies. Half a dozen “big pharma’s” (Pfi zer, Glaxo SmithKline, Sanofi-Aventis, AstraZeneca, Johnson & Johnson, and Merck) alone absorb an estimated 30% of all CRO spending. As for CMOs and also for CROs, biotech startup companies with their dichotomy between ambitious drug development programs and limited resources are the second most promising prospects after “big pharma” (see Section 12.3). Well-known “chemical” CROs in developed countries include Albany Molecular, Cedarburg, Chembridge, Innocentive, Irix Pharmaceuticals,

18

THE FINE-CHEMICAL INDUSTRY

PharmEco (Johnson Matthey Pharmaceutical Materials), and Tripos, in the USA; Alphora, Canada; Clausen-Kaas, Denmark; Evotec AG, Germany; Meridiano Medical Sciences and Serichim, Italy; CarboGen and Solvias, Switzerland; ChemShop, The Netherlands; Onyx, UK; NARD Institute, Japan; and Novotech, Australia. An example of a leading chemical CRO is Albany Molecular (AMRI). It had chemistry revenues $184 million in 2005. AMRI does organic synthesis and chemistry development, supported by computational chemistry for molecular modeling, with computer-assisted drug design. Furthermore, it offers different types of libraries: custom, semiexclusive, focused, and natural products. Finally, AMRI conducts its own proprietary R&D aimed at licensing preclinical and clinical compounds.

Asian, especially Chinese and Indian, companies are emerging as low-cost contract research providers. In India alone, there are more than 20 CROs. The largest is Syngene, a division of Biocon, with 300 employees and sales of $9 million, followed by gvkBio, Chembiotek, and ProCitius (Sanmar). Hikal is planning to set up a research center for 250 scientists in Puna. Examples of Chinese companies are JiangXi Kingnord, MerLion, and WuXi Fortune Pharmaceutical. The business of CROs is usually done through a “pay for service” arrangement. Contrary to manufacturing companies, invoicing of CROs is not based on unit product price, but on full-time equivalents (FTEs), that is, the cost of a scientist working one year on a given customer assignment. For further details, see Sections 12.5 and 12.6. Key reasons for outsourcing R&D activities are to •

•

• •

Allow pharma companies to develop drugs faster to maximize patent protection and secure marketplace advantage Contain cost—since only one in three drugs recovers its cost of development, the pharmaceutical industry needs to fi nd ways to increase the supply of drug candidates while at the same time reduce development costs. Outsourcing to top-tier CROs can accomplish both of these objectives. Deferring internal increases in headcount and expenses. Buffering demand peaks for in-house R&D services.

Some large fi ne-chemical companies are engaged in both contract research and contract manufacturing. These hybrids, which offer molecule synthesis from the milligram to the multi-hundred-ton scale, are called contract research and manufacturing (organizations) (CRAMs). Examples are DSM [The Notherlands (NL)], Lonza (Switz.), Nicholas Piramal, Jubilant Organosys, and Suven (India). The concept of the CRAMs, which are also referred to as “one-stop shops,” goes back to parallel initiatives in the mid-1990s. In India, Suven Life Sciences added a CRO competency to its fledgling fi ne-chemical

CONTRACT RESEARCH ORGANIZATIONS

19

business. In England (UK), Avecia bought the Canadian “chemical” CRO Torcan. Degussa followed suit by acquiring Raylo, also located in Canada. In the meantime, Raylo has been sold to Gilead, USA. It is questionable, though, whether one-stop shops really fulfi ll a need. The pros and cons are summarized in Table 2.5. Particularly the fi rst “pro” entry in Table 2.5, “chance to establish . . . ,” is debatable. Most new drugs fail in early-stage development. The situation has worsened over the years. Cumulative drug development success rates from phase I through approval within major pharma companies declined from 18% during 1996–1999 to 9% during 2000–2003. Furthermore, as there is little repeat business, and as different functions are in charge of sourcing laboratory chemicals as opposed to outsourcing chemical manufacturing in big pharma, sample orders only rarely evolve to industrial-scale supplies. An example in point is Johnson Matthey, the world’s largest supplier of opiates. The products are obtained by plant extraction, which is the company’s core competence. JM acquired the “chemical” CRO PharmEco with the intent to offer a one-stop shop capability. As PharmEco was primarily involved in synthetic chemistry, it is difficult to come across a synergy between the small- and the large-scale business.

Actually, the large fi ne-chemical companies consider the preparation of samples more as a marketing tool (and expense . . .) rather than a profit contributor. In order to avoid some of the pitfalls, it is advisable to manage the CRO business as a separate unit. Also, the location (venue) should preferably be separate to ensure that there is greater accountability and ability for it to operate as a standalone business. The location should be determined by availability of talent, proximity of universities, and accessibility. Also the

Table 2.5

Pros and Cons of the “One-Stop Shop” Concept

Pros

Cons Fine-Chemical/Custom Manufacturing Company

Chance to establish a relationship with a drug company early on

In >90% of cases, projects are stopped at the lab sample stage

Higher overall added value

Need to command 2 different skills: “quick and dirty” /lab-scale vs. economically viable and ecologically safe large-scale production Pharmaceutical Company

Reduction of number of suppliers

In contrast to the policy of selecting specialists for each step of drug development Overdependence on one supplier

20

THE FINE-CHEMICAL INDUSTRY

implementation of a rigorous confidentiality and IP (intellectual property) safeguard plan is mandatory to protect both the customer and the CRO. Innocentive, Andover, MA, USA, is a particular, virtual CRO. It offers companies the possibility to post research problems, such as a synthesis for a new compound anonymously on the Internet. Its Website now connects more than 95,000 registered scientists around the world. Financial incentives up to $100,000 are paid to successful problem solvers. The success rate runs at about 35%.

2.3 LABORATORY CHEMICAL SUPPLIERS Before chemical, pharmaceutical, and biotechnology companies, colleges and universities, medical research institutions, hospital research labs, government agencies, and other facilities can initiate any chemical research activity they need chemicals, solvents, and laboratory equipment. The laboratory chemical suppliers provide these items. Their key success factors are speed, ease of ordering, and number and quality of the products. A laboratory chemist, or team leader, must be in a position to order samples online, and to receive them quickly and in the right quality. Regarding the size of the offering, the five top-tier companies are •

•

•

•

•

Alfa Aesar, Germany (formerly Lancaster Synthesis and Avocado Organics): >27,000 standard catalog products, including organics, high-purity inorganics, pure elements, precious-metal compounds, alloys, and catalysts as well as equipment and accessories. Sigma Aldrich, USA. The company had sales of $1.7 billion in 2005 and serves 60,000 accounts representing over one million individual customers. Apart from offering 100,000 small and big molecules, including cell culture media, it has also 30,000 items of laboratory equipment available. Under the name “SAFC Pharma,” a $65 million PFC (including HPAI) custom manufacturing business is operated. Thermo Fisher Scientifi c, USA (formerly Fisher Scientific and Thermo Electron). The number one company in this field [sales >$9 billion (2007,E)] supplies biochemicals and bioreagents; organic and inorganic chemicals (of which >15,000 fi ne organic chemicals); sera; cell culture media; sterile liquid-handling systems; microbiology media and related products; scientific consumable products, instruments, and equipment. Tokyo Kasei Kogyo Co., Ltd., Japan. This company offers >18,000 products. VWR International (owned by CDRV Investors, USA). The distributor of laboratory supplies represents 5000 manufacturers, of which Merck KGaA’s “analytics & reagents” and VWR’s “scientific products” are the most prominent ones. According to company information, VWR

LABORATORY CHEMICAL SUPPLIERS

21

offers 750,000 products, including small- and big-molecule laboratory chemicals. Online ordering is possible from all these companies. Apart from these giants, there are many laboratory chemical suppliers with smaller catalogs geared at specific needs, such as BioCatalytics, which offers a ketoreductase kit with about 100 enzymes, or Chiral Technologies, a division of Daicel, Japan, which offers a range of 175 immobilized and coated polysaccharide chiral stationary phases for use with HPLC, SFC, and SMB equipment. A selection of N-heterocyclic compounds, especially azaindoles, naphthyridines, pyridines, and pyrrolidines, is offered by Adesis, USA. Peptide building blocks are offered by Bachem, Switzerland (9,000 products); Polypeptide, Denmark (>150 products); Senn Chemicals, Switzerland and Synthetech, USA (250); and CBL-Patras, offering different types of “Barlos resins” for solid-state peptide synthesis.

CHAPTER 3

Products

In terms of molecular structure, one distinguishes first between lowmolecular-weight (LMW) and high-molecular-weight (HMW) products. The LMW fi ne chemicals, also designated as small molecules, are produced by traditional chemical synthesis, from microorganisms (by fermentation or biotransformation) or by extraction from plants and animals. Most modern life science products are made by total synthesis from petrochemicals. The HMW products, respectively large molecules, are obtained mainly by biotechnology processes. Within LMWs, the N-heterocyclic compounds are the most important category; within HMWs it is the peptides and proteins. Significant representatives of the two categories are described in more detail in the following chapters.

3.1

SMALL MOLECULES

As aromatic compounds have been exhausted as building blocks for life science products, N-heterocyclic structures prevail nowadays. They are found in many natural products, such as chlorophyll; hemoglobin; and the vitamins biotin (H), folic acid, niacin (PP), pyridoxine HCl (B6), riboflavine (B2), and thiamine (B1). In life sciences 9 of the top 10 proprietary drugs and 5 of the top 10 agrochemicals contain N-heterocyclic moieties (see Tables 11.4 and 11.7). Even modern pigments, such as diphenylpyrazolopyrazoles, quinacridones, and engineering plastics, such as polybenzimidazoles, polyimides, and triazine resins, exhibit an N-heterocyclic structure. In the four-membered rings, the β-lactam moiety is part of the classical penicillin and cephalosporin antibiotics. The most prominent example of a drug with a five-membered ring with one nitrogen atom is Lipitor (see Table 1.1). In the five-membered rings with 2 N atoms, imidazoles are found both in modern agrochemicals, especially the imidazolinones (e.g., Imazapyr), and pharmaceuticals, such as antimycotics (e.g., isoconazole, ketoconazole, and

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

22

SMALL MOLECULES

23

miconazole), anticancers (e.g., Temodar), and antiulcerants (cimetidine and omeprazole). Five-membered rings with 3 N atoms, triazoles or triazolones, are found in other antimyotics (e.g., fluconazole and itraconazole), antivirals (e.g., ribavirin), and antidepressants (e.g., nefazodone hydrochloride). Five membered rings with four nitrogen atoms, tetrazoles and tetrazolines, are found in a variety of modern antihypertensives (“sartans”; e.g., candesartan, irbesartan, losartan, valsartan), antibiotics (cefotetan and cefazolin), antiallergics (pemirolast and pranlukast), and analgesics (e.g., alfentanil). Pyridine derivatives, six-membered rings with 1 N atom, are found in both well-known Diquat & Chlorpyrifos herbicides, and in modern chlornicotenyl insecticides, such as imidacloprid. A vast array of pharmaceuticals and agrochemicals are built around a pyrimidine (2 N atoms in 1,3 position) ring structure. Important classes are modern antiviral compounds like zidovudine and nucleotides (see discussion below). The sulfonamide antibiotics (e.g., sulfadimethoxime and sulfamethazine) set a milestone in modern medicinal chemistry, and— half a century later—the sulfonyl ureas (such as amidosulfuron and bensulfuron-methyl and in modern pest control. Benzodiazepine derivates, seven-membered rings with 2 N atoms in 1,4 position are the pivotal structures of the benzodiazepine class of breakthrough CNS (central nervous system) drugs such as Librium and Valium. The most recent drug in this class, Sepracor’s Lunesta (eszopiclone), is composed almost entirely of N-heterocyclics. Like most modern drugs, esczopiclone also has a chiral center:

O N N N O

H

Cl N N

N

O Lunesta, (+)-(5S )-6-(chlorpyridin-2-yl)-7-oxo-6.7-dihydro5H-pyrrolo[3.4-b] pyrazin-5-yl 4-methylpiperazine-1-carboxylate

Purines (purine = 7H-imidazo [4,5-d]pyrimidine, C5H4N4) and pteridines (pteridine = pyrazino [2,3-d]pyrimidine, C6H4N4) are compounds consisting of two fused N-heterocyclic rings. Adenine and guanine are important purines. They are used, for example, as building blocks for nucleotides (see discussion below). Folic acid (a vitamin), methopterin, and methotrexate are typical pteridines.

24

3.2

PRODUCTS

BIG MOLECULES

Proteins are “very high-molecular-weight” organic compounds, consisting of amino acid sequences linked by peptide bonds. Proteins are essential to the structure and function of all living cells and viruses. They are among the most actively studied molecules in biochemistry. They can be made only by advanced biotechnological processes, primarily mammalian cell cultures (see Section 4.2). Monoclonal antibodies (mAb) prevail among human-made proteins. About a dozen of them are approved as pharmaceuticals. Important modern products are erythropoietin, etanercerpt, infl iximab, rituximab, and trastuzumab. Peptides are oligomers or polymers of amino acids linked together by a carboxamide group. An example of a pentapeptide is Thymopentin = Arg–Lys–Asp–Val-Tyr Because of their unique biological functions, a significant and growing part of new drug discovery and development is focused on this class of biomolecules. Their biological functions are determined by the exact arrangement, or sequence of different amino acids in their makeup. There are 20 naturally occurring amino acids, 8 of which are essential amino acids, namely, lisoleucine, l-leucine, l-lysine, l-methionine, l-phenylalanine, l-valine, lthreonine, and l-tryptophan. In various combinations and permutations amino acids make up the peptides of living things. Virtually every life process involves peptides in some way. Many disease states are found to be influenced by peptides. Accordingly, a variety of new peptide drugs are being developed as therapeutics for cancers, cardiovascular diseases (“pril”s), diabetes, pain management, viral infections, and a host of endocrine and neurological disorders. Instead as APIs, peptides are also used increasingly as delivery systems and/or receptor targeting components of drugs. Smaller peptides, containing 艋30–40 amino acids, can be manufactured via conventional chemical protecting, coupling, and/or deprotecting methods. Larger ones, such as Insulin and Epoetin Alfa, are produced via microbial biotechnology. A big step forward regarding administration of peptide/protein drugs is the PEGylation. The method offers the two-fold advantage of 1) substituting the injection by oral administration 2) reducing the dosage—and therefore the cost of the treatment. The pioneer company in this field is Prolong Pharmaceuticals which has developed a PEGylated erythropoietin (PEG-EPO). EPO is the biggest selling peptide drug. “Biotech” fi ne chemicals made by the most modern biotechnological process, the mammalian cell culture, have played an increasingly important role in the pharma market since the mid-1990s. The fi rst-generation products where insulin (rhinsulin), a peptide composed of two chains comprising 21 and 30 amino acids, respectively [molecular weight ≈ 6000 (MN)] and Somatropin (rhGH,

BIG MOLECULES

25

recombinant human growth hormone), a single-polypeptide chain of 191 amino acids, MW 22,124. Apart from pharmaceuticals, peptides are also used for diagnostics and vaccines. More than 40 peptides are in commercial use today. A dozen of them is shown in Table 3.1. As shown in column 3 of the table, the number of amino acids that make up a specific peptide varies widely. At the low end there are dipeptides, like the blockbuster antihypertensive drug enalapril and the artificial sweetener Aspartame (not shown in the table). In terms of volumes produced, there are by far the most important product group. At the high end there is the anticoagulant Hirudin, which is composed of 65 amino acids. Sales of synthetic peptides are estimated at $4 billion as formulated drugs (resp. $300–$400 million as APIs). Four different categories of fi ne chemicals, commonly referred to as peptide buildingblocks (PBBs), are key in the preparation of larger peptide molecules (see Figure 3.1). As shown in the figure, there is a striking difference in production volumes of amino acids on one hand and protected amino acids, peptide fragments, and peptides on the other hand. In fact, about six amino

Table 3.1

Typical Peptide Drugs

Peptide

Therapeutic Class

Size a

Manufacturing Method

ACTH

Adrenocorticotropic hormone

24

Chemical synthesis

Calcitonin

Calcium regulator (osteoporosis)

32

Various

Cyclosporin A

Immunosuppressant

11

Extraction from fungus

Enalapril

Angiotensin-converting enzyme

Fuzeon (enfuvirtide)

2

Chemical synthesis

Anti-AIDS (fusion inhibitor)

36

Chemical synthesis

Glucagon, HGF

Antihypoglycemic

29

Extraction, recombinant

Goserelin

Antineoplastic (prostate cancer)

10

Chemical synthesis

Hirudin

Antithrombotic

65

Extraction from leeches, recombinant

Insulin

Antidiabetic

51

Various

Oxytocin

Oxytocic (lactation-stimulating)

Somatostatin Thymopentin a

9

Chemical synthesis

Growth stimulant

14

Chemical synthesis

Immunoregulator

5

Chemical synthesis

Number of amino acids in the chain.

26

PRODUCTS

10 0 $/kg → unit price → 105 $/kg ➃ Peptides (API) $300–400 million ➂ peptide fragments $15–20 million ➁ protected amino acids $60–70 million ➀ amino acids $4–5 billion → molecular weight →

10 2

10 4

Note: sales figures are estimates.

Figure 3.1

Classification of Peptide Fine Chemicals

acids are used in large quantities as food and feed additives. Thus, l-glutamic acid, used as a seasoning agent in the form monosodium glutamate, is the single largest-volume amino acid. Its production volume exceeds 1.5 million tons per year (see Section 11.4). More than half a million tons per year each of d, l-methionine and l-lysine are used as feed additives. l-aspartic acid and l-phenylalanine are the main raw materials for the artificial sweetener, Aspartame. Altogether, only a small part of these large-volume amino acids are used as starting materials for therapeutic peptides. Apart from the economic figures, there also is a large variation in terms of molecular weight. The smallest amino acid molecule, Glycine, has a MW of 75, while the largest peptide listed in Table 3.1, Hirudin, has a MW of 7000. Peptides and oligonucleotides are now often summarized under the heading “tides”. Oligonucleotides have short sequences, typically containing 艋20 nucleotides. The latter are combinations of a heterocyclic base, a sugar, and one or more phosphate groups. In the most common nucleotides the base is a derivate of purine or pyrimidine (see above) and the sugar is the pentose (five-carbon sugar) deoxyribose or ribose. Tides are used in a variety of pharmaceutical applications, including antisense agents that inhibit undesirable cellular protein production, which causes many diseases; as antiviral agents; and as protein binding agents.

CHAPTER 4

Technologies

Several key technologies are used for the production of fi ne chemicals, including •

•

•

•

Extraction from animals, microorganisms, or plants; isolation and purification, used, for example, for alkaloids, antibacterials (especially penicillins), and steroids Hydrolysis of proteins, especially when combined with ion exchange chromatography, used, for instance, for amino acids Chemical synthesis, either from petrochemical starting material or from extracts Biotechnology, in particular biocatalysis (enzymatic methods), fermentation, and cell culture technology

Chemical synthesis and biotechnology are most frequently used; they are described in the following sections. 4.1

TRADITIONAL CHEMICAL SYNTHESIS

Two general methods, the “bottom-up” and “top-down” approaches, are used for synthesizing fi ne chemicals (see Section 6.1). Examples of the reactions used to synthesize a number of well-known pharmaceuticals are shown in Table 4.1. The number of synthetic steps required to make the desired APIs ranges from two (acetaminophen) to seven (omeprazole). For each step of a synthesis, a large toolbox of chemistries is available. Most of them have been developed on laboratory scale by academia over the last century and subsequently adapted to industrial scale. For example, “evaporating to dryness” had to be elaborated to “concentrate in a thin-fi lm evaporator and precipitate by addition of isopropanol.” The two most comprehensive handbooks describing organic synthetic methods are the Encyclopedia of

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

27

28 Pd-catalyzed carbonylation, hydroxylation of a double bond, chemical resolution, amidation, N-protection (using trifluoroacetic anhydride), carbonyl activation (using phosgene)

Glycerol mono(2-methoxyphenyl) ether

(±)-2-(4-Isobutylphenyl) propionic acid

(S)-1-N2-(1-Carboxy-3phenylpropyl)-l-lysyl]l-proline dihydrate

5-Methoxy-2-{[(4-methoxy-3,5dimethyl-2-pyridinyl)methyl] sulfi nyl}-1H-benzimidazol

4-Amino-N-(5-methyl-3isoxazolyl)benzene sulfonamide

Guaifensin

Ibuprofen

Lisinopril

Omeprazole

Sulfamethoxazole

Source: R. Bryant (see Bibliography).

Aromatic alkylation, HF-catalyzed aromatic acetylation, palladium-catlayzed carbonylation, alkene hydration

7-(d-α-Aminophenylacetamido) cephalosporanic acid

Cephalexin

Sulfonylation of aniline, sulfphoamidation with 3-amino-5methyl-isoxazol

O-methylation, imidazole ring formation using thiourea, N-oxidation, nucleophilic displacement, N-methylation, S-oxidation

Peracid oxidation of phenol, partial N-methylation, nucelophilic displacement of glycidol

Aromatic alkylation, amination, imine formation, amidation (sidechain), fermentation, deamidation (penicillin nucleus), acid-catalyzed ring expansion

Aromatic alkylation, amination, imine formation, amidation (sidechain), fermentation, and deamidation (penicillin nucleus)

6-[d-)-α-Amino-phydroxyphenylacetamido] penicillanic acidc

Amoxicillin

Partial hydrogenation of nitrobenzene, N-acetylation

Reactions

N-(4-Hydroxyphenyl)acetamide

Formula

Acetaminophen (Paracetamol)

Name

API

Table 4.1 Reactions Used to Synthesize Selected APIs

TRADITIONAL CHEMICAL SYNTHESIS

29

Reagents for Organic Synthesis [1] and Houben-Weil, Methods of Organic Chemistry [2].1 More than 150 types of reaction offered by the fine-chemical industry are listed in the process directory section of the Informex Show Guide [3]; 45 of them are organic name reactions, representing 10% of a comprehensive listing in the Merck Index. They range from acetoacetylation all the way through to Wittig reactions. Each of the 430 companies participating at the survey indicated competence for close to 30 types of reaction on average. Amination, condensation, esterification, Friedel–Crafts, Grignard, halogenation (esp. chlorination), and hydrogenation, respectively reduction (both catalytic and chemical) are most frequently mentioned. Optically active cyanohydrin, cyclopolymerization, ionic liquids, nitrones, oligonucletides, peptide (both liquid- and solid-phase), and steroid synthesis are promoted by only a limited number of companies. Since the mid-1990s the commercial importance of single-enantiomer fi ne chemicals has increased steadily. In this context, the ability to synthesize chiral molecules has become an important competence. There are basically two types of process available for producing chiral molecules: a stereospecific synthesis, using chiral catalysts, or the physical separation of the enantiomers. Among the chiral catalysts, synthetic BINAP types (see Table 11.11) and enzymes are used most frequently. The physical separation of chiral mixtures and purification of the desired enantiomer can be achieved either by classical crystallization (having a “low-tech” image but still widely used), using standard multipurpose equipment or by various types of chromatographical separation, such as standard column, simulated moving-bed (SMB) or supercritical fluid (SCF) techniques, specifically, an advanced chromatographic technology for the separation of racemates and elimination of trace impurities. With the exception of some stereospecific reactions, particularly biotechnology (see Section 4.2), mastering these technologies does not represent a distinct competitive advantage. Most reactions can be carried out in standard multipurpose plants. The very versatile organometallic reactions (e.g., conversions with lithium aluminum hydride, boronic acids) may require temperatures as low as −100°C, which can be achieved only in special cryogenic reaction units, either by using liquefied nitrogen as coolant or by installing a low-temperature unit. Other reaction-specific equipment, such as ozone or phosgene generators, can be purchased in many different sizes. The installation of special equipment generally is not a critical path on the overall project for developing an industrial-scale process of a new molecule.

1

Bracketed reference numbers cited in text throughout the book correspond to “Cited Publications” entries in Bibliography sections at the end of parts I–III.

30

TECHNOLOGIES

Microreactions are a new technology that is being developed at several universities, 2 as well as leading fi ne-chemical companies, such as Bayer Technology Services, Clariant, Degussa, Lonza, and Sigma-Aldrich. It represents the fi rst breakthrough development in reactor design since the introduction of the stirred-tank reactor, which was used by Perkin & Sons, when they set up a factory on the banks of what was then the Grand Junction Canal in London in 1857 to produce mauveïne, the first-ever synthetic purple dye. The main advantages of microreactors are (1) much better heat and mass transfer, allowing one to carry out energetic reactions safely and rapidly, and obtain higher yields, selectivities, and product quality and (2) the substantially shortened development times. Processes that are run in microreactors do not need the cumbersome scaleup from laboratory to pilot plant to industrial-scale plant. Capacity increases are achieved by “numbering up” that is using more units in parallel. Thus, regulatory issues are also much simpler. Disadvantages are the problems associated with solids handling (already the precipitation of a byproduct can cause clogging) and the lack of experience with “industrial scale” production over extended periods of time. Examples for reactions that have worked in microreactors include diazomethane conversions, Grignards, halogenations, hydrogenations, aromatics oxidations, and Suzuki couplings. Japanese companies, with their heritage in fi ne arts and crafts, have assumed a leadership position in microtechnology. Other technologies with promising growth prospects include modern types of catalytic reaction, particularly with chiral catalyst (both synthetic and enzymatic). Three main categories of processes are used for the synthesis of peptides: chemical synthesis, extraction from natural substances, and biosynthesis. On further scrutiny, almost 10 distinct synthetic methods can be distinguished (see Table 4.2). For the synthesis of some peptides, more than one method is used, including chemical (solution or solid phase) synthesis and recombinant biotechnology for salmon calcitonin, extraction from pancreas, semisynthesis, and recombinant biotechnology for insulin. Within the chemical synthesis, by which the majority of peptides is obtained, one distinguishes between “liquid phase” and “solid phase” synthesis. The latter was pioneered by R. B. Merrifield, who introduced it in the early 1960s. It consists in attaching the fi rst amino acid to the reactive group of a resin and than adding the remaining amino acids one after the other. In order to ascertain a full selectivity, the amino groups have to be protected in advance. The corresponding products are called peptide building blocks (PPBs). Most developmental peptides are synthesized by this method, which lends itself to automation. By developing both more efficient protecting groups and resins, it has been improved substantially over the last 40 years (i.e., since the mid-1960s). 2

Examples are Swiss Federal Institute of Technology (ETHZ), Switzerland; Massachusetts Institute of Technology (MIT), USA (ETHZ & MIT have formed a joint team to explore the glycoside formation); University of Hull, UK; Fraunhofer Institute for Chemical Technology (ICT), Germany; and Micro-Chemical Process Technology Research Association (MCPT), Japan.

31

Low raw-material costs; virtually unlimited scaleup

Potential for complex molecules containing unnatural amino acids

Mild coupling under aqueous conditions without the need for sidechain protection

Low raw-material costs; scaleup potential limited only by size of production facility; purification relatively easy

Low raw-material costs; unlimited scaleup; purification may be relatively easy

Fermentation

Semisynthesis

Enzymatic

Recombinant— fermentation

Recombinant— transgenic animals and plants

Source: PolyPeptide.

Relatively simple scaleup

Extraction

Rapid development for small to medium scale Relatively rapid development cycle; potential for scaleup to metric tons

Potential for scaleup to metric tons

Advantages

Comparison of Peptide Manufacturing Technologies

Chemical synthesis Chemical— solution-phase Chemical— solid-phase Chemical—hybrid

Method

Table 4.2

Costly development and production; unnatural sequences not possible

Relatively costly development; unnatural sequences may be difficult or impossible

Competing proteolysis limits usefulness

Source availability

Applicable only for naturally occurring products

Scale limited by availability of source; potential for contamination form source material

Lengthy and costly development, relatively high cost of raw materials and conversion Scaleup potential may be limited; relatively high cost of raw materials and conversion Raw materials (resins, amino acid derivatives) currently expensive

Limitations

32

TECHNOLOGIES

The leading solid phases are the “2-chlorotrityl chloride resins.” Professor K. Barlos (University of Patras, Greece) has made the single most important contribution to the development of these resins. They consist of a polystyrene-base resin crosslinked with a small amount of divinylbenzene and functionalized with 2-chlorotritiyl chloride.

As the intermediate products resulting from individual synthetic steps cannot be purified, a virtually 100% selectivity is essential for the synthesis of larger-peptide molecules. Even at a selectivity of 99% per reaction step, the purity will drop to less than 75% for a dekapeptide (30 steps)! It is practically infeasible to go beyond 10–15 amino acid peptides by using the solidphase method. In order to prepare larger peptides, individual fragments are fi rst produced, purified, and then combined with the fi nal molecule by liquid phase synthesis. This combination of methods is listed under “chemical hybrid” in Table 4.2. Thus, for the production of Roche’s anti-AIDS drug Fuzeon (enfuvirtide), three fragments of 10–12 amino acids are fi rst made by solid-phase synthesis and then linked together by liquid-phase synthesis. The preparation of the whole 35 amino acid peptide requires more than 130 individual steps! Whereas the overall demand for outsourced pharmaceutical fi ne chemicals is expected to increase moderately (see Chapter 15), the estimated annual growth rates for the abovementioned niche technologies are much higher. Microreactors and the SMB separation technology are expected grow at a rate of even 50–100% per year! It has to be realized, however, that the size of the accessible market typically does not exceed a few hundred tons per year!

4.2 BIOTECHNOLOGY Industrial biotechnology, also called “white biotechnology,” is increasingly impacting the chemical industry, enabling both the conversion of renewable resources, such as sugar or vegetable oils, and the more efficient conversion of conventional raw materials into a wide range of commodities, such as ethanol, fi ne chemicals (e.g. 6-aminopenicillanic acid), and specialties (e.g., food and feed additives). Biotechnology allows the production of existing products in a more economic and sustainable fashion on one hand, and access to new products, especially biopharmaceuticals, on the other hand. Three very different process technologies—biocatalysis, biosynthesis (microbial fermentation), and cell cultures—are used. Biocatalysis. Biocatalysis, also termed biotransformation and bioconversion, makes use of natural or modified isolated enzymes, enzyme extracts, or whole-cell systems for the production of small molecules. A starting material is converted by the biocatalyst in the desired product. Enzymes are differentiated from chemical catalysts particularly with regard to stereoselectivity,

BIOTECHNOLOGY

33

regioselectivity, and chemoselectivity. Biocatalysis makes use of natural or modified enzymes to echance chemical reactions. Whereas enzymes were traditionally associated with the metabolic pathway of natural substances, they can also be tailored for use in chemical synthesis. Biocatalysts, particularly enzymes, are applied like chemical catalysts, either in solution or on solid supports (“immobilized enzymes”), albeit under milder conditions and in aqueous solution. Immobilized enzymes can be recovered by fi ltration after completion of the reaction. Conventional plant equipment can be used with no, or only modest, adaptations. The International Union of Biochemistry and Molecular Biology has developed a classification for enzymes. The main categories are •

• •

•

•

•

Oxidoreductases, which catalyze oxidation–reduction reactions and are acting, for example, on aldehyde or keto groups. An important application is the synthesis of chiral molecules, especially chiral PFCs (22 out of 38 chiral products produced on large industrial scale are already made using biocatalysis). Transferases, which transfer a functional group, e.g. —CH 3 or —OPO3. Hydrolases, which catalyze the hydrolysis of various bonds. The bestknown subcategory of hydrolases are the lipases, which hydrolyze ester bonds. In the example of human pancreatic lipase, which is the main enzyme responsible for breaking down fats in the human digestive system, a lipase acts to convert triglyceride substrates found in oils from food to monoglycerides and free fatty acids. In the chemical industry, lipases are also used, for instance, to catalyze the —C≡N → —CONH 2 reaction, for the synthesis of acrylamide from acrylonitril, or nicotinic acid from 3-pyridylnitrile. Lyases, which cleave various bonds by means other than hydrolysis and oxidation, such as starch to glucose. Isomerases, which catalyze isomerization changes within a single molecule. Ligases, which join two molecules with covalent bonds.

Whereas in the past, only a relatively small number of enzymes were available commercially, new developments in technology are increasing this number dramatically. Both natural diversity and synthetic “reshuffl ing” are being increasingly exploited to obtain enzymes from diverse environments and with a large variation in properties. Companies specializing in making enzymes, such as Novozymes, Danisco (Genencor), or modifying (respectively “tailoring”) enzymes to specific chemical reactions, such as Codexis, have yielded enormous progress regarding areas of application, specificity, concentration, throughput, stability, ease of use, and economics. The highest-volume chemicals made by biocatalysis are ethanol (∼70 metric tons), high-fructose corn syrup (1.5–2 metric tons), l-lysine (850,000 tons) and

34

TECHNOLOGIES

other amino acids, and some antibiotics, especially the conversion of 6-aminopenicillanic acid (APA) to 7-aminodesacetoxycephalosporanic acid (ADCA), acrylamide, aspartame, citric acid, and niacinamide.

Biosynthesis. Biosynthesis by microbial fermentation is used for the production of both small molecules (using enzymes in whole cell systems) and less complex, nonglycosylated big molecules, including peptides. The technology has been used for 10,000 years to produce food products, like alcoholic beverages, cheese, yogurt, and vinegar. In contrast to biocatalysis, a biosynthetic process does not depend on chemicals as starting materials, but only on cheap natural feedstock, such as glucose, to serve as nutrient for the cells. The enzyme systems triggered in the particular microorganism strain lead to the excretion of the desired product into the medium, or, in the case of HMW peptides and proteins, to the accumulation within so-called inclusion bodies in the cells. For the large-scale industrial production of fi ne chemicals and proteins, dedicated plants are used. As the volume productivity is low, the bioreactors, called fermenters, are large, with volumes that can exceed 250 m3. Product isolation was previously based on large-volume extraction of the medium containing the product. Modern isolation and membrane technologies, like reverse osmosis, ultra- and nanofi ltration, or affinity chromatographic methods can help to remove salts and byproducts and to concentrate the solution efficiently and in an environmentally friendly manner under mild conditions. The fi nal purification is often achieved by conventional chemical crystallization processes. In contrast to the isolation of small molecules, the isolation and purification of microbial proteins is tedious and often involves a number of expensive large-scale chromatographic operations. Examples of large-volume LMW products made by modern industrial microbial biosynthetic processes are monosodium glutamate (MSG), vitamin B2 (riboflavin), and vitamin C (ascorbic acid). In riboflavin, the original six- to eight-step synthetic process starting from barbituric acid has been substituted completely by a microbial one-step process, allowing a 95% waste reduction and a ∼50% manufacturing cost cut. In ascorbic acid, the five-step process (yield ≈ 85%) starting from d-glucose, originally invented by Tadeus Reichstein in 1933, is being gradually substituted by a more straightforward fermentative process with 2-ketogluconic acid as pivotal intermediate. After the discovery of penicillin in 1928 by Sir Alexander Fleming from colonies of the bacterium Staphylococcus aureus, it took more than a decade before Howad Florey and Ernst Chain isolated the active ingredient and developed a powdery form of the medicine. Since then, many more antibiotics and other secondary metabolites have been isolated and manufactured by microbial fermentation on a large scale. Some important antibiotics besides penicillin are cephalosporins, bacitracin, gentamycin, rifamycin, streptomycin, tetracycline, and vancomycin.

BIOTECHNOLOGY

35

More recently, Glaxo SmithKline patented an efficient fermentation route for the biosynthetic production of thymidine (thymine-2-desoxyriboside). Key to the invention is a recombinant strain that efficiently produces high titers of thymidine by blocking some enzymes in the thymidine regulating pathway. This microbial process has now replaced the chemical route and has enabled gsk to supply the anti-AIDS drug AZT (zidovudine) to third-world countries at low cost.

Cell Cultures. In mammalian organisms, the glycosylation of proteins, involving the addition of sugar moieties, often is essential for biological activity. The ability of a particular cell or organism to correctly glycosylate a protein can determine its usefulness to make a given protein. Animal or plant cells, removed from tissues, will continue to grow if supplied with and under the appropriate nutrients and conditions. When carried out outside the natural habitat, the process is called cell culture. Mammalian cell culture fermentation is used mainly for the production of complex big molecules with specific glycosylation patterns and tertiary protein structures, such as therapeutic proteins and monoclonal antibodies (mAbs). Related technologies use insect cells, transgenic animals, or plant cell cultures. In contrast to the mammals, bacteria, plants, and fungi are incapable of glycosylation. Cell culture processes allow single cells to act as independent units, much like a microorganism such as a bacterium or fungus. The cells are capable of dividing; they increase in size and, in a batch culture, can continue to grow until limited by some culture variable such as nutrient depletion. Mammalian cell culture, also known as recombinant DNA technology, has existed for 50 years. It serves for producing high-molecular-weight (HMW), or, simpler, big-molecule fi ne chemicals, including glycoproteins and monoclonal antibodies. The fi rst products made were interferon (discovered in 1957), insulin, and somatropin (see Section 3.2). For mammalian cell culture, specific cell lines are developed. It is a uniform cell population that can be cultured continuously. Commonly used cell lines are Chinese hamster ovary (CHO) cells or plant cell cultures (see text below). The production volumes are very small. The demand exceeds 100 kg per year for only four products: Rituxan (Genentech), Enbrel (Amgen and Wyeth), and Remicade [Johnson & Johnson (J&J)]. The need for cell culture technology stems mainly from the fact that bacteria do not have the ability to perform many of the posttranslational modifications that most large proteins require for in vivo biological activity. These modifications include intracellular processing steps such as protein folding, disulfide linkages, glycosylation, and carboxylation. While there are substantial differences between microbial and mammalian technologies (e.g., the cycle times are 2–4 and 10–20 days, respectively), they are even more pronounced between mammalian and synthetic chemical technology (see Table 4.3). The low productivity of the animal culture makes it very vulnerable to contamination, as a small number of bacteria would soon outgrow a larger

36

TECHNOLOGIES

population of animal cells. Given the fundamental differences between the two process technologies, plants for mammalian cell culture technologies have to be built ex novo. The production of biopharmaceuticals starts by inoculating a nutrient solution with cells from a cell bank. The latter are allowed to reproduce in stages on a scale of up to several thousand liters. The cells secrete the desired product, which is then isolated from the solution,

Table 4.3 Key Characteristics of Biotechnological and Chemical API Manufacturing (All Figures Indicative Only) Technology Mammalian Cell

Chemical

Worldwide reactor volume

∼3,000 m (fermenters)

∼80,000 m 3

Investment per m 3 reactor volume

∼$5 million a

∼$500,000

Production per m 3 reactor volume and year

Several 10 kg

Several 1,000 kg

Sales per m 3 reactor volume and year

∼$5–10 million

∼$250,000–$500,000

Value of 1 batch

∼$5 million (20,000-L fermenter)

∼$500,000

Product concentration in reaction mixture

∼2 g/L (before purification)

∼10%

Typical reaction time

∼20 days

∼6 h

Capacity expansion projects

Many, doubling of actual capacity

Few, mainly in Far East

Governing rules

cGMP, BLA b

cGMP, ISO 14000

Scaleup factor (1st lab process to industrial scale)

∼10 (μg → 1 ton)

∼10 6 (10 g → 10 tons)

Process development time

∼3 years (one step)

2–3 months per step

Share of outsourcing

∼33%

∼33%

Plant construction time

4–6 years

2–3 years

a

3

9

Examples: Lonza invested $275 million for addition of 60,000-L fermenter volume in Portsmouth, NH, corresponding to = $4.58 million/m 3). Boehringer-Ingelheim invested $320 million, resp. $3.5 million per m 3 fermenter volume, in a new 90,000-L eight-floor biopharmaceutical production plant at the former Dr. K. Thomæ site in Biberach/Riss, Germany. b Biological License Application (product-specific). Source: Reference 4.

BIOTECHNOLOGY

37

purified, and transferred to containers. A typical pilot plant for protein production from mammalian cells is shown in Figure 4.1. The mammalian cell production process is divided into the following four main steps: 1. Cultivation. The cells are transferred from the cryogenic cell bank to a liquid nutrient medium, where they are allowed to reproduce. Mammalian cells such as CHO divide about once every 24 h (bacterial cells, such as Escherichia coli, usually divide once every 20 min, and thus a sufficient number of cells are obtained in a much shorter time than in traditional fermentation processes). During the growth phase the cell culture is transferred to progressively larger culture vessels. 2. Fermentation. The actual production of the biopharmaceutical occurs during this phase. The culture medium contains substances needed for synthesis of the desired therapeutic protein. In total, the medium contains around 80 different constituents at this stage, although manufacturers never disclose the exact composition. The industrial-scale bioreactor have capacities of 10,000 L (liters) or multiples. There are both technological and biological constraints on the size of the reactor—the bigger a fermenter is, the more difficult it becomes to create uniform conditions around all the cells contained in it. The fermentation reaction is done in a batch, fed-batch, or perfusion mode. 3. Purification. The production of biopharmaceuticals in cells is a onestep process, and the product can be purified immediately after fermentation.

Depth filtration

Media prep

Centrifuge Kill system

Inoculum grow-Up 50-Liter fermenter

500-Liter fermenter

5000-Liter fermenter Utrafiltration 2 – 8°C

Concentration / diafiltration 0.2 µm filtration Protein A affinity

0.2 µm filtration

Anion exchange

Holding tank

Concentration or dilutiuon

0.2 µm filtration Concentration / diafiltration

Figure 4.1

0.2 / 0.45 µm IF Intermediate Intermediate filtration storage

0.2 µm filtration

QC / QA

Final filtration

2 – 8°C Distributed to customers Finished goods

5000-L process for protein production from mammalian cells.

38

TECHNOLOGIES

In the simplest case the cultured cells will have secreted the product into the ambient solution. Thus, the cells are separated from the culture medium (e.g., by centrifugation or filtration), and the desired product is then isolated via several purification, typically chromatographic steps. If, on the other hand, the product remains in the cells following biosynthesis, the cells are fi rst isolated and digested (i.e., destroyed), and the cellular debris is then separated from the solution together with the product. As both the reaction times are long and the product concentration is small, the productivity of this technology is low. For example, a 10,000-L fermenter yields only a few kilograms of a therapeutic antibody, such as rituximab or trastuzumab. The production steps, including purification, take several weeks. Several more weeks are then needed to test the product. Each product batch is tested for purity to avoid quality fluctuations, and a 99.9% purity level is required for regulatory approval. Only then can the fi nished product be formulated and shipped. 4. Formulation. The fi nal steps in the production of biopharmaceuticals are also demanding. The sensitive proteins are converted to a stable pharmaceutical form and must be safely packaged, stored, transported, and fi nally administered. Throughout all these steps the structural integrity of the molecule has to be safeguarded to maintain efficacy. At present this is possible only in special solutions in which the product can be cryogenically frozen and preserved, although the need for low temperatures does not exactly facilitate transport and delivery. Biopharmaceuticals are therefore strictly made to order. Because of the sensitive nature of most biopharmaceuticals, their dosage forms are limited to injectable solutions. Therapeutic proteins cannot pass the acidic milieu of the stomach undamaged, nor are they absorbed through the intestinal wall. Although work on alternatives such as inhalers is underway (the fi rst commercial application is an insulin inhaler), injection remains the predominant option for administering sensible biopharmaceuticals. Nowadays all the steps in the production of biopharmaceuticals are fully automated. Production staff steps in only if problems occur. Even a trace amount of impurities can cause considerable economic loss, as the entire production batch then has to be discarded, the equipment dismantled and cleaned, and the production process restarted from scratch with the cultivation of new cells. Plant cell culture is in an early stage of technology development. It shows promise for the selective synthesis of chiral compounds with a polycyclic structure, as found in many cytostatics, such as camptothecine, vinblastine, and paclitaxel (see Section 15.2). The concentration of biologically active molecules within the plant is usually very low. Apart from pure manufacturing and weather-related factors in manufacturing pharmaceutical substances in living plants, the downstream processing, isolation, and purification technologies that need to be developed are key to the overall process costs. The industrial viability and economy of scale have yet to be demonstrated.

BIOTECHNOLOGY

39

The “Deutsche Sammlung von Mikroorganismen und Zellkulturen GmbH—DSMZ” (German Collection of Microorganisms and Cell Cultures) is the most comprehensive Biological Resource Centre in Europe. The nonprofit organization counts more than 14,000 microorganisms, 900 plant viruses, 550 human and animal cell lines, and 500 plant cell cultures.

CHAPTER 5

Facilities and Plants

Fine-chemical plants are either located on a separate industrial site or part of a larger chemical complex. A typical standalone site comprises an administrative building, laboratories, a warehouse (with separate sections for raw materials, quarantine products, and fi nished products), a power station (for steam, brine, inert gas, etc. generation), waste treatment facilities (for the treatment of organic and aqueous liquid and solid waste and offgases), a maintenance shop, a tank farm for liquid raw materials and solvents, and, in dry areas, a cooling tower. Of these facilities, only the production building is fi ne-chemical-specific. It typically consists of three distinct sections: a reaction part, also referred to as “wet section”; a product fi nishing part, also referred to as “dry section”; and an administrative part, comprising quality control laboratories, offices, change rooms, and other facilities. In fi ne chemicals, it does not make sense to build dedicated production units for individual products, because the requirement for single fi ne chemicals rarely exceeds 100 tons per year (see Figure 5.1) and because the majority of fi ne chemicals can be produced in standardized equipment. Moreover, the product portfolio is regenerated at a fast pace, so that a single product can be superseded before a dedicated plant could be reimbursed. This set of circumstances leads to the multipurpose (MP) plant as basic instrument/vehicle for fi ne-chemical production. A multipurpose plant has to be capable of handling a series of unit operations and performing many types of chemical reaction. In the same plant up to 20 or more different process steps can be executed per year. In a few cases, fi ne chemicals are produced in dedicated or continuous plants. This can be advantageous if the raw materials or products are gaseous or liquid rather than solid, if the reaction is strongly exothermic or endothermic or otherwise hazardous, and if the highvolume requirement for the product warrants a continued capacity utilization. Highly sensitizing substances (e.g., penicillins or cephalosporins), materials of an infectious nature, and molecules of high pharmacological activity or of high toxicity (e.g., certain steroids or cytotoxic anticancer agents) should

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

40

PLANT DESIGN

41

<10,000 kg/year 10,000– 100,000 kg/year 100,000– 1,000,000 kg/year

>1,000,000 kg/year 0

Figure 5.1

20 40 % share of total production volume

60

Production volumes of APIs for prescription drugs.

be manufactured only in dedicated and completely segregated production areas.

5.1

PLANT DESIGN

The logical building block of the wet section is the train. It consists of two to three reactors, headtanks, receivers, and a filtration unit (centrifuge or nutsche). The reactors are typically equipped with a heating/cooling system, overhead condensers, and aftercondensers. By defi nition, a train is a “chemical manufacturing tool” able to handle one chemical step in a fi ne chemical’s multistep synthesis at a time. In the dry section, the drying, milling, sieving, and packaging take place. According to the nature of the products manufactured in a plant, more or less stringent measures for avoidance of product contamination, respectively cross-contamination, are needed. Specific containment and segregation rules must be adopted for pharmaceutical fine chemicals produced according to cGMP (current Good Manufacturing Practice) regulations, which constitute the majority of fi ne chemicals made. Fine chemicals that have to be manufactured according to cGMP regulations include advanced (“regulated”) intermediates and APIs for pharmaceuticals, which are manufactured via chemical synthesis, biotechnology, extraction, recovery from natural sources, or any combination thereof, as well as products such as veterinary drugs and vitamins. Separate regulations apply for food and feed additives, personal care products, and flavors and their advanced intermediates. The most demanding measures have to be taken for biopharmaceuticals, high-potency active ingredients (HPAIs), toxic substances, and drugs regulated under the Controlled Substances Act (CSA) by

42

FACILITIES AND PLANTS

the US Drug Enforcement Agency to stop illicit manufacture of narcotics, anabolic steroids, and similar compounds. Fine chemicals that are not subject to cGMP regulations comprise intermediates and active ingredients for pesticides and specialty chemicals outside life sciences (see Section 11.4).

The degree and the extent of segregation have a direct impact on the investment and the operating costs. A helpful overview of different multipurpose plant concepts can be found in the text by Rauch [5]. Before embarking on a project for a new plant, the following options for creating additional production capacity within existing plants should be considered. They are listed in order of increasing associated cost: 1. Creation of additional capacity by increasing the efficiency of processes for existing products. On the technical side, this can be achieved either by developing processes that involve fewer steps, by increasing the product concentration or reducing the reaction time, or by eliminating production bottlenecks, for instance, by installing external heating/ cooling loops or separation units. Obviously, a combination of two or more of these measures is particularly effective. Options on the business side are subcontracting earlier parts of a multistep synthesis to third parties, or “bottom slicing,” which means eliminating the least profitable items from the product portfolio. 2. Expansion of an existing plant by adding production trains, preferably in spare space in existing buildings. Thus one takes advantage of existing infrastructure. 3. Construction of a new “grass roots” plant. A fourth possibility, which cannot be ranked in terms of fi nancial attractiveness, is the purchase of an existing fi ne-chemical company. Depending on the prevailing market conditions, the purchase price can be anywhere between a nominal fee and a large EBITDA multiple. Apart from the status of the fi xed assets, a decisive element in the valuation of candidates is the goodwill, particularly the existing manufacturing agreements and the solidness of the business plan. The feasibility study represents the fi rst step in a design phase. A task force, consisting of process engineers, sales and marketing representatives, and other specialists, led by a project champion, develops the defi nition of the project and a fi rst cost estimate. Typically, the project champion will be responsible for implementing the project. Already in this very fi rst design phase appropriate measures have to be taken, in case the multipurpose plants need to operate according to cGMP rules. Already the design itself has to undergo a qualification process, namely, the design qualification (DQ). The qualification process is a procedure proving and documenting that equipment and ancillary systems are properly installed, work correctly, and actually lead to the expected results. The overall qualification process consists in general of the following steps:

PLANT DESIGN •

•

•

•

•

43

User requirement specification (URS)—documented defi nition of the project. Design qualification (DQ)—documented verification that the proposed design of the system is suitable for the intended purpose. Installation qualification (IQ)—documented verification that the system, as installed or modified, complies with the approved design. Operational qualification (OQ)—documented verification that the system performs as intended throughout the anticipated operating ranges. Performance qualification (PQ)—documented verification that the system, as connected together, can perform effectively and reproducibly according to the approved process method and specifications.

After alternatives have been checked and the defi nition of the project is found to be acceptable, the next design phase, the basic design, is initiated. At this point of time, it is appropriate to involve an external contractor. Engineering companies that are experienced in designing and building fi ne-chemical plants are Chemgineering, Foster-Wheeler, Jacobs Engineering, InfraServ Knapsack, Linde, and Lurgi. The result of the basic design phase is a rather precise plan of the project and an accurate cost estimate that will constitute the basis for the fi nal go/no go decision. The environmental impact of the project and all relevant permitting issues need also to be resolved during this phase. The detail engineering fi nally will provide the necessary information needed to execute the project. In the design of a fi ne-chemical plant the size of the equipment, especially the volume of the reaction vessels, is critical. In order to ensure that the potential customer’s needs are met by the capabilities of the plant, this has to be defi ned in close coordination with the marketing and sales function. Depending primarily on the differing quantities of the fi ne chemicals to be produced in the same multipurpose unit, the concentration of substances in the reaction mixture, and the reaction time, there is, however, an upper limit for the size of the reaction vessel and the ancillary equipment. Some factors run countercurrent to the economy of scale and point to small-size equipment: •

•

Length of the production campaign—if it becomes shorter than about 10 working days, the changeover time for preparing the plant for the production of the next product becomes too long and overburdens the production costs. Working capital—if the equipment is oversized with regard to the requirement for any particular fi ne chemical, the interval between two production campaigns becomes too long and excessive inventory is built up.

44

FACILITIES AND PLANTS •

•

•

Heat transfer—the time required for heating and cooling the reaction mixture and for its transfer among different pieces of equipment becomes too long as compared to the reaction time as such. In the case of expensive fi ne chemicals, the value of one batch in one piece of equipment becomes very high, sometimes in excess of $1 million, and therefore the risk of false manipulations becomes excessive. The dimensions of existing buildings, tank farms, and the capacity of utilities often determine an upper limit of the equipment size.

In commercial plants the volume of the reactors varies quite widely, and ranges typically between 4 and 6 m3 (more rarely between 1 m3 and 10 m3, or in rare cases even larger). As a rule of thumb, the annual capacity for a onestep synthesis process averages approximately 15–30 metric tons of product per 1 m3 reactor volume. Therefore, a production train, which is equipped with 4 and 6 m3 reaction vessels, is suitable for the production of around 100 metric tons of a step per year. As illustrated in Figure 5.1, this corresponds to a typical production volume of an API. Whereas 45% of the top 200 drugs are produced in the volume range of 10–100 tons per year, the requirement for less than 25% of the APIs exceeds 100 tons per year. Standard reaction conditions and standard materials of construction available in multipurpose plants are usually: Temperature Pressure Material of construction

−20°C to <200°C 10 mbar–3 bar Stainless-steel and glass-lined

These conditions allow for the vast majority of production processes (see Section 4.1). In order to make a multipurpose plant really fit for today’s broad market requirements, an extension of the standard conditions by adding special features to enhance the flexibility of a plant is an absolute must. Flexibility, however, always has its price. Exotic or highly specialized equipment should to be installed only in a multipurpose plant, if there is a specific need. Excessive flexibility is counterproductive. In the industrial practice, it has proved to be a good solution to provide space for special equipment in the basic design, and to order and install it only in case of a real demand. Examples of special equipment for the wet section of the plant are lowtemperature or cryogenic reactors, allowing for temperatures as low as −100°C, high-temperature reactors (up to ∼300°C), and high-pressure reactors, allowing operation at pressures up to 100 bar, fractional rectification columns, thin-fi lm evaporators, liquid–liquid extractors, various types of chromatographic columns [solid-phase, simulated moving bed (SMB), supercritical fluid (SCF)]. Beside traditional stainless steel and glass lining as materials of construction, more exotic materials like zirconium, tantalum, and hastelloy and inconel alloys are increasingly used.

PLANT DESIGN

45

In the dry section of the building, micronization equipment, nutsche– dryer combinations, spray dryers, air classifiers, adsorption and absorption units, packaging/labeling machines, and other equipment can be considered. Instead of adding special equipment to individual production trains, it is also possible to place them centrally in the dry or wet section of the plant, respectively. In this way they can be connected as needed to different production trains. Another option is to create semispecific production trains, For example, for hydrogenations, phosgenizations, Friedel–Crafts alkylations, and Grignard reactions. The choice of the proper piping concept is essential for a valid multipurpose plant design. The basic requirements for a piping system are, beside corrosion resistance for a wide array of substances, ease of cleanability (due to quality and costs) and, of course, a high degree of flexibility in order to ensure the needed multipurpose character of the plant. Typically, the following approaches are available: A preinstalled piping system with an adequate number of manifolds and coupling stations, according to the required flexibility (see Figure 5.2). This classical system may be advantageous in cases where the product

SOLVENTS & REAGENTS

•

Figure 5.2 Piping manifolds for multipurpose plants.

46

FACILITIES AND PLANTS

•

mix tends to be not too broad and/or the number of product changes per unit of time is relatively small. A process-specific piping concept is the system of choice in cases where the products to be manufactured are still unknown during the design phase of the plant. This system is also ideal in cases when the campaign lengths are expected to be short, that is, when frequent product changes are likely. The process-specific piping concept generally minimizes the needed amount of fi xed-installation pipes. Connections between reactors, headtanks, receivers, pumps, fi ltration units, and other components are installed only as needed, on a strictly on a campaign-to-campaign basis. In addition, suitable hoses are installed instead of solid piping whenever possible. This concept also facilitates the cleaning–changeover process, as it minimizes or even avoids “dead locks.”

The complexity of the plant design, the degree of sophistication, and the quality requirements of the fi ne chemicals to be produced; the necessity to process hazardous chemicals; the sensitivity of product specifications to changes of reaction parameters and the availability of a skilled workforce all determine the degree of automation that is advisable. Full process control computerization for a multipurpose plant is much more complex and therefore will be also be much more expensive than for a dedicated single-product plant. Whenever possible, all efforts have to be made to choose standard process control systems and to apply standard control software; this is a proven measure to control the investment costs in this segment and will also minimize the risk of having excessive investment and startup costs due to initiating problems with the computer control system. The fact that automation systems need to be validated has become a critical aspect of all automation systems that are being applied for cGMP productions. Some guidelines on this topic can be found in the US Code of Federal Regulations [6]. Good manufacturing guidelines apply also to heating, ventilation, and air-conditioning (HVAC) systems. They have to be designed to exclude contamination. The material handling in a multipurpose plant is driven mainly by the following considerations: •

•

To optimize direct labor costs versus investment costs by the mechanization of material-handling operations To comply with all pertinent quality requirements regarding safety, hygiene, and cGMP, if applicable

According to the nature of the substances involved, specific segregation within the production area might be necessary. In order to exclude the risk of any cross-contamination the following precautions might be taken:

PLANT DESIGN •

•

•

47

Dispensing of starting materials and charging of solids into reactors might be located in isolated and contained areas. The transfer of wet solid material from centrifuges or nutsches to dryers should occur either via dedicated transfer pipes or via a solid material tote bin system. Depending on the nature of the products, the unloading of dryers might have to take place in a segregated area (e.g., cleanrooms for cGMP products).

In case of cGMP productions, the material flow has to follow strict rules. Specifically, the following activities have to be fully integrated into the material flow process: •

• •

•

• •

Receipt, identification, sampling, and quarantine of incoming materials, pending release or rejection In-process control laboratory operations Sampling and quarantine before release or rejection of intermediates and APIs Holding rejected materials before further disposition (e.g., return, reprocessing, or destruction) Storage of released materials Packaging and labeling operations

Even during the very early design phase, material flow has to be modeled in order to identify these requirements. Three examples of state-of-the-art multipurpose plants are described in Figures 5.3–5.5. They represent (1) a typical pharmaceutical fi ne-chemical

Material Flow

Head Block

Material Flow

Containment Area : 6 Trains

Open Structure 6 Trains Utilities

Charging

Reaction

Material Flow

B

Containment Area

A

Containment Area

Utilities

Head Block : Offices, Labs, Controls, Rest room

Utilities

Cristallization

Filtration

Drying API Unloading Basement Utilities

Locker Rooms

Utilities

Spares

B

A

Schematic Layout

Section A-A

Section B-B

Figure 5.3 Multipurpose plant example 1. [Source: Rohner AG (Beteiligungsgesellschaft Arques) at Pratteln, Switzerland [15].]

48

FACILITIES AND PLANTS

Plant F: Different Areas

(B)

(A) (A)

(B)

(A) (B) (C) (D) (E) (F)

Production area balcony electrical distribution air distribution central service core and satellites

(B)

(B) (A)

(E)

(B)

(A) (C)

(A) (D)

(E) (C) (E)

(A) (B)

(B)

(A)

(C)

(F)

Figure 5.4 Multipurpose plant example 2. (Source: Schering AG, Bergkamen.)

plant of a small Swiss company, Rohner AG (now owned by the Starnberger Beteiligungsgesellschaft Arques, Germany); (2) a large fi ne-chemical plant with an innovative layout built by the German drug company Schering AG (now Bayer Schering Pharma) for its captive API requirements; and (3) the equipment scheme of a production train from a concept study, “Fine Chemicals Complex 2” (FCC-2) in Lonza’s Visp, Switzerland plant. Whereas FCC-1 will be used for production of advanced intermediates, FCC-2 is targeted to produce APIs. Operating principles of multipurpose plant example 1 are as follows: •

•

• •

Train concept—the logical operating unit of the plant is a train. A typical train consists of approximately three multipurpose reactors (up to a maximum volume of 10 m3 each), one filtration unit (nutsche or centrifuge), and one dryer. Production flow of the plant—charging of starting materials (level 4), reaction (level 3), crystallization (level 2), filtration (level 1), and drying and blending (level 0). Material flow area—reserved zone for material flow. Open structure—manufacturing in a maximum flexibility and minimal segregation environment, six trains in the same area. The reactors and

PLANT DESIGN

Hastelloy 30m2

Hastelloy 15m2 ±20° Hastelloy 1.5m2 +20°

49

±20°

V4A Trocken

5.0G 24.30m

Hastelloy 10m2 ±20°

Hastelloy

2.5m2

4.0G 18.80m 1.6 m3 Email

-20° +150°

H2

3.0G 13.30m

6.3 m3 Email V4A 5m2 ±20° −20° +150°

Hastelloy 3m2

+20° +150°

±20°

2.0G 7.80m

Hastelloy 3m3

800l Email

6.3 m3 Email

7m2

EG 0.00m

Figure 5.5 Multipurpose plant example 3. (Source: Lonza, Switzerland.)

•

•

fi ltration units of the different trains can be connected as needed. This approach also allows for a maximum capacity utilization. Containment area—manufacturing combined with maximum segregation; six compartments, each housing one train. Headblock—containing in-process control laboratories, offices, training, and meeting rooms, integrated into the main structure of the building.

50

FACILITIES AND PLANTS •

•

Infrastructure—refrigerator plant, offgas treatment, air-conditioning systems, locker rooms, spares, and other facilities, located in the basement or as open-air installations on the roof of the plant. Manufacturing standard—cGMP, intermediates, key intermediates, and active pharmaceutical ingredients (APIs).

Operating principles of multipurpose plant example 2 are as follows: •

•

•

•

•

•

•

•

The futuristic-looking hexagon-shaped plant design with satellite buildings is the result of a new developed safety–ecology–operating concept. The building complex, which tops 42 m in height, has a diameter of 88 m, and an working area of over 28,000 m 2 , is operated by over 100 welltrained chemical operators, engineers, and chemists. The satellite buildings contain service areas, laboratories, storage areas, offices, and various utilities (ventilation, electricity, brine, steam, inert gas and water for fi re protection). For the processing flow, a top-down approach was chosen, utilizing gravitational force whenever possible. The plant houses six segregated and independent manufacturing areas, in order to separate, for example, corrosive chemistry from final purification steps of APIs. Production takes place in strictly closed equipment and is controlled by an state-of-the-art process control system. The core of the hexagon-shaped building is used for the central services, and supply of liquid and gaseous media via a ring pipe. Manufacturing standard: cGMP, intermediates, key intermediates, and active pharmaceutical ingredients (APIs).

The building is subdivided vertically in 10 trains for PFC/API production and horizontally into five floors. On floor 5, a condenser and a vacuum pump for the evacuation of the “nutsche” are installed, as well as an overhead condenser for the reaction vessel (see text below). Floor 4 houses a contained cabin for charging solid raw materials and intermediates and an agitated 1.6m3 feeding tank for catalyst slurries. The latter is connected to a plate filter for catalyst and charcoal recovery, a fi lling station for big bags, and an overhead condenser. The jacketed 6.3-m 3 glass-lined reaction vessel is installed on floor 3. The main piece of equipment is a hastelloy filter nutsche (∅ 2100 mm) for liquid–solid separation. The unit is connected to a heating/ cooling temperature control module (TCM). The filtercake is discharged to a silo and then fi lled in big bags or drums. It is further processed in a separate drying–sieving–fi lling station. The mother liquor is discharged to a holding tank. The building will also contain absorption columns for the pretreatment of waste gases as well as distillation columns for solvent recovery. A generous

PLANT OPERATION

51

infrastructure is available on site. Next to the building a tank farm for solvents with 25- and 50-m3 tanks will be built. Storage of intermediates and fi nished products takes place in a state-of-the-art warehouse. For fi re protection, the air in the warehouse is diluted with nitrogen, thus reducing the oxygen concentration to 13.2%. Utilities comprise electric power from a nearby hydroelectric power station, steam generated in the waste incinerator, and nitrogen from an onsite air separation plant. The production of fi ne chemicals using biotechnological processes fundamentally follows the same pattern as the one for synthetic fine chemicals: preparation and charging of the raw material, reaction, liquid–solid (crude product) separation, product purification, and packaging. Depending on the specific bioprocess used, there are, however, generally substantial differences in the design and operation of the plant. Simple fermentations used for specific steps in low-molecular-weight fi ne chemicals (e.g., conversion of a carbonyl to an amido group, or of a carbonyl to a chiral hydroxy group) can be carried out in conventional multipurpose plants. This is particularly the case if enzymes fi xed on a solid support are used as catalysts. The production of modern high-molecular-weight biopharmaceuticals by the use of recombinant processes requires specifically designed plants, where utmost attention is paid to the safeguard of sterility (see Section 4.2).

5.2 PLANT OPERATION In today’s global economy, it is vital for fi ne-chemical manufacturers to adhere to international standards for safety and ecology. For that purpose there are several highly developed systems available, including the International Organization for Standardization’s ISO management system, ISO, Geneva; the Responsible Care trademark of the American Chemistry Council program, which is of US origin; or the European Union Eco-Management and Audit Scheme (EMAS), European Commission, Environment DG. The ISO 14001 set of ISO’s management system standards focuses on minimizing harmful effects on the environment and achieving continuous improvement of environmental performance. Responsible Care is a voluntary program, initiated be the US chemical industry, to achieve improvements in environmental, health, and safety performance beyond levels required by the US government. Responsible Care continues to strengthen its commitments and enhances the public credibility of the industry. Finally, the Responsible Care 14001 certification process combines ISO 14001 with the Responsible Care program; for instance, the revised EMAS includes the ISO 14001 system. Quality and documentation aspects in general have become an increasingly important success factor in the fi ne-chemical business. This is even more true for cGMP production. Because fi ne chemicals are sold according to stringent specifications, adherence to constant and strict specifications, at risk because of the batchwise production and the use of the same equipment for

52

FACILITIES AND PLANTS

different products in multipurpose plants, is a necessity for fi ne-chemical companies. The ISO management system standards, which are implemented and recognized worldwide, play an important role. Specifically, the ISO 9001 family deals primarily with quality management and focuses on the customer’s quality requirements, regulatory requirements, customer satisfaction, and continuous improvement on all pertinent processes. Standards for food-grade chemicals in the United States are published in the Food Chemicals Codex (FCC) [7], for laboratory reagents in Reagent Chemicals—ACS Specifi cations [8], and for electronics-grade chemicals in the Book of SEMI Standards (BOSS) by Semiconductor Equipment and Materials International (SEMI). The latter two product categories, with the exception of reagent chemicals used as diagnostics, are not subject to cGMP regulations. Fine chemicals intended for use in pharmaceuticals are to be manufactured according to guidelines for industry ICH Q7A [9], which is GMP for active pharmaceutical ingredients. These guidelines were developed within the Expert Working Group of the International Conference on Harmonization (ICH) of the technical requirements for registration of pharmaceuticals for human use. Since 2001, the document has been applied by the regulatory bodies of the European Union, Japan, and the United States. In addition, the United States Code of Federal Regulations [10] represents guidelines specific for the United States. A fi rm producing pharmaceuticals has to be approved by national authorities. If the products are intended for the US market, an inspection of the premises and the relevant documentation by the FDA is also required. The inspectors use three classifications for their observations, namely NAI (no action indicated), if the fi rm is compliant, VAI (voluntary action indicated), if a fi rm has several violations that have to be corrected as soon as possible and OAI (official action indicated), if the fi ndings are significant. In the latter case they usually are documented in the “warning letter” and require immedicate attention to prevent an injunction, seizure and/or prosecution. General standards for drugs are typically published in the so-called national pharmacopoeia. The names of the different national pharmacopoeia are formed by pharmacop(o)eia combined with the name of the country, for example, the United States Pharmacopeia and National Formulary (USP– NF). Attempts to generalize and unify the different national pharmacopoeia have continued for over a century. The European Community signed a convention that resulted in issuance of the European Pharmacopoeia [11]. Finally, the WHO (United Nations World Health Organization) publishes a Pharmacopoeia Internationalis [12]. A comprehensive training program for all employees is another essential element to secure adequate quality and safety standards. The program has to incorporate the entire workforce involved into any aspect of the manufacturing process and needs to be documented. All quality aspects within a company are to be controlled by an independent organizational unit. Beside the quality control unit, of course, the quality

PLANT OPERATION

53

assurance activities are also part of this operation. The following main aspects are considered here: • • •

• • •

• • •

Releasing or rejecting products. Reviewing and approving qualification reports. Reviewing and approving validation reports. The validation process is a program that provides a high degree of assurance that a process will consistently produce a result meeting predetermined acceptance criteria. Approving all specifications and master production instructions. Making sure that critical deviations are investigated and resolved. Establishing a system to release or reject raw materials and labeling materials. Approving changes that potentially affect intermediate or API quality. Making sure that internal quality audits are performed. Making sure that effective systems are used for maintaining and calibrating critical equipment.

These criteria are mandatory for cGMP products; however, it is recommended practice to utilize, whenever possible, the same criteria for non-cGMP products as well. A new program at FDA called process analytical technology (PAT) allows the use of continuous process control systems that measure and assess quality during the manufacturing process rather than between batches. The framework specifies the development of manufacturing processes that can consistently ensure a predefi ned quality at the end of the manufacturing run. Such procedures would be consistent with the basic tenet for “quality by design” inherent in currently available commercial control systems.

Production planning for a fi ne-chemical company operating one or more multipurpose plants is a very demanding task. It begins with the defi nition of the term “production capacity.” The goal must be to achieve optimum capacity utilization, which is important for the profitability of the company. However, confl icting interests of marketing, manufacturing, and controlling have to be aligned carefully. Particularly critical is an excellent communication with the marketing–sales (M&S) group, which determines what quantity of which products can be sold; and manufacturing, which determines how the existing equipment can be used most advantageously and what type of plant is needed in the future. There are both short- and long-term aspects to production planning. A useful tool for short-term planning is a rolling 18-month sales forecast, which committs for the fi rst 2–6 months and is somewhat more flexible for the rest of the period. In order to ensure the necessary minimal critical flexibility for practical planning purposes, a multipurpose plant must contain a minimal critical

54

FACILITIES AND PLANTS

number of reactors or trains. It also must be realized that a 100% capacity utilization can never be achieved in a multipurpose plant. Even in the unlikely event that there is sufficient demand to run the plant for the whole year and that all available equipment can be used for all products manufactured, there is still changeover time that is unproductive. Particularly in the case of frequent product changes, close attention should be paid to the reduction of changeover time, which may consume a significant portion of the production capacity. Apart from the requirement of the market, the optimal campaign length also depends on a number of additional parameters, like product stability and value, slots of free capacity, changeover cost, storage costs, and interest rates. Product changeovers consist of partially overlapping activities, namely, phaseout of the previous product; cleaning the equipment; dismantling, adapting, reassembling, repair, and maintenance; fi nal cleaning and quality control; and startup with new product. Analytical procedures to determine the previous product in ppm (part per million) ranges in the new product need to be available. Optimum capacity utilization of capital-intensive multipurpose plants is crucial to overall performance. Therefore, running a fi ne-chemical company has been described as “gap management.” Commercially available software is becoming increasingly accessible, which efficiently supports the complex task of production planning in multipurpose plants. In a given production train of a MP plant, different products with widely varying production capacity in terms of kilograms per annum are produced in the course of a year. It is not possible, therefore, to indicate a production capacity of a MP plant in terms of “kilograms of product per year,” as is the case in the heavy-chemical industry with its dedicated (monoproduct) plants. As a kind of artifact, the criterion “m3 of reactor volume” has been chosen as a reference unit, instead. It is, however, a rather imprecise measure as neither capacity per se nor capacity utilization are defi ned unambiguously. With regard to the former, the type of equipment, which determines the reactor volume, is not well defi ned: Does one consider only the reaction vessels, or also crystallization vessels and buffer tanks? With regard to the capacity utilization, the traditional notion of “capacity utilization” is based on a one-dimensional “yes/no” approach, assuming full utilization, when the plant is running and zero utilization when it is not. In a more thorough approach three factors have to be distinguished, namely, time (how many days per year the production unit is running), equipment (which part of the equipment of a production unit is used to make a specific product), and volume, respectively concentration (how many kilograms of product are produced per m3 of reactor volume). The total utilization then results from the multiplication of the time utilization, asset utilization, and volume utilization, as described by the following formula: Capacity utilization = time based utilization × asset utilization × volume utilization

PLANT OPERATION

55

100 90

70 60

1a

3

4 a

50

1b m m 4 4 ab bc

40

5

Order cancelation

Asset utilization (%)

80

Production

Clean-out

30 20

2

10 0

Jan

10

Feb Mar Apr May Jun Jul

Figure 5.6

No production Aug Sep Oct Nov Dec

Capacity utilization—two-dimensional approach.

A practical example for capacity utilization of a production train in a MP plant over a 12-month period is shown in Figure 5.6. For the sake of simplicity, only time-based and asset utilization, but not the product concentration, are considered. As shown in the graph, the plant runs flat-out for the fi rst 10 months. Because an order has been canceled, there is no production at all during November and December. At fi rst glance, this would result in a capac10 – or 83% for the full year. However, the reality is quite difity utilization of 12 ferent, and the actual record of plant performance during the year under review is as follows: 1a

2

3

The fi rst product had been used primarily as the basis for the plant design; 90% of the installed equipment is used for its production. The order is for 60 metric tons to be delivered at a rate of 12 monthly lots of 5 tons each. Production was scheduled to produce all 60 tons during January and February, at a rate of 1 ton per day, but controlling intervened, because the working capital would be too high with this schedule. It was decided to produce the 60 tons in two campaigns; the fi rst one, 1a, in January, and the second one, 1b, beginning in July. The capacity that became available because of the splitting of the campaign for product 1 in February could not be used very effectively. In fact, during this month only a toll distillation was run, which used only 10% of the equipment. Product 3 was a fairly new product; it was not included in the original design of the plant and required relatively simple

56

4a

1b ma

mb

4b 4c 5

order canc.

FACILITIES AND PLANTS

chemistry. This explains why only a modest equipment utilization of 60% was achieved. Like product 1, product 4 had a good fit with the equipment. It had been scheduled for production throughout June. Because the inventory of product 1 was approaching zero level, the production had to be stopped after 2 weeks. After the cleanout, the second campaign of product 1 was successfully completed in July. The yearly plant shutdown for maintenance was scheduled for the fi rst 2 weeks of August, when most operators take their yearly vacation. During maintenance, a leak in the central heating/cooling system was discovered. The search for the location of the leak took a long time. Also, spare parts had to be ordered. The shutdown lasted for a total of 4-12 instead of 2 weeks and the plant could be started again only in September. Production of this product 4 resumed. Just when the production was about to reach a steady mode, a quality problem arose, necessitating a rework of several batches, which took the second half of the month. After completion of the fifth cleanout, product 5 went into production. The tolling agreement required a production of 1-12 months. Unfortunately, the raw materials that had to be supplied by the customer were substantially delayed, so the production had to be interrupted after 2 weeks. Because of the cancellation of the order, the plant was idle during November and December. Fortunately, at least the fi rst 2 weeks of this period could be used for the cleanout after product 5.

In conclusion, the plant actually produced for only 180 days in 2005, resulting in a time-based utilization of 50%, and the average asset utilization was only 66%, resulting in an overall capacity utilization of 50% × 66% = 33%

CHAPTER 6

Research and Development

The overall emphasis of fi ne-chemical R&D is more on development than on research (“small r, big D”). The main tasks are (1) designing, respectively duplicating and adapting in case of contract manufacture, and developing laboratory procedures for new products or processes; (2) transferring the processes from the laboratory via pilot plant to the industrial scale (the scaleup factor from a 10-g sample to a 1-ton batch is 100,000); and (3) to optimize existing processes. At all times during this course of action it has to be ensured that the four critical constraints, namely, economics, safety, ecology and timing are observed. R&D expenditures are higher in the fi ne-chemical industry than in the commodities industry, representing around 5–10% versus 2–5% of sales. On the business side, product innovation must proceed at a more rapid pace, because lifecycles of fi ne chemicals are shorter than those of commodities. Therefore, there is an ongoing need for substitution of obsolete products. The growth of the business as such can kick off only once this backlog is fi lled. On the technical side, the higher complexity of the products and the more stringent regulatory requirements absorb more resources. The project portfolio enables an overview on the ongoing research activities. Numerous economic and technical parameters have been proposed to provide a meaningful picture. Examples are attractiveness, strategic fit, innovation, gross/net present value, expected profits, R&D expenditures, development stage, probability of success, technology fit, and realization time. Most of these parameters cannot be determined quantitatively, at least during the early phases of a project. The probability of success, for instance, depends on a number of factors. On the technical side it is the likeliness that the laboratory results in terms of yield, throughput, and quality can be matched on the industrial scale within the planned timeframe. On the business side, it is the likeliness of realizing the forecasted sales and profit figures. A twofold risk is encountered here. On one hand, the fine-chemical company

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

57

58

RESEARCH AND DEVELOPMENT

has to be chosen as a supplier; on the other hand, the customer, typically the pharmaceutical company, has to be successful in launching the new drug.

The best way to take advantage of a project portfolio is to develop and use it in an iterative way. By comparing the entries at regular intervals, for instance, every 3 months, the directions that the projects take can be visualized. If a negative trend persists with one particular project, the project should be put on the watch list.

6.1

OBJECTIVES

R&D has to manage the following functions in order to deliver the requested services: Literature and Patent Research. An efficient literature and patent search capacity has to be made available. Patent research is particularly important for evaluation of the feasibility of taking up R&D for new APIsfor-generics. Provisions have to be made for a periodic examination of all acquired research results to determine whether applications for protective rights (patent) are indicated. Process Research. This key function has to design new synthetic routes and sequences and undertake initial experiments to secure the feasibility. Two approaches are feasible. For simple molecules, the “bottom-up” approach is the method of choice. The researcher converts a commercially available starting material and sequentially adds more reagents until the target moleculae is synthesized. The starting material is mostly a petrochemical commodity, sometimes a natural product. For more complex molecules, a “top-down” approach, also known as retrosynthesis, is chosen. Through the chemist’s imagination, key fragments of the target molecule are fi rst identified, then synthesized individually, and fi nally combined to form the desired molecule through convergent synthesis. Process Development. This provision focuses on the design of new, efficient, stable, safe, and scalable synthetic routes to a target fine chemical. It represents an essential link between process research and commercial production. The resulting “base process” description provides the necessary data for the determination of preliminary raw material and product specifications, the manufacture of semicommercial quantities in the pilot plant, the assessment of the ecological impact, the regulatory submissions and technology transfer to manufacture at industrial scale, and an estimate of the manufacturing costs in an industrial-scale plant. If the base process is provided by the customer as part of the technology transfer, process research has to optimize it so that it can be transferred to the bench-scale laboratory or pilot plant. Furthermore, it has to be

OBJECTIVES

59

adapted to the specific characteristics of available production trains. A third task of process development is to fi nd new “breakthrough” alternatives for existing processes featuring substantially better economics (e.g., switching to cheaper raw materials or reducing the number of isolation steps required to make a given product). In addition, for all cGMP products the critical process parameters and their ranges have to be determined and validated. Fine chemicals made by fermentation or natural product extraction processes are not burdened by a broad range of route possibilities. Bench development by microbiologists and engineers proceeds along the following steps [13]: • Microbial or plant cell fermentations: 1. Elucidation of the pathway to the secondary metabolite 2. Nutrient, precursors, and optimization of fermentation cycle conditions 3. Strain and cell line improvements with respect to productivity and robustness in fermentation 4. Data gathering to support scaleup to stirred tanks at different scales 5. Defi nition of the downstream process candidate for recovery, concentration, purification, and isolation of the target molecule from fermentation •

Extraction from natural sources (plant or animal material):

1. Evaluation of differing sources of the compound-bearing materials 2. Pretreatment conditions for successful extraction 3. Extraction or leaching conditions, solvent, or extracting stream material selection, and separation of spent plant material 4. Defi nition of the process candidate for concentration, purification and isolation 5. Data gathering to support scaleup Most likely, both technologies eventually have to deal with relatively large volumes of cell mass or plant material waste, and benchwork to address those issues is also needed.

Other tasks are as follows: Analytical Development. The increasingly complex molecules require a permanent development of new, sophisticated analytical methods and, if required, their validation. In order to fulfi ll this demanding task, a well-equipped state-of-the-art analytical laboratory has to be accessible. In custom manufacturing projects, a close cooperation between the analytical departments of the customer and the supplier is essential for a successful completion of a project. Hazard Analysis and Risk Assessment. Before a new or revised process is cleared for pilot and—later on—industrial-scale production, it has to pass a detailed, standardized HAZOP (hazard and operability)

60

RESEARCH AND DEVELOPMENT

analysis. HAZOP comprises detailed safety reviews of the chemical and mechanical processes involved, such as reactions, distillations, rectification, drying, and milling–blending operations. Bench-scale Laboratory and Pilot Plant Development. This step serves as an intermediary between laboratory and industrial scale. The scaleup addresses the change in process conditions that arise from the greater dimensions and different geometries of industrial-scale reactors as compared with laboratory equipment. Apart from reduced mass and heat transfer rates (resulting primarily in longer reaction times), flow regimes, phase separation rates, interfacial surface areas, flow patterns, and heterogeneity in process streams are also dimensionally sensitive variables and parameters. A lot of engineering know-how is required here. Although modern reaction calorimeters allow one to foresee the effects of these different conditions to a certain extent, a direct transfer of a process from the laboratory to the industrial scale is not recommended, because of the inherent safety, environmental, and economic risks. In development, the viability of the process on a semicommercial scale has to be demonstrated. Trial quantities of the new fi ne chemical have to be manufactured for market development, clinical tests, and other requirements. The necessary data have to be generated to enable the engineering department to plan the modifications of the industrialscale plant and in order to calculate production costs for the expected large-volume requirements. Both equipment and plant layout of the pilot plant reflect those of an industrial multipurpose plant, except for the size of reaction vessels (bench-scale laboratory ∼10–60 L; pilot plant ∼100–2500 L) and the degree of process automation. Once a laboratory process has been adapted to the constraints of a pilot plant, has passed the HAZOP analysis and been validated (only for cGMP products), and demonstration batches have been successfully and repeatedly run, the process is ready for transfer to the industrial-scale plant. 6.2 PROJECT INITIATION There are two main sources of new research undertakings: concepts originating with the researchers themselves (“supply push”), and those coming from customers (“demand pull”). Ideas for new processes typically originate from researchers, ideas for new products from customers, respectively customer contacts. Particularly in custom manufacturing, “demand pull,” promoted by business development, prevails. Incoming ideas for new research programs have to be evaluated at regular intervals and decisions have to be taken as to whether to pursue or reject an idea and initiate a R&D project. The main criteria for the selection of new product ideas are the size and attractiveness of the demand on one hand and the fit with the supplier’s

PROJECT EXECUTION AND MANAGEMENT

61

unique selling proposition (USP) on the other hand. What is expressed bluntly with the saying “Can we sell it, can we make it, will we make money?” translates into a meticulous pondering of business, technical, and financial considerations in the industrial reality. The “new product committee” is the body of choice for this task. It has the assignment to evaluate all new product ideas. It decides whether a new product idea should be taken up in research, namely, whether it becomes a project (see discussion below). The tasks and members are described in Section 12.1. A very comprehensive “project assessment checklist” has been published [14]; a simplified version is reproduced in Appendix A.2. It is not recommended to summarize the attractiveness of a project in a single number—and to reject project B, which totals 3.9 versus project A, which totals 3.8 points. It could just be that B had a higher-ranking in patentability, but a lower ranking in competitiveness of pricing than A! Last but not least, the committee decides also about the abandonment of a project, once it becomes evident that the objectives cannot be reached.

6.3 PROJECT EXECUTION AND MANAGEMENT Once a new idea has been accepted, a project management organization is set up. Its task is to successfully complete the project by defi ning the objectives that have to be met, the human and material resources needed and the milestones to be reached and by establishing the internal and external reporting system. A detailed project schedule for a custom manufacturing project is reproduced in Appendix A.3. The project team is cross-functional and comprises representatives from most business functions. They can be on either full- or part-time assignments. In a typical project the overall responsibility for the economic and technical success lies with the project champion. If the project is executed for a key account, the pertinent key account manager is the prime candidate for the position. This individual is assisted by the project manager, who is responsible for the technical success. All technical project team members report to the latter. The duties of the two key persons are listed in more detail in Table 6.1. While individual team members may have customer contacts for specific questions, such as the preparation of the reference analytical method, the main information flow between customer and supplier goes through the project champion. The new project committee overlooks the project and coordinates with the R&D and business development departments (see also Section 12.1). In custom manufacturing, a typical project starts with the acceptance of the product idea, which comes mainly from business development, by the new product committee, followed by the preparation of a laboratory process, and ends with the successful completion of demonstration runs on industrial scale and the signature of a multiyear supply contract, respectively. The technical

62

RESEARCH AND DEVELOPMENT

Table 6.1

Duties of the Project Champion and Project Manager Project Champion

Project Manager

Key responsibility

Successful completion of project overall

Successful completion of technical aspects

Subsidiary responsibilities

Management of project team Financials (budget, investments, etc.) Customer relationship management (CDA, R&D agreement, supply contracts) Pricing Market and competitor intelligence

Development of a viable, scalable, economic, and environmentally safe process Technology transfer Preparation of samples, trial quantities, and validation batches Process validation Preparation of regulatory submissions

Assigned functions

Business development Controlling Legal Procurement

R&D QA/QC Engineering SHE

part of a project defi nes its duration. Depending on the quality of the information contained in the “technology package” received from the customer and the complexity of the project as such, particularly the number of steps that have to be performed, the total duration can be any time between 12 and 24 months. Depending on the number of researches involved, the total budget easily amounts to several million US dollars. Figure 6.1 gives an impression of the initial decision points that a project has to pass during its execution. Key success factors for project management are •

•

•

•

•

•

Appointment of experienced managers with leadership qualities to the roles of project manager and champion. They also must be well viewed by the customer A project plan with well-defi ned and clearly communicated roles, responsibilities, and timetable of deliverables must be agreed on. Project managers and champions must be empowered to manage scientists and other team members to execute the agreed-on project plan, to write reports, and so on. Customers must be encouraged to have direct contact with project managers. A provision for safeguarding confidentiality and intellectual property rights must be included. Modifications of the project plan must be kept to aminimum.

PROJECT EXECUTION AND MANAGEMENT

63

Idea

evaluation ?

rejected

accepted

end

revised

preliminary offer ? laboratory revised offer ?

rejected

end

accepted

pilot plant firm offer ? commercial

technical

Figure 6.1

•

•

Project Sequence.

Proper follow-up and interaction with customers on all project-related matters, including the preparation of progress reports according to an agreed-on format, should be ensured. Adequate software tools, such as Microsoft Project, Excel, Lotus Notes, and Primavera, should be employed.

CHAPTER 7

Cost Calculation

7.1

INVESTMENT COST

Investment costs for multipurpose plants vary considerably, depending on the degree of sophistication. A comparison between five different plants is shown in Table 7.1. First, investment costs for plants in developing countries, particularly in the Far East, represent only a fraction of those in Western countries. In the latter, the costs for a state-of-the-art fi ne-chemical cGMP production train, consisting of approximately three reactors, one filtration unit, and one drying unit, may range from $10 million to $25 million. Furthermore, investment costs of plants in full compliance with cGMP standards are higher than the investment costs of non-cGMP plants. A breakdown of the investment costs according to major categories is given in Table 7.2. The variation in the voice “piping” is given by, among other things, the piping concept (preinstalled or process-specific; see Section 4.1) and the sophistication of the insulation; in “equipment,” this depends on the complexity of the individual items. Costs of reactors, for example, vary according to the material of construction, the operational pressure and temperature ranges, the heating/cooling system (jacket or coils), and the construction of the agitating system. In contrast, the impact of the equipment size on the total investment costs is marginal. Hence, by increasing the equipment size manufacturing costs on a per kilogram (kg−1) basis typically decrease substantially [15]. The variations of the other voices are self-explanatory.

7.2

MANUFACTURING COSTS

The raw material and the conversion cost are the two elements that establish the manufacturing cost for a particular fi ne chemical. The former is determined primarily by the purchasing price and the unit consumption; the latter,

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

64

65

Case 1

4.0

24

3.0

10

6 2 2

2

($ million) ($ million) ($ million) (—) ($ million) (—)

Total capital investment

Capital investment per main equipment

Capital investment per train Relative capital investment per train

Capital investment per m 3 reactor volume Relative capital investment per m3 reactor volume

0.9 1

11 1.1

2.1

21

Capital Investment Key Figures

(m )

(m )

Average reactor volume

(—)

Total number of reactors per train

3

(—)

Total number of main equipment

Total reactor volume

(—) (—) (—)

Main equipment Total number of reactors Total number of fi ltration units Total number of drying units

3

(—)

Description of Multipurpose Plant

(Units)

3.4 4

23 2.3

4.3

181

2.1

54

3.3

42

26 8 8

8

Case 2

Benchmarking—Capacity versus Investment Costs of cGMP Multipurpose Plants

Total number of trains

Criteria

Table 7.1

3.9 5

17 1.8

3.8

87

1.5

22

3.0

23

15 5 3

5

Case 3

4.9 6

14 1.4

2.7

83

0.9

17

3.2

31

19 6 6

6

Case 4

0.9 1

10 1.0

2.1

39

4.2

46

2.8

19

11 4 4

4

Case 5

66

COST CALCULATION

Table 7.2

Major Investment Cost Categories of a Multipurpose Plant

Investment Category Piping and installation (including insulation and painting) Equipment (reactors, solid–liquid and liquid–liquid separators, dryers, tanks, pumps etc.)

Share (%) 25–30 ∼20

Building (including heating, ventilation, and air conditioning)

15–20

Process control, instrumentation, and electrical installation

10–15

Engineering

10–15

Qualification and startup

5

Contingencies

5

by the throughput in kilograms per day in a given production train. A precise calculation of the conversion cost is a demanding task for controlling. Different products are produced in campaigns in multipurpose plants, occupying the equipment to different extents. Therefore, cost elements such as labor, capital, utilities, maintenance, waste disposal, and QC cannot be allocated unambiguously. A pragmatic approach consists in to defi ning a daily “operating cost” for a production train as a cost percent by dividing the total yearly fi xed costs by the number of available production days. The problem that has to be addressed is how to fairly allocate costs for nonutilized capacity. This can be due to the fact that the production train is idle for a number of days during the year, or that not all the equipment installed in a train is used to manufacture a given product (see also Section 5.2). If a correction for the unutilized equipment is not made, simple products for which only part of it is used can show an attractive profit margin without providing a good return for the overall investment in the multipurpose plant. For portfolio optimization, not only the profit margin per production day but also the overall income for a certain period should be considered. In other words, marketing has to fi nd a balance between pricing or costing of individual products and overall profit optimization within a specific equipment based on a planned capacity utilization taking the risk of empty capacity or unforeseen bottlenecks into account. A particularly controversial issue is the allocation of R&D costs, as only a minority of new products or processes studied in R&D enjoy commercial success. This problem is usually disguised by not including R&D in the cost calculation of individual products, but by placing R&D in the general overhead. An indicative cost structure for a fi ne-chemical company is given in Table 7.3. The operating schedule also has a significant impact on the production costs. Whereas continuous plants typically run 24 h per day, there is more

67

MANUFACTURING COSTS

Table 7.3

Indicative Cost Structure of a Fine-Chemical Company

Cost Elements

Details

Share (%)

Raw materials

Inclusive solvents

30

Conversion cost Plant-specific Utilities and energy Plant labor Capital cost Plant overhead R&D Marketing & sales General overhead

Electric power, steam, brine Shift and daytime work Depreciation and interest on capital QC, maintenance, waste disposal, etc. Inclusive pilot plant Inclusive promotion Administrative services

4–5 10–15 15 10 8 5 15

Total

Exclusive taxes

100

freedom in establishing operating schedules for multipurpose plants. Depending on the workload and the flexibility of the workforce, schedules can be adjusted as needed. Some schedules still include only a one-shift or a twoshift operation (e.g., 8 h or 16 h per day for 5 days a week). In this case frequently some minimum activity is maintained during the night, such as supervision of reflux reactions, solvent distillations, or product drying. A full 7-day/week operation, consisting of four or five shift crews, each working 8 h per day, is becoming the standard. In terms of production costs, this is the most advantageous scheme. Higher salaries for night work are more than offset by better fi xed cost absorption. Also, only part of the workforce has to adhere to this scheme. Manufacturing costs usually are reported on a per kilogram product basis. For the purpose of benchmarking (both internal and external), time- or (reactor) volume-based costs, or even a combination of both costs per m3 and hour, are useful aids. Campaign reports are a valuable tool for monitoring the plant performance for a specific product. During budgeting, standard costs for a production campaign of a particular fine chemical are determined on the basis of past experience. The actual results of the campaign are then compared with the standard. When the attractiveness of new products is evaluated, either for submitting an offer or for inclusion in the R&D program, manufacturing costs have to be estimated on the basis of a laboratory synthesis procedure. This is best done by breaking down the process into unit operations, the standard costs of which have been determined previously. Care has to be taken to estimate the time required for each step of a process. Thus a liquid–liquid extraction can take more time than the chemical reaction. The capability of a fi nechemical company to make dependable manufacturing cost forecasts is a distinct competitive advantage.

CHAPTER 8

Management Aspects

Successfully managing a fi ne-chemical company presents a greater challenge than running a more conventional manufacturing company. The fi nechemical industry is relatively small, very competitive, complex, and capitalintensive. The single major vulnerability is the lack of “product equity.” A fi ne-chemical producer simply does not control the destiny of the business. The risk–reward balance is therefore quite difficult to manage and means a great challenge for both the organization, systems, and business processes in general and the profi le of the chief executive officer (CEO) in particular. Apart from the usual entrepreneurial capabilities, the CEO should possess a combination of a strong chemical background (i.e., an academic degree in chemistry plus industry experience in a research laboratory and pilot plant), a view of the pragmatically feasible, and business acumen. As part of their “natural latent abilities,” CEOs must be good communicators and negotiators will all types of stakeholders. Considerable experience supports the notion that in complex situations such as this, expectation is realized only by appropriate measurement, normally represented by measures of performance (MOPs). Measurement is, however, fraught with danger as it will have an undoubted effect on behavior, and it is therefore crucial that the right things are measured so that the organization does both “the right thing” and “the thing right.” Thoughtful consideration of the difference between drivers and outcomes is essential, as is a clear understanding of responsibility and accountability. Another important consideration is the so-called “line of sight” between individuals who can effect performance that impacts a driver and the consequential outcome. Kaplan and Norton at Harvard Business School recognized many of these issues and through multicompany research developed something of a topdown solution called the balanced scorecard. During the 1990s this concept was constantly developed with papers published in Harvard Business Review. A simple representation is shown in Figure 8.2 and depicts good connectivity and alignment between measures and the vision and strategy of the company.

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

68

RISK/REWARD PROFILE

69

It is still necessary, however, to differentiate between measures of outcomes that act as milestones to demonstrate progress with the strategy as opposed to measures of drivers that will result in those outcomes. A good example is working capital reduction measured by inventory turn. In the short term, simply measuring this may result in initial improvement that helps the business, but without a systematic improvement program aimed at the drivers, there may not be a sustainable benefit. The required drivers would be campaign length and changeover in a typical multipurpose plant with multiple sequential product campaigns (see also Section 5.2).

Each of these key issues is now explored in more detail. 8.1

RISK/REWARD PROFILE

The fi ne-chemical industry embodies a complex combination of physical assets, technologies, know-how and intellectual property (IP) that are geared to commercial process development and manufacturing. As opposed to process IP, there is in general little or no product IP owned by a fi ne-chemical company. Since the mid-1990s the marketplace has become much more competitive with a proliferation of independent players and the emerging strength from low-cost economies (see Chapter 14). Some of the characteristics of the industry are • • • • • •

High fi xed capital intensity High working capital High fi xed costs High quality standards and regulations Long supply chains Considerable yield and material waste

For quantitative data, see Table 8.1. In the market, considerable risk exists because of the structure of the customer base, primarily the pharmaceutical industry: • • •

•

High product attrition within customer portfolios Strong consolidation of customer base Strong purchasing power (customers usually are much larger than suppliers) Competition from backward-integrated customers who have a major share of capability and capacity within the industry

In addition to this, the fi ne-chemical industry does not offer genuine differentiation and responsiveness compared to other industries. Actually, the announcements made by the companies look strikingly similar:

70

MANAGEMENT ASPECTS

Table 8.1

Fine-Chemical Industry Benchmark Data

Benchmark data

% of Sales

Fixed assets

90

Working capital

35

Net operating assets (NOA)

125

Return on Net Operating Assets (RoNOA)

7½

Depreciation

9

Direct Labor

12

Research & Development

6

QA/QC

4

Marketing & Sales

3

Gross Margin Return on Sales (ROS)

55 9

Source: Author’s estimates.

• • • • • • • • •

State-of-the art facilities Versatile equipment Room for expansion Large toolbox of technologies Creative process development Seamless transition from laboratory to plant Full compliance with cGMP FDA-approved plants Highly efficient waste management

The consequences are high risks on both cost and demand sides. The impact of these industry characteristics on the return on sales (ROS) is shown in Figure 8.1. These data come from a 45-company cohort and are believed to be representative of the Western fi ne-chemical industry. As can be seen, profitability was dramatically affected as the number of new chemical entities (NCEs) declined at the end of the 1990s. By 2002 over 50% of the sample had profitability below the average cost of capital and would have struggled to maintain investment in their businesses. The 2003 data show strong companies getting stronger and weak companies further weakening. This fi nding apparently contradicts the preceding statement, namely, that there is no differentiation among the industry. The explanation is that there actually is little or no differentiation in hard facts, such as types of equipment used, but a lot in soft issues, such the reputation, built on a track record of successfully realized custom manufacturing projects and FDA inspections.

PERFORMANCE METRICS AND BENCHMARKING

71

% of Top-45 producers

Profitability in the fine chemical industry 100% ROS

80%

>15%

60%

10 –15%

40%

5–10% <5%

20% 0% 2000

2001

2002

2003

Year

Figure 8.1 Profitability in the fi ne-chemical industry. (Source: Excelsyn / Ramakers—fi ne-chemical benchmarking database.)

With such a disparity between the best (ROS > 15%) and worst (ROS < 5%, sometimes negative) performers, a “survival of the fittest” condition is developing (see Chapter 20)

8.2

PERFORMANCE METRICS AND BENCHMARKING

In order to determine the strengths and weaknesses of a particular fi nechemical company, it is worthwhile to gather performance benchmarks both within the company and with important competitors. There are, however, a number of potential pitfalls in collating data from both inside and outside the industry. On the inside there may be significant subsectors, sometimes referred to as segments, where the offering and business model can vary substantially so that taking over data unbiased across these clearly defined subsectors will be very misleading. On an external comparison, getting appropriate industry “peer groups” is important. Judging the balance of technology, development, manufacturing, and service to get meaningful comparators is complex and difficult. Benchmark data collected in a study of a representative number of European and US Fine Chemical companies over the 1998 to 2003 period are listed in Table 8.1. The average return on net operating assets (RONOA) of the sample was 9%. The last two figures exemplify the capital intensity of custom manufacturing (CM)-biased fi ne-chemical companies. In order to achieve a good return of capital employed, a healthy margin is mandatory. A more standard

72

MANAGEMENT ASPECTS

product-dominated business portfolio would have significantly lower capital intensity but also lower margins at RONOA and ROS levels. A better performance would improve these measures, but these parameters are largely measures of outcomes not measures of performance on drivers. The notion of a balanced scorecard linking strategic vision to operational delivery and measures of performance was developed by the Nolan Norton Institute (research arm of KPMG). David Norton and Robert Kaplan undertook a multicompany study to help develop the performance model [16]. Norton’s network in the consulting arena helped establish some momentum with many companies in a diverse array of industries embracing the methodology. The system developed and senior executives started to use the scorecard to develop company strategy, not just measure performance. The most recent collection of reports is reviewed in Reference 17. The five-volume set includes balanced scorecard basics, human capital, mapping strategy, and both the 2004 and 2005 editions of the Balanced Scorecard Report Hall of Fame. Figure 8.2 provides a vertically connected tool for aligning the plethora of fi nancial, operational, and development activities to the strategy and the vision. This facilitates an organizational alignment whereby employees can relate their activities and measures to the delivery of the strategy and the consequent success of their corporation or enterprise. In addition, the scorecard should be read right to left along the bottom as the learning, innovation, and growth perspective should feed and develop the internal perspective, which should be responding to customer needs. The combination of this sequence of activity will result in the fi nancial outcome. Although the concept

Statement Of Vision

What is My Vision of the Future?

If My Vision Succeeds, How Will I Differ?

1. Definition of SBU 2. Mission Statement 3. Vision Statement

Financial Perspective

Customer Perspective

Internal Perspective

Innovation and Learning

What Are the Critical Success Factors? What Are the Critical Measurements?

THE BALANCED SCORECARD

Figure 8.2

Connected Measurement. (Source: Kaplan & Norton, HBR.)

ORGANIZATION

73

has many obvious attractions, care is required to ensure that on implementation at a specific company, the correct measures are selected and individuals and teams have a clear “line of sight” on how their actions and measures affect the implementation of the strategy and the consequential financial results. The constant advance of regulation and compliance coupled with a strong wish to self-regulate in the chemical industry resulted in initiatives such as responsible care. Voluntary external auditing and accreditation was necessary to establish standards and measure compliance. Thus, as the 1990s proceeded, accreditation of ISO 9000, ISO 9001, ISO 9002, and ISO 14000 became increasingly popular. Such a system forces a company to define its organization and business processes with the commensurate identification of measures of performance (see following section). This methodology inevitably leads to a resultant company performance scorecard, an example of which is shown in Appendix A.4. In the fine-chemical arena regulatory bodies such as the American Food and Drug Authority (FDA) and the European Medicines Agency (EMEA), which focus on establishing and ensuring current Good Manufacturing Practice (cGMP), can have a big impact on the measures chosen. Thus, measures such as “really right fi rst time” or “process deviations” become very important. Systems such as ISO 9000 bring a structure what is to be welcomed, and such transparency and measurements will defi nitely yield benefit, but it can sometimes institutionalize an existing organization that in reality is inappropriate for the strategy and business model. This methodology has value in providing the necessary guidance and roadmap for individuals in the company. The ISO concept of a complete inventory of measures should be used as a backup for choosing the most appropriate measures for any given function and time period. As the business develops and a large inventory of MOPs is maintained, it will be appropriate to focus during each annual review for each employee on a small number of key measures of performance (drivers and outcomes) that will be prioritized for the whole organization in that particular budget period. As a result, all employees can identify with at least one vital measure and have a clear “line of sight” on the impact of their individual or team contribution. Such measures must be connected to a formalized improvement program that ensures delivery and sustainability. The basis to develop the system is clearly defined responsibilities, accountabilities, and line of sight. Last but not least it will be management’s task to clearly communicate progress and success.

8.3

ORGANIZATION

A manufacturing company can basically be organized according to assets, geographic regions, or businesses. More than in other industries, the destiny of the fi ne-chemical/custom manufacture industry depends on the individual

74

MANAGEMENT ASPECTS

businesses, respectively customers. The latter decide which product is made by whom, in which quantity, and by what process, and they themselves are subject to verdicts of the regulatory bodies. In due consideration of the customer’s impact, the businesses come forward as main organizational element. This is reflected by the basic structure outlined in Figure 8.3. The structure is appropriate for companies with more than 250 employees. It allows delegating the profit and loss (P&L) responsibility from top to middle management, which has the best handle on all the drivers of the business. “Operations” is in charge of enterprise resource planning, supply chain management, plant infrastructure (e.g., utilities, maintenance, warehouses, waste disposal), QA/QC, and SHE. “Staff functions” comprise human resources, fi nance, general administration. “Manufacturing” refers en principe to the production trains in which the products for the individual business units are produced. In the routine of an enterprise, the allocation of manufacturing assets can constitute a pitfall of this business-oriented organizational structure. Given the multipurpose design of the plants, the same production train actually produces for more than one business unit. This problem can be solved by applying the “major user” principle. For the R&D function, a flat structure, which allows for the rapid formation and dissolution of project teams, should be chosen. For the description of the “marketing” function, see Section 12.1. For smaller fi ne-chemical companies, a subdivision of manufacturing is not advisable. In this case the business units are limited to R&D and Marketing. In the description of both the detailed skeleton and of individual functions, ISO systems and cGMP regulations will have to be observed (see previous

CEO

Operations

Manufacturing

Staff Functions

CM Pharma

CM Agro

R&D

Marketing

Figure 8.3

Organization.

Standard Products (APIs)

ORGANIZATION

75

chapter). The assignment of the particular functions can cause internal friction because the egos of individuals are at stake. An example in this case is the pilot plant, which can report to either R&D or manufacturing. The fact that there are more—and more demanding— technology transfers from laboratory to pilot plant than from pilot plant to industrial scale speaks in favor of the fi rst option. The fact that both the pilot and industrial plants use the same site infrastructure (utilities, maintenance, internal transports, etc.) favors the subordination to manufacturing. An authoritarian decision by the CEO can avoid a lot of wasted time in such situations. A classical pyramidal organization model with strong functions may embody a “silo” condition that prevents effective team engagement and overall alignment; thus, ensuring that the company has the correctly engineered organization as a prerequisite for success and measurement alone will be insufficient. Once the detailed organizational structure is in place, job descriptions, which should be an integral part of the organization, are prepared and individuals are assigned to the various functions, fundamental changes should be avoided. Actually, many companies suffer from the “organization carousel syndrome”; after drawbacks of the actual organization become apparent, a paradigm shift is believed to be necessary in the (vain) attempt to establish the perfect organization. A vicious cycle typically starts with the appointment of a new CEO, or the creation of an overseas subsidiary, which calls for a geography-based organization. After the disadvantages of the new model have become apparent (e.g., because the plants in the USA and EU produce for the same customers), an asset-based organizational structure is drawn, which does not meet the ideal of the perfect organization, either. This becomes apparent, when customers report that they have been visited by marketing people from different asset owners. At the end, the original scheme, perhaps under a different name, is readopted. One complete turn of the organization carousel typically lasts for ∼15–20 years, depending on the fluctuation rate in top management.

BIBLIOGRAPHY

Further Reading P. Pollak and E. Habegger, Fine chemicals, in Kirk-Othmer Encyclopedia of Chemical Technology, 5th ed. vol. 11, pp. 423–447, Wiley, New York, 2005. http://www .mrw.interscience.wiley.com/kirk/ A. Cybulski et al., Fine Chemicals Manufacture—Technology and Engineering, Elsevier, 2001, 564 pages. http://www.elsevier.com C. S. Rao, The Chemistry of Process Development in Fine Chemical and Pharmaceutical Industry, Asian Books Private Ltd., 2004, 1311 pages—ISBN 81-8629950-5 http://www.asianbooksindia.com The Merck Index, 14th ed., Merck & Co., Whitehouse Station, NJ, 2007. http:// scistore.cambridgesoft.com A. Kleemann and J. Engel, Pharmaceutical Substances, 4th ed., Thieme-Verlag, Stuttgart, New York, 2001. http://www.thieme.com S. H. Nusim, ed., Active Pharmaceutical Ingredients: Development, Manufacturing and Regulation, Taylor & Francis, Boca Raton, FL, 2005. R. Bryant, Pharmaceutical Fine Chemicals: Global Perspectives, Informa Publishing Group, London, 2000.

Cited Publications 1. Encyclopedia of Reagents for Organic Synthesis, 8-vol. set, Prof Leo A. Paquette (Editor-in-Chief), Wiley, New York, 1995. http://www.wiley.com 2. Houben-Weyl, Methods of Organic Chemistry, Thieme, Stuttgart, Germany, 2001. http://www.thieme-chemistry 3. Process Directory (section), Informex Show Guide, 2005, pp. 123–167. 4. C. Chassin and P. Pollak, Outlook for chemical and biochemical manufacturing, PharmaChem 135–136 (Jan./Feb. 2004). 5. J. Rauch, Mehrprodukteanlagen, Wiley-VCH Verlag, Weinheim, Germany, 1998. 6. 21 Code of Federal Regulations; Guidance for Industry, Part 11, Electronic Records; Electronic Signatures, Scope and Application, US Department of

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

76

BIBLIOGRAPHY

7. 8. 9. 10.

11. 12. 13. 14. 15. 16. 17.

77

Health and Human Services, Food and Drug Administration (1 CFR part 11), Aug. 2003. Food Chemicals Codex (FCC), 5th ed., Institute of Medicine, Washington, DC, 2003. Reagent Chemicals—ACS Specifi cations, 9th ed., American Chemical Society, Washington, DC, Sept. 1999. ICH Q7A, Good Manufacturing Practice for Active Pharmaceutical Ingredients. http://www.fda.gov 21 Code of Federal Regulations; Part 210, Current Good Manufacturing Practice in Manufacturing, Processing, Packing or Holding of Drugs, US Department of Health and Human Services, Food and Drug Administration (21 CFR Part 11), US Department of Health and Human Services, Food and Drug Administration, Aug. 2001, ICH. http://www.fda.gov European Pharmacopoeia, 5th ed., EDQM, European Pharmacopoeia, Council of Europe, B.P. 907, F-67029, Strasbourg, France, July 2004. Pharmacopoeia Internationalis, 3rd ed., World Health Organization, Geneva, Switzerland, 2003. C. Rosas, in Active Pharmaceutical Ingredients, S. H. Nusim, ed., Taylor & Francis, Boca Raton, FL 2005, pp. 41–42. P. Romagnoli, Business Development in GMP Fine Chemicals, Romagnoli Consulting s.n.c., Milan, 2003, pp. 297–304. E. Habegger, Chimia 54, 708 (2000). http://www.chimia.ch D. Norton and R. Kaplan, The balanced scorecard—measures that drive performance, Harvard Business Revue (Jan./Feb. 1992). R. S. Kaplan and D. P. Norton, Breakthrough Results with the Balanced Scorecard, Report Collection, 2nd ed., the President and Fellows of Harvard College, April 19, 2005.

PART II

THE BUSINESS

CHAPTER 9

Market Size and Structure

9.1

FINE-CHEMICAL MARKET SIZE

As stated in Chapter 1, fi ne chemicals account for only about 4–5% of the universe of chemicals. The latter, valued at $1800 billion, is dominated mainly by oil-, gas-, and mineral-derived commodities on one hand and a large variety of specialty chemicals at the interface between industry and the public on the other hand (see Table 9.1). All fi ne chemicals are used for making speciality chemicals, either by direct formulation or after chemical/biochemical transformation from intermediates to active substances. Specialty chemicals are solid (e.g., tablets) or liquid (e.g., solutions) mixtures of commodities or fine chemicals and exhibit specific properties. They are sold on the basis of “what they can do” (e.g., protect the skin against ultraviolet radiation), rather than on “what they are” (e.g., molecular structure 2-ethyl-hexylmethoxycinnamate). Within specialties, pharmaceuticals and other life science products use the largest amount of fi ne chemicals. They are described in detail in Sections 11.1–11.3. Uses of fi ne chemicals outside life sciences are discussed in Section 11.4. There are three main reasons why it is not possible to exactly determine the size of the fi ne-chemical market: •

The defi nition of fi ne chemicals is not very accurate (see Section 1.1 text and Figure 1.1). Adopting the “$10 per kilogram” as the threshold for distinguishing between commodities and fi ne chemicals, it cuts right into several otherwise homogeneous product classes. Thus, within vitamins, niacin (vitamin B3) is classified as a commodity and biotin (vitamin H) and vitamins D and E as fi ne chemicals. The same occurs within amino acids, where d,l-methionine and l-lysine are commodities, whereas lproline and l-tryptophane are fine chemicals. This somewhat disturbing inconsistency is also justified by the fact that the products at the low end of the price range of these classes are produced in dedicated plants in

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

81

82

MARKET SIZE AND STRUCTURE

Table 9.1

Structure of the $1800 billion Global Chemical Market

→ Added value →

Specialties ≈ 55% ($990 billion)

Additives and catalysts Biocides Dyestuffs and pigments Electronic chemicals Flavors and fragrances Food and feed additives Household and personal care Life science products Specialty polymers

Fine chemicals ≈ 4%

 Pharmaceuticals Veterinary drugs  Agrochemicals

{

Standard and advanced intermediates Active substances for drugs (human and veterinary), and pesticides

Commodities Petrochemicals ≈ 40% Plastics and synthetic rubber ($720 million) Synthetic fibers Fertilizers Other inorganic chemicals

•

quantities exceeding 10,000—in some cases even 100,000—tons per year. These are typical characteristics of commodities. Many fi ne chemicals are not traded, but produced in-house by diversified chemical and life science companies. One must distinguish, therefore, between “merchant value” and “production value” of fi ne chemicals (FCs in the following equation). The former is the product of traded quantities times the unit sales prices; the latter, the product of produced quantities times (virtual) unit prices of captively manufactured products. The total value is the sum of both merchant and production values: Total value = ∑ (p1− m × q1− m ) + ∑ (P1− n × Q1− n )

p = unit price of traded fi ne chemicals q = volume of traded fi ne chemicals

> merchant value

P = (virtual) unit price of captively produced FCs > production value Q = volume of captively produced FCs

>total value

One can also say that the merchant value corresponds to the actual aggregated sales revenues of the fi ne-chemical industry, whereas the total value is the theoretically achievable revenue, if all fi ne-chemical requirements were outsourced.

83

MARKET BREAKDOWN BY MAJOR APPLICATIONS •

The official trade and custom statistics are not broken down to fi ne chemicals. The US Bureau of the Census classification, for instance, uses the following main product categories: “organic chemicals,” “inorganic chemicals,” “plastics,” “fertilizers,” “pharmaceuticals,” “cosmetics,” “dyes & colorants,” and “other.”

In order to arrive at a realistic figure for the size of the fi ne-chemical business, a top-down approach has been adopted. For the total value it is based on three key figures, namely, the total sales of a category of specialty chemicals (e.g., pharmaceuticals) and the percentage share of active ingredients. For determination of the merchant market, the latter figure is multiplied by the share of outsourcing. As the total sales figures for major specialties are published and the share of active ingredients in the specialties is known approximately, the total value of fi ne chemicals can be estimated with reasonable accuracy. As no reliable data exist on the degree of outsourcing, estimation of the size of the merchant market is more speculative.

9.2

MARKET BREAKDOWN BY MAJOR APPLICATIONS

In Table 9.2, the approximately $75 billion fi ne-chemical market is subdivided into major applications according to their relevance, namely, fi ne chemicals for pharmaceuticals, agrochemicals, and specialty chemicals outside life sciences. Furthermore, a distinction is made between captive (in-house) production and merchant market. Pharmaceutical fi ne chemicals (PFCs) account for more than two-thirds of the total value of fi ne chemicals. The figure of $55 billion for the PFCs has been derived from the $550 billion turnover for formulated pharmaceuticals, as published periodically by IMS Health (see Appendix A.1). An average percentage of 10% (8% for proprietary drugs, 15–20% for generics) has been applied for the PFCs’ share (see also Table 9.3). Out of the total PFC value

Table 9.2

Size of Fine-Chemical Markets in Developed Countries a Size ($ billion) Total A.I.

Captive

Merchant

50 10

30 6

20 4

Various specialty chemicals

15

10

5

Total fi ne-chemical industry

75

45–50

25–30

Life sciences

a

Pharmaceuticals Agrochemicals

According to the consultancy fi rm Brychem, there is a domestic API-for-generics market of approximately. $30 billion in third-world countries! (See Ref. 6.)

84

MARKET SIZE AND STRUCTURE

of $55 billion, about $20 billion (∼40%) are traded, and $30 billion are the production value of the pharma industry’s in-house production. The accuracy of these figures is about ±20–25% (see Table 9.3). Within life science products, fi ne chemicals for agro, and—at a distance—for veterinary drugs follow in importance. Global sales of proprietary drugs were $505 billion in 2005, or more than 90% of the total pharma market. With a share of 45%, the United States has by far the single largest market. Global sales of generics were about $45 billion in 2005 (except China and India), or less than 10% of the total pharma market. Obviously, the difference in production volumes is smaller. For agrochemicals, an incidence of the active fi ne-chemical ingredients of 33% has been assumed, resulting in a total value of $10 billion out of $30–$35 billion for the global pesticide market. The percentage is much higher than for pharmaceuticals, especially proprietary drugs, because cost/benefit considerations are more important in the agrochemical industry. A farmer uses a pesticide only, if such use provides an economic benefit, whereas a patient with a perscription does not care much about the cost of the medicine (which the patient does not pay, anyway). For the value of fi ne chemicals used in speciality chemicals outside life sciences, only a best guess is possible. Issues such as “at what stage of the supply chain the end price is determined (wholesaler, supermarket, or specialty boutique),” “what is the exact concentration of the embedded fi ne

Table 9.3

Structure of the Pharmaceutical Fine-Chemical Market Formulated Drugs

Total Pharma Market 100% / $550 bio

share of proprietary drugs 92% / $505 bio

share of non proprietary drugs 8% / $45 bio

Pharmaceutical Fine Chemicalsa share of active ingredientsb 8% / $40 bio

share of active ingredientsb 15-20% / $8 bio

Total active ingredients ª $50 bio

share of outsourcing 40% / $15 bio

share of outsourcing 65% / $5 bio

Total share of outsourcing ª $20 bioc

Accuracy of numbers ±20%. APIs + advanced intermediates. c For a further breakdown of the markets according to types of company and drug development stage, see Table 12.6. a

b

MARKET BREAKDOWN BY MAJOR APPLICATIONS

Table 9.4

85

Embedded Value of Fine Chemicals in Specialty Chemicals

Product

l-Lysine

Aerogard

Listerine

SuperGlue

Application

Vitamin supplement

Insect repellent

Mouthwash

Adhesive

Wholesale price package size Unit price

$10.00

$6.00

$5.00

$1.50

0.1 kg $100/kg

0.15 kg $40/kg

1.5 kg $3.30/kg

3g $500/kg

Key ingredient Concentration Share of price

l-Lysine >95% ~5%

Diethyl toluamide 19% ~4%

Ethanol 27% ~3%

α-Cyanoacrylate >95% ~4%

Di-n-propyl isocinchomerate, N-Octyl bicycloheptenedicarboxamide

Eucalyptol, Menthol, Methyl salicylate, thymol

—

Other ingredients

chemical” (strengths of sunscreen formulations vary by a factor of 10), or “how do formulations from different companies vary” are difficult to address with mathematical precision. Furthermore, many specialty chemicals contain more than one active ingredient; laundry detergents, for instance, contain zeolithes (15–30%), tensioactives (5–15%), antiredeposition agents, foam regulators, optical brighteners, perfume, proteoloytic enzymes, polycarboxylates, and other compounds (<5%). For an order-of-magnitude estimate, four household specialty chemicals have been selected randomly and analyzed (see Table 9.4). Although the weight shares of the active ingredients vary widely (viz., between 19% and >95%), the variation of the embedded values of the active ingredients all range between 3% and 5%. It can be assumed, therefore, that the total value of active ingredients in specialty chemicals corresponds to 4% of the global sales revenue of formulated specialty chemicals, which amounts to $390 billion [$990 billion of which $600 billion for (pharma + agro)]. This translates into a market value of about $15 billion, a figure that is widely used in the industry. As the leading specialty chemical companies, Degussa, Dow, Chemtura and Rohm & Haas, are backward-integrated, the share of in-house production is estimated at 75–80%, leaving a merchant market of approximately $5 billion (see Table 9.2).

CHAPTER 10

The Business Condition

The fi ne-chemical industry has undergone three boom phases during its almost 30 years of existence. The fi rst one, which led to the creation of the industry, occurred in the late 1970s, when the overwhelming success of the histamine H 2 receptor antagonists Tagamet (cimetidine) and Zantac (ranitidine hydrochloride) created a strong demand for PFCs. These anti–stomach ulcer drugs virtually eliminated the need for stomach surgery. The second boom took place in the late 1990s, when both high-dosage anti-AIDS drugs and COX-2 inhibitors required a high multipurpose manufacturing capacity and gave a big boost to custom manufacturing. The most recent—minor— boom is associated with stockpiling of Tamiflu (oseltamivir phosphate) by many countries in order to prepare for a possible avian flu epidemic. For the manufacture, Roche has established a global network including several Roche sites and more than 15 external contractors in nine countries. After the second boom phase, which saw double-digit growth rates for the fi ne-chemical business and was described as “irrational exuberance” of the 1990s, the industry entered a recession after the turn of the century. This unfavorable development is in sharp contrast to the very optimistic growth forecasts, which many fi ne-chemical companies had announced (see Table 10.1). They obviously had been based on a forward projection of past performance. In most cases, these projections have been missed by a large margin. A number of major fi ne-chemical companies suffered from declining sales, contrary to the major customer base, the pharmaceutical industry, which continued to grow. This striking spread constitutes a true challenge for business development [4]. The root causes for the reversal of the industry’s fortunes and the persisting harsh business environment are unfavorable developments on both demand and offer sides. The net result is underutilized fi ne-chemical production capacities, estimated at 40% for the pharmaceutical industry and 30% for the fi ne-chemical industry, and eventually a serious offer–demand imbalance. Last but not least, the currency exposure is another element of concern. Costs incur in Euros; sales are in US dollars. Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

86

87

OFFER

Table 10.1

Fine-Chemical Company Growth Expectations Sales ($ million) Actual

Year

Expected

Year

CAGR (%/year)

Dow Pharma, USA

200

2000

800–1000

2009

18

Degussa, Germany

500

2000

1000

2004

18

Clariant , Switzerland

700

2000

1400

2004

19

Cambrex, USA

350

2000

1000

2004

23

130

2000

250

2003

24

75

2002

255

2005

30

30

2000

120

2004

41

113

2000

500

2004

45

30–40

2003

500

2010

≈50

20

2000

2003

71

Company

a

Dynamic Synthesis

b

UBE, Japan Rhodia Pharma Sol., USA, F c

Great Lakes , USA Nicholas Piramal, India Solutia, USA (Switzerland) a b c

300–500

Now Archimica (after acquisition by TowerBrook). Now Rockwood (after merger with Novasep). Now Chemtura (after merger with Crompton).

10.1

OFFER

The sharp increase in fi ne-chemicals production capacity—usually expressed in “m3 cGMP reactor volume”—is a consequence of both the upgrading of idle dyestuff intermediates plants and the new capacity, which has been built mainly in Asian countries. The number of exhibitors at the world’s most important fi ne-chemical trade fair, the CPhI (Chemical and Pharmaceutical Ingredients), is a valid qualitative indicator for the expansion of the industry. A mere 16 companies participated at the fi rst CPhI, which was held in 1990. From then on, about 100 additional exhibitors registered every year, to reach 1750 in 2006. Whereas there were only a number of CRO’s, which joined from the Western hemisphere lately, the major growth came from Asia, particularly China and India. Exhibitors from this region accounted from more than 50% of the total in 2006! A comparison of the sales development of selected Indian versus European fi ne-chemical companies is shown in Figure 10.1. Because of the exponential growth of the Indian companies, a logarithmic scale has been adopted for the Y-axis. The graph shows first of all the different growth patterns of the Western and Asian companies. Sales revenues of all three European companies had peaked in 2001, went through a trough between 2001 and 2005 and have not fully recovered.

88

THE BUSINESS CONDITION 1000 (1) Lonza

S million

(2) (3) 100 (5) (6) (4)

(1)

Siegfried (2) F.I.S.

(3)

Matrix

(4)

Divi’s

(5)

Hikal

(6)

Dishman (7)

(7)

10 2001

2002

2003

2004

2005

Figure 10.1 Sales development of Indian and European fi ne-chemical companies.

In contrast, sales of the four Indian companies have boosted. The frontrunner is Matrix. The company started its business activity with the manufacture of the active ingredient for Citalopram in the year 2000 and became a leading API-for-Generics manufacturer with sales slightly exceeding $250 million, 44 commercialized, and 112 developmental APIs in merely five years. The sales of Dishman, Divi’s and Hikal increased between 15% and 25% per year between 2001–2002 and 2005–2006. If they succeed in retaining their growth mode, they will exceed sales of $100 million by the year 2010 and join the ranks of the mid sized fi ne-chemical companies. As the new players from Asia in general are still small compared to the big European companies and have relatively small production capacities only, their 50% share of the exhibitors at CPhI does not correspond to 40% of the global production capacity. Furthermore, their capacity utilization in terms of $/m3 per year generally has not yet reached European standards. Divi’s Laboratories, India, established in 1990, is an example of a company that has installed a very impressive production capacity. At its two sites in Hyderabad and Vishakhapatnam (in Andhra Pradesh), the company has put onstream multipurpose GMP fi ne-chemical plants with a total reactor volume of 2000 m 3, far more than any large European fi ne-chemical company. However their sales of $87 million (2005) translate in a very modest turnover of $43,000 per m 3 of reactor volume.

The new production capacity that has come onstream in Asia since the mid-1990s has allowed the fi ne-chemical companies in these countries to capture a close to 50% share of the global merchant market for API-forgenerics, the only segment of the industry where demand has developed favorably lately (see text below). The pharmaceutical industry itself, plagued by underutilized capacity, has gone more aggressively after thirdparty business.

DEMAND

10.2

89

DEMAND

The demand for fi ne chemicals depends mainly on the requirements of the largest customer base, the pharmaceutical industry. Its needs for custom manufacturing of PFCs for proprietary drugs on one hand, and for APIs-forgenerics on the other hand, have developed in opposite directions. The innovator pharma industry’s pipeline is thinning because fewer new drugs are entering and more products are exiting it. In contrast, the generic companies are profiting from the trend to replace proprietary by nonproprietary drugs and the afflux of drugs that have lost patent protection. Custom manufacturing is driven primarily by the frequency of new drug launches and the industry’s “make or buy” attitude; the latter is strongly influenced by the available in-house production capacity. The generally used yardstick for new drug launches is the statistic of new drug approvals (NDAs) in the United States, published regularly by the FDA. As other agencies, such as EMEA (European Medicines Agency) are generally following the decisions of the FDA, they also are a good indicator of the frequency of global launches. The FDA’s approvals of new drugs based on small molecules, the so-called new chemical entities (NCEs), has plunged from an all-time high of 51 in 1997 to an all-time low of 15 in 2005 (see Figure 10.2). The big molecules, respectively new biological entities (NBE’s), did not fare better. They plummeted from 8 in 1997 to 3 in 2005. Obviously, the number of new APIs launched in any given year does not exactly correlate with the new sales generated. The individual products differ both in sales volumes and unit prices. Nevertheless, it is a valid indicator for the trend of the demand. The magnitude of the problem is illustrated by an evaluation done by The Boston Consulting Company. BCG found that a big pharma company must launch at least three new drugs per year, if it wants to maintain a growth rate in the low double digit figure. 60 NCE

50

(1)

NBE

40 (2)

30 20 10 0

(1) (2)

95 96 97 98 99

0

1

2

3

4

5

Figure 10.2 FDA approvals for new APIs, 1995–2005. (Source: www.fda.gov; CDER Drug and Biologic Approvals.)

90

THE BUSINESS CONDITION

Possible root causes for the slump in pharma R&D productivity are discussed in Section 15.2. Within exclusives, also known as “PFCs for proprietary drugs,” the market for custom manufacturing has also suffered from the reticence of the pharmaceutical industry, particularly “big pharma,” to outsource the chemical manufacturing of their drug substances. Rather than being guided by a clear long-term strategy, their “make or buy” decisions are based on opportunistic short-term considerations. An example in point is the contract manufacturing deal between Lonza and Bristol Myers-Squibb for Orencia (abatacept), a new drug for treatment of rheumatoid arthritis: In order to increase production capacity and meet expected long-term demand for the drug, BMS has enlisted Switzerland’s Lonza to share the manufacturing until the company builds a second manufacturing facility to cope with the output on its own. —in-Pharma Technologist, (Feb. 19, 2006).

A summary of the pros and cons for outsourcing from the pharma industry’s perspective is given in Table 10.2. As extended studies at the Stern Business School of the New York City University have shown, fi nancial considerations clearly favor the “buy” option [1,2]: Two important findings of the studies were: “Focusing resources on chemical R&D instead of production can help to increase returns” and “Return on physical assets in the chemical industry is roughly equal to the cost of capital, while the return on R&D substantially exceeds the cost of capital”. Contrary to other big industries, both traditional, such as automotive, and modern, such as electronic, the pharma industry thus far was not under such a cost pressure to prioritize fi nancial considerations. Actually, the recent slowdown in growth has given more emphasis on “avoiding job losses” and “fi lling underutilized capacity.”

Table 10.2

Pros and Cons for Outsourcing API Manufacture

Pros

Cons

Concentrate on core activities (innovation and marketing)

Loss of tax benefits resulting from production of APIs in tax havens

Deploy fi nancial resources for more profitable investments

Dissemination of intellectual property

Benefit from Fine-chemical industry’s know-how and expertise Eliminate long lead times to build and validate a manufacturing facility Free capacity for new product introductions Avoid risks of using hazardous chemistry

Loss of know-how Job losses Underutilization of in-house production capacity Overdependence on suppliers: “If we want 100% supply security, we have to do it in-house”

DEMAND

91

The latter has been created both by the abovementioned slump in new drug approvals and the megamergers in the industry. In-house manufacturing usually gets the right of fi rst refusal for the manufacture of APIs. For new production, outsourcing is not even considered; old products that have been sourced from third parties are taken back in-house. Overall, the clash between an increased number of players and a boost of global production capacity on one hand and an overall sluggish demand on the other hand has created a highly competitive environment. In order to avoid plant closures, fine-chemical companies accepted prices that covered only variable costs, in some cases even only part of them. An example of this is the duloxetine antidepressant project at Eli Lilly. The company is buying in the penultimate (next-to-last) step of the molecule. It was able to get FDA approval for this molecule as a “semi–starting material.” The requirement was divided among four suppliers. So it is easy for Lilly to play among four vendors at the same time and get very attractive prices.

The question as to whether this unfavorable situation will to persist or change for the better will be discussed in Part III, Outlook. “Nonexclusives” (see Section 12.2.2), especially API-for-generics, constitute the second most important outlet for fi ne chemicals after custom manufacturing. Because of new distribution systems, such as the health management (maintenance) organizations (HMOs) and government measures to contain costs of medication, global sales of generics are increasing rapidly. They reached $45 billion in 2005, or less than 10% of the total pharma market. On a volume/volume basis, their market share is 24%, due to the much lower unit prices for generics. The regional importance of the generics market decreases in the following order: Americas outside USA > USA > Europe > rest of the world > Japan. The rapid growth of the US generic market is also evident from the increasing number of ANDAs (Abbreviated New Drug Applications) being submitted to the FDA. They doubled from 320 in 2001 to 640 in 2005. (Actual approval of generics improved at a less rapid, but still remarkable, pace; from 315 to 465 in the same period.) In Europe the market size decreases in the order Germany > United Kingdom > Italy > Spain. The Japanese market is insignificant for the time being. There are two main reasons for the booming generics market: (1) almost ubiquous government pressure on reducing healthcare costs—and therefore incentives for substituting originator drugs with generics and (2) the large number of drugs that will loose patent protection over the years to come (see Table 17.1). In both the United States and Germany, more than 50% of physician prescriptions already are for generics—and the other countries are catching up. More than 60 “top 200 drugs” alone, representing aggregated sales of $120 billion, are expected to fall into the public domain within the 2007–2012 period (see Table 17.1). In terms of forthcoming API sales, this figure represents a total business potential of $2.0–2.5 billion (see Section 12.2.2).

92

THE BUSINESS CONDITION

Within the $120 billion worth of proprietary drugs that face patent expiry, there is also $20 billion worth of biopharmaceuticals (e.g., epoetin and insulin). “Biogenerics” produced in living celllines have not played a role so far, mainly because an unambiguous regulatory framework has not been established yet in the United States. Within the FDA, two legislations cover biogenerics approvals: •

•

Food, Drug and Cosmetics Act—approves, for example, human growth hormone (hGH), insulin, enzymes (e.g., hyaluronidase, urokinase) Public Health Service Act—approves most biologics, including recombinant therapeutic proteins

Sandoz has received EMEA approval for launching the fi rst biogeneric, the growth hormone omnitrope, which is “biosimilar” to Pfi zer’s proprietary Genotropin. The total market for API-for-generics has been growing at a low double-digit annual rate from approximately $8 billion in 2002 to $12 billion in 2005 and is expected to increase to approximately $18 billion in 2008. Because most generic companies are only formulators, the share of outsourcing is higher than in custom manufacturing, most likely about 65%. As the value of the API accounts for approximately 15–20% of the drug sales price, this translates into a merchant market of approximately $7.5–10 billion (2005), respectively $10–$15 billion (2010) for the fi ne-chemical industry. The large domestic markets in China and India are not included in these figures. Asian companies in particular vie for the forthcoming generics business. They have the triple advantage of their low cost basis, their big home market, and previous manufacturing experience in producing for their domestic and other nonregulated markets. This is even more so in the case of APIs for the established generics. Apart from the rapid expansion of the Indian fi nechemical manufacturing capacity (see Section 12.2.2), drug master fi le (DMF) submissions by Indian companies have also risen rapidly (see Section 14.1). DMFs are generic dossiers fi led with the FDA in order to allow the API to appear in marketed drugs. Thus an API manufacturer fi les just one application for a product, which can then be used to support approval of any generic based on that API.

The dichotomy in the development of offer and demand also has a direct impact on the development of the fi ne-chemical industry in a global context. Whereas Western companies have suffered from the reduced demand for custom manufacturing services, Asian companies have benefited from the generics boom. The opposite turnover development of selected Indian and European fi ne-chemical companies is depicted in Figure 10.1.

CHAPTER 11

Customer Base

11.1

PHARMACEUTICAL INDUSTRY

The pharmaceutical industry constitutes the most important customer base for the fi ne-chemical industry. It absorbs about a third of the global chemical market (see Chapter 9). It also has a track record of above-average growth. Global sales tripled from $52 billion in 1980 to $167 billion in 1990, corresponding to a compound annual growth rate (CAGR) of 12% per annum. The growth slowed down in the following decade to—a still impressive—7.4% per annum, arriving at $347 billion in the year 2000. It was up again to almost 9.5% per annum in the most recent period, 2000–2005, bringing global pharma sales to close to $550 billion in 2005. The global pharma industry is conveniently subdivided into a three-tier structure: “big pharma,” “medium pharma,” and “small” or “virtual pharma.” Each one has its distinctive characteristics (see Table 11.1). “Big pharma” in the United States is impressive primarily because of the strength of its marketing. Marketing supremacy is an important success element. Actually, the Americans have outpaced their once-dominant European counterparts. For instance, each of them employs a “field force” of up to 20,000 (!) sales representatives, who visit physicians and hospitals at a heavy cadence. The aggressive marketing methods have impaired the public image. The industry is criticized for promoting expensive new drugs that do not give additional therapeutic benefits over existing ones, covering up negative side effects, suppressing clinical studies with unfavorable results, bribing physicians, diseasemongering (i.e., inventing diseases), or using legislative loopholes to extend the patent duration of proprietary drugs [3]. “Medium pharma” are companies with annual sales in the $0.5–$5 billion bracket with primarily regional reach. All except the smallest generics companies belong to this category. Consequently, the product portfolios consist primarily of generics. Occasionally, however, they succeed in launching a blockbuster drug, such as those of Altana Pharma (Germany) with Pantozol (pantoprazol), Lundbeck (Denmark) with Celexa (citalopram), and Sankyo Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

93

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Table 11.1

Structure of the Pharmaceutical Industry

Type

Number

Big pharma

<20

Global companies with sales >$5 billion; many blockbusters, large in-house capabilities in R&D, manufacturing & marketing

See Table 11.2

Medium pharma

50–100

Sales $0.5–$5 billion, regional reach, <300 m 3 reactor volume, limited R&D capabilities, mainly unlicensed drugs and generics.

Barr, Forest, Sepracor, USA; Altana, Merck, Stada, Germany; Sankyo, Japan; Dr Reddy’s, Ranbaxy, India

Virtual pharma

4000– 5000

Venture capital funded, 1–2 developmental drugs, mainly biopharmaceuticals, small R&D, no production, no M&S a organization

Cell Therapeutics, Gilead, Trimeris, Vertex, USA; Alizyme, UK; Morphosys, Germany; Actelion, Speedel, Switzerland

a

Characteristics

Examples

Marketing and sales.

(Japan) with Pravachol (pravastatin). They also draw advantage from the fact that it is no longer possible for “big pharma” companies to effectively pursue products that would be considered of minimal-to-limited turnover potential. This creates a reservoir of opportunities for the midsize drug companies, which exploit the potential of drugs in the $20–$200 million annual sales range. Many generics fall into this category. The distinction between some generics companies and traditional, innovative pharmaceutical companies are blurred. On one hand, the large generics companies move upstream, invest in R&D, and attempt to develop innovator drugs of their own as well, as explained above. On the other hand, ethical pharma companies use generics, either in combination drugs [in the “sartan” category antihypertensives, e.g., both Merck’s Hyzaar and Novartis’ Diovan HCT are combination drugs between a proprietary API (losartan, resp. valsartan) and the generic diuretic hydrochlorothiazide], or in their consumer health OTC drug businesses. The many generic brands of N-acetyl-paminophenol and acetylsalicylic acid (Acuprin, Amigesic, Anacin, Anaflex, Arthritis pain Ascription, etc.) illustrate this. In a bid to stave off generic competition, some pharma companies also have introduced the concept of “authorized” generics. Here the brand company (innovator) “authorizes” a generic company to market the brand product as a generic under a different label. This ensures that new generics, enjoying a 180-day exclusivity period, will not face immediate competition, and opens up a new revenue stream for

PHARMACEUTICAL INDUSTRY

95

the innovator company. Yet another strategy adopted by pharmaceutical companies is to set up generic subsidiaries. Novartis has made a full-blown commitment to generics with its Sandoz subsidiary. Also, Pfi zer’s Greenstone, Sanofi-Aventis’ Winthrop, and Schering-Plough’s Warwick generic units have become more active in launching authorized generics. Some big and medium pharma companies are hybrids in the sense that they also offer pharmaceutical fi ne chemicals and custom manufacturing services and therefore compete with their PFC suppliers. Examples are Abbott, USA; Bayer Schering Pharma (through the acquisition of Schering AG by Bayer Health Care), Boehringer-Ingelheim, Merck KGaA (all Germany); Organon Biosciences (formerly Akzo-Nobel Pharma), The Netherlands; Pfi zer (through the acquisition of Pharmacia Upjohn), USA; and Sanofi-Aventis. France (through the integration of Roussel-Uclaf).

The roots of the big and medium pharma companies go back either to drugstores or chemical companies, the former prevailing in United States; the latter, in European enterprises. The lack of a chemical manufacturing history is also a reason why US pharma companies en principe are more prone to outsourcing. Small pharma companies originate mostly from academia. Therefore, their R&D strategy is more focussed on the elucidation of the biological roots of diseases rather than HTS. In order to attract investors, they are also referred to as “biopharmaceutical companies.” As all biopharmaceutical companies are neither small (e.g. Amgen, Genentech), nor exclusively developing big molecules, this term is not appropriate. The attractiveness of big, medium, and small pharma as potential customers is described in Section 12.3, on target markets. The ranking of the top 10 innovator and generic drug companies is shown in Table 11.2. In the innovator category, there are 5 US and European companies each among the top 10, with each geographic region contributing about half to the sales of $247 billion. If one looks at the top 20 companies, than US companies hold fi rst place with just over 50% of the sales, followed by Europe, 43%; and Japan, 5%. Primarily as a consequence of three important products loosing exclusivity, the sales of the world’s number one pharmaceutical company, Pfi zer (according to Pfi zer’s annual report for 2005), dropped by 4%, from $46.1 billlion to $44.3 billion between 2004 and 2005. The sales of the single products nosedived as follows: Neurontin (gabapentin) from $2723 million in 2004 to $639 million in 2005 (−77%), Diflucan (Fluconazole) from $945 million to $498 (−47%), and Accupril/Accuretic (quinapril) from $665 million to $294 million (−56%). The combined loss in revenue was $2902 million year-on-year.

In generics, European, particularly German and Swiss, companies have captured the lion’s share with half of the total top 10 sales revenues. After a period of intensive mergers and acquisitions, the pharma industry has reached

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Table 11.2

Top 10 Innovator and Generic Pharmaceutical Companies Innovator Companies

Generic Companies

Sales in 2005 ($ billion) Company

Total

of which ethical

Pfi zer, USA

51.3

44.3

Sales in 2005 ($ billion) Company Sandoz a,b,c b,c

Glaxo SmithKline, UK

39.5

34.0

Teva

Sanofi Aventis, France

34.0

31.4

Merck KGaA

Total

of which generics

3.88

3.88

5.25

3.7 E

7.04

2.15

E

1.8E

AstraZeneca, UK

24.0

24.0

Hexal

1.8

Johnson & Johnson, USA

50.5

22.3

Watsond

1.65

1.65

Merck & Co., USA

22.0

22.0

Ratiopharm

1.48

1.48

Roche CH, Switzerland

28.5

21.9

Stada

1.28

1.28

Novartis, Switzerland

25.9

16.3

Mylan Labs

1.25

1.25

Wyeth, USA

18.8

15.4

Schwarz

1.23

1.23

Bristol-Myers Squibb, USA

19.2

15.3

Ranbaxyb,c

1.18

1.06

Total top 10 e

247

Total

19.4

a

Division of Novartis. Also active in production of originator drugs. c Also active in production of biogenerics drugs. d After completion of the acquisition of Andrx Corp., Watson is anticipated to become the third largest generics-producing company (estimated sales for 2007 = $2.8 billion). e Top 11–20 companies (figures in $ billion): Eli Lilly, 14.7; Abbott, 14.0; Bayer Schering Pharma, ≈13.4 (pro forma); Amgen, 12.0; Boehringer-Ingelheim, ≈10.2; Schering-Plough, 9.5; Takeda, 8,5; Astellas (merger between Fujisawa and Yamanouchi in 2005), ≈8, Daichi Sankyo, 7,3; Genentech, 5.5. Total top 11–20: $103 billion. Total top 20: $350 billion. Note: Activities outside pharmaceuticals include consumer health, veterinary products, diagnostics, medical devices, and nutritional products. Sources: Company annual reports, 2005. b

a sizable degree of consolidation. Within innovator drugs, the top 10 companies generate sales of $247 billion, or almost 50% of the total proceeds of this business (70% for the top 20). The corresponding number for generic companies is $19.4 billion for sales of the top 10 companies, corresponding to 43% of global generics turnover. The numbers show that the degree of consolidation of both types of industry is similar despite the big difference in total turnover. The $19.4 billion turnover of the top 10 generics houses represents only a modest part, compared with the $247 billion (2005) for the top 10 “big

PHARMACEUTICAL INDUSTRY

97

pharma” companies (see Table 11.2). Sandoz and Teva are by far the largest generics companies. They differ from their competitors not only in sales revenues but also because they are located outside the United States and are not pure generics players. In terms of overall sales, profit growth and new product launches, the Israel-based Teva has been very successful in recent years. Sales increased 2.5-fold from $2.1 billion (2001) to $5.3 billion in 2005. The already strong position on the US market was further extended by the purchase of Ivax. “First to fi le” generics for proprietary drugs with total sales of $25 billion are in the pipeline. Contrary to most of its competitors, Teva also has an R&D program for developing its own originator drugs and considerable in-house chemical manufacturing capabilities. Teva’s Copaxone, (glatiramer) the top-selling proprietary drug for treating multiple sclerosis on the US market, achieved blockbuster status with sales of $1.2 billion in 2005. The number 2 company is SANDOZ. The name goes back to the Swiss chemical/pharmaceutical company Sandoz, which merged in 1996 with Ciba-Geigy to form Novartis. Novartis’ generics are sold under the trademark SANDOZ. Sales have almost quadrupled from $1.2 billion in 2001 to $4.7 billion in 2005. The product portfolio of penicillines is backed up by captive production in plants in Kundl (Austria) and in Torre Annnunziata (Italy). Pharmaceuticals containing more than 2000 different active ingredients are in commerce today; a sizable number of them are sourced from the fi nechemical industry. They can be classified according to different criteria. In order of relevance to the fi ne-chemical industry, they are described in the following paragraphs: 1. Sales Volume. All stakeholders in the pharmaceutical industry, the fi ne-chemical industry included, have a keen interest in the top-selling or “blockbuster” drugs. The term “blockbusters” refers to pharmaceuticals with worldwide annual sales in excess of $1 billion. Their number has increased steadily, from 27 in 1999 to 51 in 2001, to 76 in 2003, and to 103 (15 of which latter are biopharmaceuticals) in 2005. Key data of the top 10 blockbuster drugs are listed in Table 11.3, and their structural formulas are presented in Table 11.4. The largest-selling nonproprietary drugs are paracetamol, omeprazole, ethinylestradiol, amoxicillin, pyridoxine, and ascorbic acid. Only one of the top 10 drugs, Enbrel (etanercept), is a “big” (HMW) molecule. However, with an average molecular weight of over 400, the “small” (LMV) molecules also exhibit quite complex structures. On average, they show three cyclic (often N-heterocyclic) moieties (see also paragraph 5, below). 2. Position in the Drug Lifecycle. A drug’s position in the lifecycle impacts distinctly the interface with a fi ne-chemical company. The consequences for the selection of target products are discussed in detail in Section 12.2. 3. Patent Status. Drugs produced under valid product and manufacturing patents are referred to as patented, proprietary, innovator, or ethical drugs. They account for the largest part of global drug sales. The leading

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Table 11.3

Top 10 Proprietary Drugs: Key Data

Brand Name

API

Company

Lipitor

Atorvastatin (I)

Pfi zer

Plavix

Clopidogrel (II)

Advair/Seretide

Sales, 2005 ($ billion)

Approval Date

12.2

Dec. 1996

Bristol-Myers Squibb SanoviAventis

5.8

Nov. 1997

Salmeterol (IIIa) + fluticasone (IIIb)

Glaxo SmithKline

5.2

Nov. 1999 Sept. 1998

Nexium

Esomeprazole (IV)

AstraZeneca

4.7

March 2000

Norvasc

Amlodipine (V)

Pfi zer

4.7

July 1992

Zocor

Simvastatin (VI)

Merck & Co.

4.4

Dec. 1991

Zyprexa

Olanzapine (VII)

Eli Lilly

4.2

Sept. 1996

Diovan and Co-Diovan

Valsartan (VIII)

Novartis

3.7

Dec. 1996 Oct. 1997

Enbrel

Etanercept (IX)

Wyeth/Takeda

3.6

Nov. 1998

Risperdal

Risperidone (X)

Johnson & Johnson

3.5

June 1996

Total top 10 a

52

a

Top 11–20 brands (all figures in $ billion): Ogastro/Prevacid (Takeda), 3.5; Effexor (Wyeth), 3.5; Procrit/Eprex (Johnson & Johnson), 3.3; MabThera/Rituxan (Roche), 3.3; Zoloft (Pfi zer), 3.3; Fosamax (Merck), 3.2; Singulair (Merck), 3; Cozaar+Hyzaar (Merck), 3; Seroquel (AstraZeneca), 2.8; Remicade (Johnson & Johnson), 2.5; Lovenox (Sanofi-Aventis), 2.7. Top 20 brands (figures in $ billion): Vytorin/Zetia (Merch/Schering-Plough), 2.4; Avandia/ Avandamet (gsk), 2.4; Glivec, 2.2; NeoRecormon, Epogin (Roche), 1.8. Notes: Exchange rates e1 = $1.245/CHF 1 = $0.804/£1 = $1.82 prices are manufacturer prices. Sources: Company annual reports, 2005.

pharmaceutical companies are active primarily in this category. It has lost part of its glory, as fewer new products arrive and more old products drop out (see also Table 17.1). Drugs whose patents have expired are called off-patent, nonproprietary drugs or generics. A generic drug (short: generic) is a drug that is bioequivalent to an originator drug but is sold for a lower price. Generics must contain the same active ingredient and the same strength as the originator drug. Generics can be legally produced and sold, if the patent of the innovator drug has expired or in countries that do not adhere to international patent legislation. They represent the largest number of active

Table 11.4

Structural Formulas for Top 10 Proprietary Drugs

H3C O

CH3

N H

H N

H3C

OH OH COOH

N

H3CO

CH3

O Cl

O F

NH2

O O

Amlodipine 88150-42-9

Atorvastatin 134523-00-5

(V)

(I) Simvastatin 79902-63-9

OCH3

O

O

HO O H

O N S Clopidogrel 113665-84-2

O

H3C

Cl

H

H3C CH3

H

CH3

H3C (II)

(VI) Olanzapine 132539-06-1

OH H N

HO

CH3 N

O

N Salmeterol 89365-50-4

HO

N N H

(IIIa) F HO CH3 H F

S CH3

(VII)

O O O

H3C O

CH3

H3C

CH3

Fluticasone propionate 80474-14-2

F

N

CH3 COOH N N N HN

Valsartan 137862-53-4

(VIII)

(IIIb) Esomeprazole 161796-78-7

OCH3

S (IV)

N OCH3

CH3 N O N

CH3

H

O

H3C

S

N H

N

CH3 N

F

O Risperidone 106266-06-2

N O (X)

Note: No structural formula exists for Enbrel (IX), which is a biopharmaceutical (dimeric fusion protein). Source: The Merck Index, CD-ROM version.

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substances. They have smaller profit margins than do the proprietary drugs. The attractiveness of proprietary versus nonproprietary drugs for the fi nechemical industry is discussed in Section 12.2. 4. Sales Channels. Prescription drugs can only be purchased by the public at a pharmacy with a physician’s prescription. OTC drugs are available at convenience stores. Most OTC drugs are generics. 5. Molecular Structure. One distinguishes primarily between low-molecular-weight (LMW), or small, and high-molecular-weight (HMW), or big molecules. Most fi ne-chemical companies are active in small molecules, which are produced by traditional chemical synthesis in conventional multipurpose plants, biocatalysis, microbial fermentation, or a combination of the three technologies (see Chapter 4). Within small molecules, N-heterocycles represent the most important class of PFCs (see Section 3.1). An example is Sepracor’s recently launched antiinsomnia drug Lunesta (eszopiclone). Apart from a —C(O)O— linkage, it is composed entirely of N-heterocyclics. Like most modern drugs, esczopiclone also has a chiral center. Correspondingly, technologies for introducing chirality, by both traditional chemical and fermentative processes, play an increasingly important role in pharmaceutical fi ne chemical production. The structure for lunesta is O N N N O

H

Cl N N

N

O Lunesta, (+)-(5S )-6-(chlorpyridin-2-yl)-7-oxo-6.7-dihydro5H-pyrrolo[3.4-b] pyrazin-5-yl 4-methylpiperazine-1-carboxylate

Biopharmaceuticals are big molecules. They have captured a market share of close to 10% of the global pharmaceutical market. Only a few fi ne-chemical companies possess the assets and the know-how for their production, primarily by mammalian cell culture technologies (see Section 4.2). At the interface between small and big molecules, the “tides” (i.e., nucleotides and peptides) have gained attention as pharmacologically active substances lately. Smaller peptides, composed of up to 30–40 amino acids, can be manufactured by conventional chemical protecting, coupling, and/or deprotecting methods. Larger ones, such as calcitonin and epoetin alfa, are produced by microbial biotechnology. “Bio fi ne chemicals” made by the most modern biotechnological process, the mammalian cell culture, have played an increasingly important role within the pharma market since the mid-1990s. First-

AGROCHEMICAL INDUSTRY

Table 11.5

101

Top 5 Therapeutic Drug Classes Sales 2004

Rank

Therapeutic Class

$ billion

%

1

Cardiovascular

87.9

17

2

Central nervous system (CNS)

85.7

16

3

Alimentary tract and metabolism

63.9

12

4

Antiinfectives (without vaccines)

55.7

11

5

Respiratory

35.5

7

Total

329

63

Source: Adapted from GlaxoSmithKline annual report, 2005.

generation products were recombinant human growth hormone (rhGH) and insulin (rhinsulin). 6. Therapeutic Categories. This classification is important for the pharmaceutical industry, as many companies specialize in selected therapeutic classes. The ranking of the major ones is shown in Table 11.5. Together, they account for 30% of global drug sales. This classification is less relevant to the fi ne-chemical industry. It should only be noted that the ratio between small and big molecules varies according to the individual class. For instance, small molecules prevail in antihypertensives; large ones, in oncology drugs. 11.2

AGROCHEMICAL INDUSTRY

Agrochemical companies are the second largest users of fine chemicals. Most of them have a “pharmaceutical heritage.” The processes for the development of new products are similar. Apart from pesticides (mainly herbicides, insecticides, and fungicides), the leading companies are also involved in genetically modified (GM) crops, plants, and seeds. As a consequence of an intensive M&A activity over the past 10–20 years, the industry now is more consolidated than the pharmaceutical industry. The top 10 companies had a share of more than 85% of the total 500,000 tons/$35 billion pesticide output in 2005 (see Tables 11.6 and 11.7). The dominance of the US industry is less pronounced than in innovator pharma. The world numbers 1–3 are German and Swiss; US companies follow, in positions 4–6. There are also many agrochemical generics companies around the world. Apart from the largest ones, namely Mahkteshim Agan, Nufarm and Chem nova there are hundreds of smaller ones with sales of less than $50 million per year, mainly in India and China. The largest market for pesticides is agriculture. Industrial applications (e.g., weed killers for railway tracks) and turf, home, and garden applications

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Table 11.6

Top 10 Agrochemical Companies Sales (2005)

Rank

Company

Agrochemicals

GM Seeds

1

Bayer CropScience, Germany

$7.02 billion

$1.3 billion

2

Syngenta, Switzerland

$6.31 billion

$1.8 billion

3

BASF Agricultural Products & Nutrition, Germany

$4.10 billion

Major

4

Dow AgroScience, USA

$3.13 billion

N/A

5

Monsanto, USA

$2.79 billion

$3.1 billion

6

DuPont Agriculture & Nutrition, USA

$2.28 billion

>50% a

7

Maktheshim-Agan, Israel

$1.54 billion

N/A

8

Sumitomo Chemical, Japan

$1.38 billion

N/A

9

Nufarm, Australia

$1.24 billion

N/A

Arysta LifeScience, Japan

$0.76 billion

N/A

10

Total top 10

b

$30.55 billion

a

DuPont’s Pioneer is the world’s leading seed brand. Top 11–20 companies (figures in $ million): FMC, 725; Cheminova, 490; Ishihara (ISK), 364; Uniroyal, 369; Sipcam-Oxon, 355; Nippon Soda, 346; Kumiai, 337; Nihon Nohyaku, 328; Nissan, 319; Hokko, 291. Note: Noncrop sales (industrial, turf, home & garden, etc.) are not included. Sources: Cropnosis Ltd.—Agranova. b

represent attractive niches for the agro industry, but use relatively small quantities. The leading companies spend approximately 7.5% of their sales on R&D. A new crop protection product takes about eight to nine years and $200 million to develop. The R&D effort is focused mainly on nextgeneration agricultural biotechnology products. This comprises (1) GM crops with enhanced resistance to pests and environmental factors, (2) GM plants that contain beneficial ingredients such as oil or protein, and (3) GM plants that produce valuable complex products. Thanks to a major strategic thrust, and a liberal application policy, American companies hold a leading position in this area. At both Monsanto and DuPont, GM seed businesses already account for more than 50% of total sales. To the detriment of the fi ne-chemical industry, those two companies not only do not need chemicals for their production but also have a reduced demand for chemically produced pesticides. Whereas agrochemicals are used mainly in cereals, maize, and rice, GM crops are most diffused in soybean, maize, and cotton. In terms of applications, agrochemicals (synonyms: pesticides, plant protection products) are subdivided into herbicides, about 45–50%; insecticides, about 25–30%; and fungicides, about 20%. Nematicides, rodenticides, and fumigants account for the remaining 10%.

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AGROCHEMICAL INDUSTRY

Table 11.7

Top 10 Agrochemicals: Key Data Sales (2005)

Brand Namea

Active Ingredient

Application

$ millionb

metric tons

4,351

229,500

Round-up

Glyphosate (I)

Herbicide

Gaucho

Imidacloprid (II)

Insecticide

830

1,800

Amistar

Azoxystrobin (III)

Fungicide

590

4,590

Horizon

Tebuconazole (IV)

Fungicide

495

2,425

—

Paraquat (V)

Herbicide

420

16,000

Callisto

Mesotrione (VI)

Herbicide

390

5,735

Karate

λ-Cyhalotrin (VII)

Insecticide

380

495

—

Acetochlor (VIII)

Herbicide

380

29,775

—

Chlorpyrifos (IX)

Insecticide

375

27,675

Fungicide

370

3,575

8,581

321,570

2

Stroby Total top 10

Kresoxim-methyl (X ) c

a

Branded products still proprietary. Ex-factory. c Top 11–15 brands (units: $ million/tons): Actara (thiamethoxam), 350/900; Regent (fipronil), 346/1190; 2.4-D, 320/55,000; Dual Gold (S-metolachlor), 315/14,850; Flint (trifloxystrobin), 315/1620. Sources: Cropnosis Ltd.—Agranova. b

Examples within herbicides are, the world’s top-selling product, Monsanto’s Round-up (glyphosate) (formula I in Table 11.8), BASF’s (formerly American Cyanamid) Imezathapyr, an imidazolinone; DowAgroScience’s Treflan (trifluralin), the class of sulfuryl ureas pioneered by DuPont (Nico- and Rimsulfuron); and Syngenta’s acetanilides Acetochlor (VIII in Table 11.8), AAtrex (atrazin), and S-metolachlor. Within insecticides, the traditional organophosphates, like malathion, are being substituted by pyrethroïds, like λ-cyhalotrin (VII) and Ambush (permethrin), as well as the neonicotinoids, including BASF’s Boscalid, BayerCropScience’s Imidacloprid (II) and Thiacloprid, and pyrazoles, such as Aventis’ Acetoprole. Within fungicides, the strobilurins, a new class, are growing rapidly and already have captured more than 10% of the $7 billion global fungicide market. The fi rst product, Astra-Zeneca’s Amistar (azoxystrobin, III) was launched in 1995. Also BASF (F-500 Series), Bayer CropScience, Monsanto, and Syngenta are developing new compounds in this class. Older products are BASF’s Opera, BayerCropScience’s, Runner and Sportak, and DowAgro Science’s Feniramol. Within the geographic regions, North America has the largest usage, with a share of about a third, followed by Europe and the Far East with 25% each

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Table 11.8

Structural Formulas for Top 10 Agrochemicals O2N

O

O HO

CO

P

HO

SO2CH3

CH2NHCH2CO2H O (I) Glyphosate

(VI) Mesotrione (S) (Z)·(1R)-cisNO2 H O H CF3 C CN C=C C O Cl H H CH3 CH3

N

N Cl

N H

N

CH2

(II) Imidacloprid N

O

(VII) Cyhalotrin CH3

N

COCH2Cl O

O

N

CH3O

CN

CH2OCH2CH3

CO2CH3

CH2CH3

(III) Azoxystrobin

(VIII) Acetochlor

OH Cl

CH2 CH2

C

S

C(CH3)3

CH2

Cl

N

OP(OCH2CH3)2

N N

Cl

Cl

N (IV) Tebuconazole

(IX) Chlorpyrifos CH3 O

CH3

+

N

N

+

–

CH3 2 Cl

CH3O

N

OCH3

O (V) Paraquat

(X) Kresoxim-methyl

Source: The Pesticide Manual. 14th ed., BCPC Publications, Alton IL (2006).

(the Far East has recently overtaken Europe), and Latin America with less than 20%. Seven out of the top 10 products are proprietary. Because of the strong impact of Round-up (glyphosate), they represent more than 20% of the global sales.

AGROCHEMICAL INDUSTRY

105

The top 20 agrochemicals in terms of sales dollars are compiled in Tables 11.6 and 11.7. The list shows both modern products requiring small dosages and old ones with high dosages. The former products require much smaller application rates, but also have much higher unit prices. The most expen-sive agrochemicals in terms of unit prices are the modern insecticides λ-cyhalothrin ($768/kg) and Imidacloprid ($461/kg); the cheapest ones are the old herbicides Atrazin ($4.90/kg) and 2.4-D ($5.80/kg). As shown in Table 11.8, the cheaper products are the simpler ones in terms of their chemical structure. A recent example of a product that is demanding in terms of process chemistry is a new herbicide from BASF. The seven-step synthesis requires bromination, chlorination, carbonylation, oxydation (with H 2O2), hydrogenation, and a reaction with ethylene. As no fi ne-chemical manufacturer was in a position to offer the whole range of process technologies, the manufacture will be split between two fi ne-chemical companies.

Some 70% of the global market is now accounted for by generics. Active ingredients account for about 33% of the total turnover, resulting in a production value of about $10 billion (see Table 9.2). The proportion of the active substance in the price of the formulated product, therefore, is much higher than in drugs. The main reason for this difference is the pressure on the price for agrochemicals. A farmer does not use a pesticide unless there is a distinct economic advantage in terms of better crop yields. Pharmaceuticals are not driven by the same cost/benefit imperative. As illustrated by the structural formulas of the active ingredients of the top 10 agrochemicals, the chemical structures are more diversified—and generally simpler—in agrochemicals than in pharmaceuticals. The average molecular weight of the top 10 is 300, as compared with >400 for the top 10 pharmaceuticals. Given the diversity of the chemical structures, a wide variety of chemical process technologies are also used for the manufacture of agro fi ne chemicals. An example is glyphosate, which is the only compound out of the top 10 that does not contain at least one aromatic or heterocyclic moiety in its molecules. The pivotal intermediate is iminodiacetic acid, which is obtained by either (1) a Strecker reaction from hydrogen cyanide, formaldehyde and ammonia or (2) a catalytic oxidation of diethanolamine. The hydrogen atom in the imino moiety is then substituted by phosphonic acid, through chlorination with phosphorous trichloride and hydrolysis. Despite the diversity, 4 of the top 10 molecules contain a N-heterocyclic structure. Thus, heterocyclic chemistry also plays a role in agrochemicals, albeit a less dominant one than in pharmaceuticals. Taking into account its much smaller size, the agrochemical industry has been more innovative than its pharmaceutical counterpart. Ten to twelve NMEs have been launched by the agrochemical industry each year during the past 25 years. The future development of demand for agrochemicals will depend primarily on the fate of genetically modified crops. The question as to whether they will be generally accepted for human nutrition by the public

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is wide open. For the growth potential of the agrochemical industry, see Chapter 17.

11.3

ANIMAL HEALTH INDUSTRY

Animal health is a segment of the life sciences industry at the interface of pharmaceuticals and agrochemicals. Global sales were $15 billion in 2005 ($14.5 billion in 2004, $13.8 billion in 2001, inflation-adjusted). Of the top 10 companies, 9 are business units or spinoffs from pharmaceutical companies (see Table 11.9). The industry is rather concentrated, with the top 10 companies accounting for 75% of total sales. As they do in pharma, US companies dominate in animal health products. Many of the veterinary products in the portfolios had originally been developed for human use or as pesticides. In the “pet” (respectively companion animal) segment, which comprises cats, dogs, birds, some rodents, reptiles, and horses and represents about 40% of the total market, the association with human health is particularly prominent.

Table 11.9

Top 10 Animal Health Companies (resp. Divisions)

Rank

Company/Division

Parent Company

1

Pfi zer Animal Health, USA

2.21

Pfi zer, USA

2

Merial, France

2.01

JVa

3

Intervet, Netherlands

1.36

Akzo Nobel, Netherlands

4

Bayer Animal Health, Denmark

1.06

Bayer AG, Germany

5

Fort Dodge, USA

0.88

Wyeth Labs, USA

6

Elanco, USA

0.86

Eli Lilly, USA

7

Schering-Plough Animal Health, USA

0.85

Schering-Plough, USA

8

Novartis Animal Health, Switzerland

0.79E

Novartis, Switzerland

9

Virbac, USA

0.37

N/A

10

Boehringer-Ingelheim Tierernährung, Germany

Total top 10 b a

Sales (2005) ($ billion)

0.36

E

B-I, Germany

10.8

Joint venture between Rhône Mérieux (division of Rhône-Poulenc, now Sanofi-Aventis, France) and MSD AgVet (division of Merck & Co., Inc., USA). b Total top 11–15 companies (figures in $ million): CEVA, 340; Alpharma, 325; Phibro, 297; Vétoquinol, 244E ; Monsanto, 225E. Source: Wood Mackenzie Animal Health, 2005.

ANIMAL HEALTH INDUSTRY

107

For example, Clomicalm is a product sold by Novartis for treating separation anxiety in dogs. The active ingredient is the benzodiapin clomipramine, which is also contained in the human antidepressant Anafril of Novartis. Similarly, the active ingredient of Novartis’ antihypertensive Cibacen, benazepril, is used for Fortecor, a veterinary drug for treatment of heart failure in dogs and chronic renal insufficiency in cats. The farm animal, or livestock segment, represents about 55% of the total. Pigs constitute the biggest share in terms of numbers of animals; cattle, in terms of veterinary drug consumption; followed by poultry and sheep. In terms of product categories, the animal health market is dominated by parasiticides (28%, mainly endectocides, like MériaI’s Ivermermectin, Pfi zer’s Dovamectin, and Fort Dodge’s Cydectin) and antibiotics, such as cephalosporines, penicillines, sulfonamides, and tetracyclines. About 80% of the top 20 veterinary drugs are antibiotics and antimicrobials. They are widely used to treat infections in both human and veterinary medicine. Classical examples are ampicillin and amoxicillin, such as Intervet’s Amfipen and Amoxypen, respectively. The third segment, aquaculture, represents about 5–10% of the market. Nowadays, about one-third of fish for food are produced by aquatic farming, where intensive care is mandatory. The top 10 animal health products are listed in Table 11.10. The degree to which active ingredients are sourced from third parties varies considerably. It depends primarily on the affi liation of a given animal Table 11.10

Rank

Top 10 Veterinary Drugs

Brand Name

Active Ingredient

Company

Sales (2005) ($ million)

Patent Status

1

Ivomec/Heartgard

Ivermectin

Merial

375

Off

2

Terramycin

Oxytetracycline

Pfi zer

300

Off

3

Posilac

Bovine somatropin

Monsanto

275

On (USA)

4

Aureomycin

Chlortetracycline

Alpharma

270

Off

5

Tylamix/Tylan

Tylosin

Elanco

230

Off

6

Coban/Rumensin

Monensin

Elanco

220

Off

7

Naxcel/Excenel

Ceftiofur

Pfi zer

170

On

8

Baytril

Enrofloxacin

Bayer

140

Off

9

Lincomix/Lincocin

Lincomycin

Pfi zer

126

Off

Micotil/Pulmotil

Tilmicosin

Elanco

120

On

10

Total top 10 Source: Wood Mackenzie Pharma Forum Report, 2006.

2230

108

CUSTOMER BASE

health business and the patent status of the product. Thus, animal health businesses that are divisions of pharma companies (6 out of the top 10) procure the active substances for their patented products primarily from the parent company. An example is the abovementioned Clomicalm. Once a product becomes nonproprietary, it is more likely purchased on the merchant market. This is, for example, the case for veterinary drugs containing ampicillin and amoxicillin. Small independent animal health companies generally outsource all their requirements for active substances. This also applies to the many small distributors of veterinary drugs, which do not have in-house chemical manufacturing capabilities. Also, the proportion of the active ingredient in the price of the fi nished drug varies widely. It can be below 1% in low-dosage, rarely administered, patented injectable drugs. In contrast, it can be up to 25% in generic drugs administered as powders. In real terms, the growth of the animal health market has been just over 1%/year since the mid-1990s. Whereas the market in the developed world is almost saturated, a rapid increase in demand is expected in developing countries. Of 1.5 billion farm animals, 1 million are located in tropical and subtropical countries. Also, more and more of the latter are raised by industrial methods and require regular medication. Likewise, an increasing number of affluent people in these countries can afford “lifestyle” medicines for their pets. On a global basis, an annual growth between 1.5% and 2.0% is expected in the 2006–2010 period. In terms of NCEs, the animal health market is not innovative. The patents of most active ingredients have expired. The regulatory hurdles for approval of new veterinary drugs are almost equally high as for human drugs. The pertinent regulatory bodies are the FDA for drugs, and the EPA for parasiticides. Moreover, relatively few active ingredients are made by traditional chemical synthesis. About 20% of all veterinary drugs are vaccines. New products are derived mainly from new pharmaceuticals that are formulated to the requirements of the animals. Thus, the active ingredients of new veterinary drugs for the treatment of arthritis pain in dogs, namely, Mérial’s Previcox, Novartis’ Deramaxx, and Pfi zer’s Rimadyl, are well-known COX-2 inhibitors. Business opportunities for fine-chemical companies arise when animal health divisions are spun off from their parent pharmaceutical companies and therefore cut off from the supply of the active ingredients. This was the case when Mérial was created as a joint venture between Merck & Co.’s MSD AgVet division and Rhône Mérieux in 1997. With the pending restructuring of many pharmaceutical companies, new opportunities will arise.

11.4

OTHER SPECIALTY-CHEMICAL INDUSTRIES

Apart from life sciences, speciality chemicals—and therefore also their active ingredients, commodities, or fi ne chemicals—are used ubiquitously, in both

OTHER SPECIALTY-CHEMICAL INDUSTRIES

109

industrial applications, such as biocides and corrosion inhibitors in cooling water towers, and consumer applications, such as personal care and household products. The embedded products extend from high-price/low-volume molecules, used for liquid crystal displays to large-volume/low-price amino acids used as feed additives. Examples of applications in eight areas, ranging from adhesives to specialty polymers, are listed in Table 11.11. The manufacturer base is very heterogeneous, too. It extends from small “garage-type” outfits, which prepare some simple household cleaner formulations to the megasize specialty companies, such as the “Four Soapers,” Henkel, Germany; Kao Soap, Japan; Procter & Gamble, USA; and Unilever, The Netherlands, as well as the big food companies, Ajionomoto, Japan; Danone, France; Kraft, USA; and Nestlé, Switzerland. The innovation process is directed mainly toward creation of new formulations; the design of new chemical entities is the exception rather than the rule. It is most likely to happen in application areas unrelated to human health (where NCEs are subject to very extensive testing). This is the case with electronic chemicals and specialty polymers. The attractiveness of “non–life science” specialties for the fi ne-chemical industry varies considerably, both among the categories listed and within themselves. The determining elements are size of the market for the embedded active ingredients in terms of both volume and sophistication of the active ingredients, the backward integration of the manufacturers, and the growth potential. Many specialty chemicals are “commoditized” and based on lowpriced commodities as active ingredients. Within adhesives, the applications extend from household, such as paper gluing, all the way to high-tech specialty products used for assembling electronic parts and automotive and aircraft construction. In the latter application they are increasingly substituting for welding. The total consumption of adhesives in Europe was 3 million tons in 2005. The largest producer is Henkel, which reported sales of $2.2 billion. Most of the products are chemically uncomplicated compounds, such as the phenolics, poly(vinyl acetate/ alcohol), rubber cements, melamine-, phenol, and ureaformaldehyde, and most epoxy resin types. Fine chemicals are used for “high tech” adhesives, such as the α-cyanoacrylates, which are used for assembling electronic components and parts of modern civil and military aircraft, including rotor tips for high-speed helicopters. Biocides also cover a wide array of applications. Examples of products based on inorganic active ingredients are the century-old “Eau de Javelle” used for removing stains from shirt collars and terracotta floors and iodine for disinfecting small bruises. In order of increasing carbon atom count, organic biocide active ingredients extend from C1–C3 petrochemicals through quaternary ammonium compounds, brominated aliphatics, phenolics, N-heterocycles and N,S-heterocycles, all the way up to biguanide polymers used for swimming pool sanitation. Selected important biocides are listed in Table 11.12.

110 TBZ

Water treatment

PRO-JET

Flavors and fragrances

Fragrances

EuroVanillin Rhovalin Jasmone Cis

Zyron 8020 Novaled Pin OLED

Etchants OLED

Flavors

Licristal

Liquid crystals

cis-3-Methyl-3-(2-pentenyl)2-cyclopenten-1-one

Vanilline

Trifluoromethoxyphenyl derivatives (e.g.) Octafluorocyclobutane Various

see footnoteb

Irgazin DPP Red

Red automotive coating Inkjet printer ink

Electronic chemicals

6,15-Dihydro-5,14,18anthrazinetetrone Diketopyrrolopyrrol

Indanthren

Cellulosic vat dye

Novozym 388

Dyestuffs and pigments

2,2′-Bis(diphenylphosphino) 1,1′-binaphthyl 1,3-Specific lipase

Chiral synthesis

Borregaard, Norway Rhodia, France Givaudan, Switzerland

DuPont, USA CIBA Specialties, Novaled

Merck KGaA, Germany

Fuji Photo Film (Formerly Avecia), Japan

Ciba Specialties, Switz.

Dystar, Germany

Rhodia, France; Solvias, Switz. Novozymes, Denmark

Hikal, India

Degussa, Germany; Medichem, Spain

Chemicrea, Japan

Henkel (Loctite), Germany Huntsman, USA

α-Cyanoacrylates Diglycidyl ether type [5-Chloro-] 2methylisothiazoline3-one 1,1′-Hexamethylene-bis [5-(p-chlorophenyl) biguanide]digluconate Thiabendazole

Manufacturer (Examples)

Generic Name

Product

Catalysts and enzymes

BINAP

Chlorohexidine digluconate

Disinfectant

a

Zonen-10

Industrial antimicrobial

Biocides (industrial antimicrobials)

SuperGlue Araldite

Brand Name

Rapid bonding Structural adhesive

Specific

Adhesives

Application

Application Examples of Fine Chemicals outside Life Sciences

General Category

Table 11.11

111

Precision parts, electric connectors

Electronic coatings

Wire and cable

Electronic composites

Matrimid Kapton Avimid Teflon FEP Neopflon FEP BCB Ultrem, Siltrem Vectra Zylon Twaron

BT-resins

Matrimid Kapton Avimid Primaset BADCY, PT-resins

Primaset BADCY, PT-resins

Biolys

Amino acid feed additive

Aerospace composites

Carnipure tartrate Biotin, vitamin H

Dietary supplement Vitamin feed additive

Fluorinated ethylene/ propylene polymer Benzocyclobutene polymers Polyimides Liquid crystalline polymers

2,2-Bis(4-cyanatophenyl) propane and oligomers, Novolac cyanates 2,2,-Bis(4-cyanatophenyl) propane and oligomers Nonmelting polyimides

2,2-Bis(4-cyanatophenyl) propane and oligomers, Novolac cyanates Nonmelting polyimides

l-Carnitine l-tartrate Hexahydro-2-oxo-1Hthieno[3,4-d]imidazole4-pentanoic acid l-lysine

Huntsman, USA DuPont, USA Mitsui, Japan DuPont, USA Daikin, USA Dow, USA GE-Plastics, USA DuPont, USA Toyobo, Japan Akzo, Netherlands

Mitsubishi Japan

Huntsman, USA DuPont, USA Mitsui, Japan Lonza, Switzerland

Lonza, Switzerland

Degussa, Germany

Lonza, Switz. DSM, Netherlands

b

Inventor: R. Noyori. Asymmetric Catalysis In Organic Synthesis. Wiley-Interscience (1994). ISBN 0-4715-7267-5. Direct Blue 199 for cyan; combination of Direct Yellow 86 and 132 for yellow; combination of Acid Red 52 and Reactive Red 180 for magenta, Fod Black 2 for black.

a

Specialty polymers

Food and feed additives

112

Sodium hypochlorite

Potassium peroxymonosulfate

Formaldehyde

Ethanol

2-Propanol

2-Bromo-2-nitropropane-1,3-diol

Dibromo nitrilo propionamide

5-Chloro-2-methyl-4-isothiazoline-3-one

3.5-Dimethyl-1.3.5-thiadiazinane-2-thione

Glutaraldehyde

DMDMH (dimethylol dimethyl hydantoin)

Sodium phenolate

4-Hydroxy-3-methoxy-cinnamic acid

Rely-On

Formaline

Ethyl alcohol

Isopropyl alcohol

Protectol BN

DBNPA

Zonen-10 Kathon

Protectol DZ

Cidex,

Dantogard

Chloraseptic

Ferulic acid

C 0 –C10

Eau de Javelle

Generic Name

Iodine

Biocides

—

Brand Name

Table 11.12

Auspure Biotechnology

Prestige Brands, USA

Lonza, Switzerland

Prestige Brands, USA

BASF, Germany

Chemicrea, Japan; Rohm & Haas, USA

Dow, USA

BASF, Germany

Shell, UK, Netherlands

ADM, USA

SABIC, Saudi Arabia

DuPont, USA

Solvay, Belgium

Nippoh, Japan

Manufacturer

Preservative

Antiseptic

Biocide

Biocide

Preservative

Biocide

Biocide

Antibacterial

Disinfectant

Disinfectant

Preservative

Disinfectant

Disinfectant

Disinfectant

Application

113

o-phenyl-phenol

2,2′-Methylenebis (3.4.6-trichlorophenol); hexachlorophene

5-[(3.4.5-Trimethoxyphenyl)methyl]-2.4-pyrimidinediamine

Dowicide A

pHisohex

Trimethoprim

Tylosin (macrolide, C 46)

Polyvinylpyrrolidone/iodine

Polyhexamethylenebiguanide

Tylan

Povidone-I 2 Betadyne

Vantocil

b

a

Chlorhexidinea digluconate (C 34)

Chlorhexamed, Merfen

Arch Biocides, USA

Purdue, Pharma b, USA

Chlorhexidine = N,N″-bis(4-chlorophenyl)-3,12-diimino-2,4,11,13-tetraazatetradecanediimideamide. Manufacturers of the PVP segment are BASF and ISP.

Polymers

Degussa, gsk, Novartis

Didecyl dimethyl ammonium chloride

Bardac 22

Eli Lilly, USA

Lonza, Switz.; Stephan, USA

4-Chloro-2.6-dialkylamino-s-triazine

Chemtura, USA

Roche, Switzerland

Sanofi-Aventis (formerly Givaudan), France

Dow, USA

Merck, Germany

Bellacide

C 21 –C 50

Butyl 4-hydroxy benzoate

Butylparaben,

C11 –C 20

Antimicrobial

Disinfectant

Antibacterial

Disinfectant

Biocide

Biocide

Antibacterial

Biocide

Biocide

Preservative

114

CUSTOMER BASE

Applications include antimildews, antimicrobials, bactericides, disinfectants for hard (hospitals, schools, restaurants) and soft (skin) surfaces, preservatives for cosmetics, food, marine coatings and water-based paints, sanitizers, slimicides, water treatment (drinking water, cooling towers, swimming pools), and wood conservation. Preservatives are usually the highestvalue biocides. It is often necessary to include a variety of preservatives to deal with mold, bacteria, fungus potential, and other contaminants. The inclusion rate is very small, less than 1%, but the value per kilogram can be high, especially in high-priced cosmetics. Chemical companies have their own brands of biocides. For example, AkzoNobel proposes Arquad and Berol; Chemtura, the Bellacide; Degussa, the Quab; Dow, the Dowicide; DuPont, the RelyOn; Lonza, the Bardac and Barquat; and Rohm and Haas, the Kathon biocide product line. As with other specialty chemicals, which can impair human health and therefore need extensive and expensive testing prior to commercialization, R&D in biocides is concentrating on formulations and applications, rather than on new chemical entities. NCEs are developed for substitution of old products with environmental hazards, such as the copper/arsenic compounds used in timber and wood preservation. Chemical reactions enhanced by catalysts or enzymes are an integral part of the manufacturing processes for the majority of chemical products. The total market for catalysts and enzymes amounts to $11.5 billion (2005), of which catalysts account for about 80%. It consists of four main applications: “environment” (e.g., automotive catalysts), 31%; “polymers” (e.g., polyethylene and polypropylene), 24%; “petroleum processing” (e.g., cracking and reforming), 23%; and “chemicals,” 22%. Within the latter, particularly the catalysts and enzymes for chiral synthesis are noteworthy. Within catalysts, BINAPs [i.e., derivatives of 2,2′-bis(diphenylphosphino)-1,1′-bis-1,1′-binaphthyl) have made a great foray into chiral synthesis. Within enzymes, apart from bread-andbutter products, like lipases, nitrilases, acylases, lactamases, and esterases, there are products tailored for specific processes. These specialty enzymes improve the volumetric productivity 100-fold and more. Fine-chemical companies, which have an important captive use of enzymes, are offering them to third parties. Two examples are described here: DSM, through the acquisition of Gist-Brocades, has a strong position in enzymes for penicillin manufacture. Codexis, USA is a company specializing in the development of tailored enzymes. With their “molecular breeding” technology, they split the protein chains of existing enzymes into small peptide fragments. These are then reassembled randomly. Some of the artefacts thus obtained exhibit much better performance. Codexis won a 2006 Presidential Green Chemistry award for the directed evolution of three biocatalysts to produce ethyl (R)-4-cyano-3-hydroxybutyrate, “hydroxynitrile,” the key chiral building block for Pfi zer’s Lipitor (atorvastatin). the starting material is ethyl 4-chloroacetoacetate. (See also Table 1.1.)

OTHER SPECIALTY-CHEMICAL INDUSTRIES

115

The serendipic discovery of mauveine, also called a aniline purple, by William Perkin in 1856 gave not only birth to the dyestuff industry but also the organic chemical industry as a whole. The roots of the pharmaceutical and agrochemical industries as well go back to dyestuff manufacture. The dyestuff and pigments industry nowadays generates annual sales of $9–$10 billion. Substantial changes have occurred in the industry since the early 1990s. In the United States, the production of dyestuffs has practically disappeared. Whereas DuPont sold its organic pigments business (the company still produces the inorganic pigment titanium dioxide) to CIBA back in 1984, Sun Chemical, a division of the Japanese Dainippon Ink Corporation, is the only producer left. Europe continues to be the stronghold of the industry. The world’s largest dyestuff manufacturer is DyStar. The company goes back to a merger between the Bayer and Hoechst dyestuff divisions in 1995, with BASF joining 5 years later. DyStar reported sales of $900 million in 2005. Its largest plant, located at Brunsbüttel, produces 20,000 tons. Clariant, Switzerland, produces both dyestuffs and pigments. Other important players in pigments are BASF, in Germany, and CIBA Specialties (which sold its dyestuff division to Huntsman in early 2006, but kept its pigment business), in Switzerland. The dyestuff production in Far East countries dwarf the European one in terms of production volume. India alone has a production capacity of 150,000 metric tons. Whereas Europe focuses on the production of the high-end specialties, simpler dyestuffs and pigments and their intermediates are now sourced from Far East countries, primarily China, India, and South Korea. Three cooperation models are used; (1) establishing its own factories (DyStar has three of them in China); (2) entering into joint ventures, such as the CIBA Specialties/Indian Dyestuff Industries JV; or (3) sourcing from the hundreds of “garage-type” producers. China benefits not only from a low cost advantage but also from the fact that the country prides itself on having the world’s largest textile market, which is the main outlet for dyestuffs. Statistics indicate that it is likely to account for 40% of the global output of textiles in the medium term. The largest dyestuff company in the Far East is Everlight Chemical Industrial Corporation in Taiwan. Intermediates account for about 30%, or $3 billion of the total market. Their prices range from about $5 to $25–$30 per kilogram. The starting materials are mostly aromatics, particularly benzene, naphthalene, and anthracene. Thus, the well-known “letter acids” are substituted naphthalenes; for instance, H-acid is 1-amino-8-hydroxynapthalene-3.6-disulfonic acid. They are produced in simple dedicated, or at best multiproduct, plants. In its custom manufacturing offering (!), DyStar lists, among others, the following reactions: acylation, diazotization/azo coupling, halogenation, hydrolysis, nitration, reduction, and sulfonation/chlorosulfonation. Most of them are carried out in aqueous solution. R&D focuses on product formulation and application. The development of new molecular entities has practically come to a halt. Examples of this trend are inks for inkjet printers. The pigments used are conventional: Food Black 2 for black; Direct Blue 199 for cyan; a combination of Direct

116

CUSTOMER BASE

Yellow 86 and 132 for yellow, and a combination of Acid Red 52 and Reactive Red 180 for magenta. The know-how is contained in the formulation. It consists of deionized water, 60–90%; water-soluble solvent (e.g., propanol, 5–30%; surfactant, 0.1– 10%; buffer, 0.1–0.5%; biocide, 0.05–1%), and other additives (chelating agent, defoamer, solubilizer, etc.) >1%.

Overall, dyestuff and pigments offer limited business opportunities for Western fi ne-chemical companies with their sophisticated multipurpose plants and high SHE requirements. Humanity spends much the same amount on electronic goods, about $500 billion, as for pharmaceuticals. The chemical industry provides most of the hardware materials. Electronic chemicals, an approximately $25 billion market (2006), are attractive because the manufacturers of electronic goods are not backward-integrated with regard to chemical synthesis; the merchant market for sophisticated fi ne chemicals is quite large and growing. Liquid crystals (LCs) are a prominent example (see Table 11.11). Because both the ongoing substitution of cathode ray tube by LC displays (LCDs), respecitively thin-fi lm transistor–liquid crystal displays (TFT-LCDs) and the shift to bigger screens, sales are expected to exceed $80 billion in 2008, almost 3 times the 2005 figure. The leading LC manufacturer, Merck KGaA, has a market share of about two-thirds. It has enjoyed double-digit growth rates in its LC business lately. In 2005 alone, sales grew by 27% to close to $900 million. The return on sales for the business was 47%, well ahead of that for its pharmaceutical operations. Merck’s production know-how, particularly in twisted nematic cell LCs, is well covered by IPR and has enabled it to erect high entry barriers. In the backpanel segment for LCDs, the demand for optical-grade poly(methylmethacrylate) organic glass is also growing rapidly. Degussa, the leading poly(methylmethacrylate) producer, is building a 40,000-ton/year facility with its JV. partner Forhouse, Taiwan. The largest consumption of electronic chemicals is for Silicon Wafers (approx. $20 billion), followed by specialty gases (∼$3 billion). The DuPont Zyron portfolio of high purity etchants for silicon-based dielectric films comprises di- and trifluoromethane, octafluorocyclobutane, and nitrogen trifluoride. The latter are also used as chamber-cleaning gases. New opportunities for use of fi ne chemicals in electronic chemicals emerge at a fast rate. Within LCs, inkjet systems are being introduced for dispersing pigments, such as CIBA Specialty Chemicals’ diketopyrrolopyrrol reds (see Table 11.11). While the substitution of cathode ray tube displays by plasma and liquid crystal displays is in full swing, new types of panels are emerging. They are based on organic light-emitting diodes (OLEDs) and polymer organic light-emitting diodes (POLEDs). With a share of about 95%, OLEDS dominate the market. They are based on small-molecule materials, including substituted perylenes and quinacridones. The leading enterprises in the fledgling OLED and POLED markets are—again—Merck KGaA, BASF, Germany, and Sumitomo, Japan as traditional chemical companies and Cambridge Display Technologies, UK and Universal Display Corp., US, as new-

OTHER SPECIALTY-CHEMICAL INDUSTRIES

117

comers. The OLED market potential is estimated at more than $15 billion. In order to gain wider acceptance, POLEDs must increase lifetime and efficiency. Poly-(3,4-ethylenedioxythiophene)/polystyrenesulfonate, from Bayer’s Starck unit marks a big progress as compared with the originally used polyanilines. Also, Air Products and Plextronics work on new materials that will help POLED commercialization. Other new developments that will create a demand for NCEs are identification systems with radiofrequency identification tags and “smart” cards, using technologies such as organic photonic sensors. They are expected to capture a large share of the market within the next 10 years. Finally, a market for polymer photovoltaic solar cells is expected to gain importance. Flavors and fragrances (F&F) appeal to the palate (i.e., taste) and nose (i.e., smell), respectively. Accordingly, flavors are used in the food and fragrances, in the cosmetic industries. The products originally were natural extracts from, for example, lavender, cultivated in large areas in Grasse, France; roses, grown in Bulgaria; or vanilla, grown in Madagascar. Nowadays, natural products originate mainly from China. They currently account for only 10% of the total market and are used for high-end applications, such as couturier perfumes or premium food. In order to benefit from the reputation of the term “natural,” synthetic aroma chemicals are sometimes referred to as “natural identical.” Whereas natural vanilla flavor from beans (recognized by the “black dots”), is used in premium ice creams, soft drinks are flavored with synthetic vanillin. Natural vanilla contains other flavoring agents as well. Thus, F&F is the only segment of the chemical industry where impurities add to the quality—and the price—of a product! The global F&F market amounted to approximately $16 billion, at manufacturer prices, in 2005. Retail sales would give substantially higher numbers. The top 10 F&F companies add up to about two-thirds of this figure. They comprise Givaudan (acquisition of Quest in 2006), Switzerland, sales ≈ $3 bio; International Flavors & Fragrances, US, $2 bio; Firmenich, Switzerland ≈ $1.9 bio; Symrise (merger of Dragoco and Haarmann & Reimer), Germany, ≈ $1.4 bio; Takasago, Japan, ≈ $900 mio; Sensient Flavors, USA, $520 mio; T. Hasegawa, Japan, ≈ $400 mio, Mane SA, France, ≈ $330 mio; Danisco, DK, ≈ $250 mio, Frutarom, Israel, $245 mio. Flavors account for the largest share, approximately 40% of the market, followed by fragrances, 35%; aroma chemicals, 13%; and essential oils, respectively natural extracts (see text above), 12%. Aroma chemicals, that is, the fi ne chemicals used in the F&F formulations, are produced both for captive use and for the merchant market (see Table 11.13). About 3000 different molecules are used in the F&F industry. Approximately half of them, mostly terpenes, are included in the FEMA (Flavor and Extracts Manufacturing Association) and FDA lists. However, only a few hundred compounds are used in larger than ton quantities. Terpenes constitute the vast majority of the aroma chemicals. They are obtained either by

118

CUSTOMER BASE

Table 11.13

Major Aroma Chemicals Category

Name

Aroma Chemicals

Volume (metric tons)/ Value ($ million)

Name

Production Volume (metric tons)

Benzenoids, naphthalenoids

88,000/675

Vanilline 2-Phenylethanol Benzaldehyde Phenyl methyl propional α-Hexyl cinnamaldehyde (etc.)

9,000 9,000 8,500 8,000 7,000

Terpenes

67,350/694

(−)-Menthol Linalool and esters Geraniol/nerol and esters α-Terpineol and esters Citral (etc.)

13,500 10,000 6,500 4,500 4,500

Musks

14,850/340

Polycyclic musks Nitromusks, (etc.)

10,000 N/A

Various

22,000/395

Aliphatics (e.g., C1–C18 acids), alicyclics (e.g., furanes), heterocyclics (e.g., pyrazines)

Total

N/A

192,000/2,100

Source: Adapted from market survey, Flavors and Fragrances, SRI Consulting, Menlo Park, CA, 2005.

partial synthesis, starting from α- or β-pinene, or by total synthesis. There are two main industrial processes for the pivotal intermediate, 2-methyl-2heptenone (I). The fi rst starts from acetylene and acetone to form methyl butynol. Hydrogenation yields 3-methyl-1-buten-3-ol, which is condensed with diketene or methyl acetoacetate (Carroll rearrangement) to (I). Alternatively, (I) can also be obtained by reaction of methyl butenol with isopropenyl methyl ether, followed by Claisen rearrangement. The second one starts from isobutylene and formaldehyde. The formed 3-methyl-3-buten-1-ol reacts with acetone to yield (I). Compound I can be further converted to important aroma chemicals, such as geraniol, dehydrolinalool, and methyl ionones. Dehydrolinalool (II) is also used as intermediate for vitamins A and E. Chirality plays a big role in aroma chemicals. Takasago developed the fi rst industrial-scale process using a chiral (BINAP) catalyst for (−)-menthol. Firmenich uses the same technology for the manufacture of its Hedione (3oxo-2-pentyl cyclopentane-1-acetic acid methylester) jasmine note. The F&F

OTHER SPECIALTY-CHEMICAL INDUSTRIES

119

OH

Dehydrolinalool (II)

companies start their production typically from commercially available intermediates. Apart from the usual specifications, they also must pass olfactory tests by the customers, which adds a certain element of uncertainty to the business transactions. Aroma chemicals are typically both used internally and sold to third parties. The structure of dehydrolinalool is As the art of creating a new fragrance—and, mutatis mutandis, a new flavor— consists in fi nding a new combination of existing aroma chemicals, perfumers play a major role in new product development. As the structure–odor relationship still is not well understood; this is still a trial-and-error approach. In R&D, the analytical departments play an important role in identifying aroma components. Thus, several hundred constituents have been found in coffee. The future demand for aroma chemicals is expected to follow the general economic development. Food and feed additives, also known as dietary supplements, are minor ingredients added to improve the product quality. Most commonly, the effects desired relate to color, flavor, nutritive value, taste, or stability in storage. The market sizes are estimated to be $20 billion each for food and for feed additives, respectively. The major customers for the food additives are the big food companies Ajinomoto, Danone, Kraft, and Nestlé, mentioned at the beginning of the chapter. With the exception of Ajinomoto, these companies are rarely backward-integrated. As they prefer to use natural ingredients rather than synthetic ones, they are not very important customers of the finechemical industry. Premixers, that is, enterprises that prepare ready-to-use mixtures of nutrients for the farmers who raise cattle, pigs, and chicken, are the main users of feed additives. Food and feed additives do not stand back with regard to the diversity of products. They extend from minerals, mainly calcium, phosphorus, and potassium, to amino acids, vitamins and natural spices. All in all, there are several hundred individual compounds used as feed and food additives. The most expensive product is saffron, made from the stigmas of the saffron crocus flower. The yearly production amounts to about 700,000 kg, and the spice is retailing for about $2500/kg. Amino acids play a big role; the largest product is monosodium glutamate (MSG), with a yearly production of 1.5–2 million tons and a price of about $2.30 per kilogram, followed by l-lysine (850,000 tons/$1.50/kg), d,l-methionine (600,000 tons/$3/kg), l-threonine (85,000 tons, $3.40/kg), and l-tryptophane (1750 tons/$24/kg). Major producers of

120

CUSTOMER BASE

Table 11.14

Major Food and Feed Additives

Category

Food and Feed Additives

Amino acids

MSG (monosodium glutamate), d, l-methionine, l-lysine, l-threonine, l-tryptophane

Antioxidants

Ascorbic acid, BHA (butylated hydroxyanisole), BHT (butylated hydroxytoluene tocopherols)

Artificial sweeteners

Acesulfame-K, aspartame, cyclamate, saccharine, sucralose

Carotenoids (tetraterpenes)

β-Carotene, Axanthin

Preservatives

C1—C 3, citric, lactic, sorbic, and benzoic acid and salts

Vitamins

Fat-soluble: A, D, E, K Water-soluble: C, B1, B2 , B3, B6, B12 , H, folic acid, Ca pantothenate

amino acids are Ajinomoto and Kyowa Hakko, Japan and BASF and Degussa, Germany. Chiral amino acids are mostly produced by fermentation. Also, many vitamins are produced more economically by fermentative processes than by traditional chemical synthesis. The vitamins are used to enhance the nutritional value of food and feed. The major producers are Adisseo, France (vitamin E only); BASF, Germany; DSM, The Netherlands; Takeda, Japan and a host of Chinese companies. The global production volumes correspond more or less to the Recommended Daily Allowances (RDA). For humans, the five vitamins with the highest RDA are: Vitamin C (ascorbic acid), 60 mg; Vitamin B3 (niacin), 18 mg, Vitamin E (tocopherol), 10 mg, Calcium pantothenate, 6 mg and Vitamin B2 (riboflavin), 1.6 mg. Correspondingly, Vitamin C enjoys the highest production volume, about 80,000 mtpa, but suffers also the lowest price, approx. $5/kg. An overview of important food and feed additives is given in Table 11.14. Apart from the six categories listed in the table, there are also flavors (see aroma chemicals), medications (see animal health), buffers, colorants, growth promoting antibiotics, hormones, microbial cultures, minerals, pellet binders, and preservatives. Most of the food and feed additives are commoditized. This is also the case for the artificial sweeteners. The main products are Saccharin (550), Aspartame (Canderel, 200), Acesulfam K (Sunnett, 200), and Cyclamate (35). The figures in brackets are the “sweetness intensity,” whereby sucrose = 1. Sucralose, discovered in the 1980s by Tate & Lyle, now taken over by Johnson & Johnson’s formidable marketing machine, is enjoying a revival as Spenda. Specialty polymers exhibit particular chemical and mechanical properties, are more expensive and produced in smaller quantities than the large volume /

121

25,000

8,000

Application/ Backward Integration of Producers

Wire and cable insulation backwards integrated

60

240

Aerospace and rigid electronic parts; some producers buy advanced intermediates

Aerospace and rigid electronic parts partly backward-integrated

High-Temperature Thermoset Resins

1,800

Fluorinated Thermoplasts

Turnover ($ million)

∼100

0.5

Aerospace and rigid electronic parts; some producers buy advanced intermediates

Wafer coatings; producer is backward-integrated

20

500

Electronic connectors and precision thermosplast parts; some producers buy advanced intermediates

Liquid Crystalline Polymers (Smectic and Nematic)

5–250

100 a

Electronic Coatings (Thermoset and Thermoplast)

30

30

60

Unit Price ($/kg)

Market Size (2005)

In 30% solution. Note: A number of branded specialty polymers and their manufacturers are listed in Table 11.11.

a

Aramides, aromatic polyesters, polypenzazoles

Polyimides

5a

2,000

Cyanates

Benzocyclobutene polymers

8,000

Nonmelting polyimides

30,000

Volume (tons)

Specialty Polymers

Fluorinated ethylene/propylene

Type

Table 11.15

122

CUSTOMER BASE

low-price commodity polymers, like polyethylene, polypropylene, polystyrene and poly(vinylchloride), which are household names. Specialty polymers, also known as engineering plastics, are not well known to the general public. They are used primarily in the electronic and aerospace industries, where very demanding electrical, respectively mechanical, properties are required. A large portion of the added value in specialty polymers lies in the polymerization process itself. An extreme case is the expensive “organic metal” polyaniline, which is made from the commodity aniline. Fluorinated poly(ethylene/propylene) has the largest market (see Table 11.15). As the producers, Daikin, Japan and DuPont, USA, are fully backward-integrated, this polymer does not offer business opportunities for the fi ne-chemical industry. Polyimides are the most versatile specialty polymers in terms of applications. Starting materials are dianhydrides, such as pyromellitic dianhydride or bis(phenyltetracarboxylic acid dianhydride) on one hand and aromatic diamines, such as phenylenediamine or diaminodiphenyl ether on the other hand. Polyetheretherketones (PEEK) are engineering plastics with extraordinary mechanical properties. They are obtained by condensation of aromatic dihalides, e.g. di-(p-chlorophenyl) ketone with bisphenolate salts. The semi crystalline material is used in bearings, piston parts, pumps and also considered for implants. Producers are Changchun Jida High Performance Materials, China; Solvay Advanced Polymers, USA and India; and Vitrex, UK.

CHAPTER 12

Marketing

12.1

ORGANIZATION AND TASKS

In large companies, a differentiation is made between marketing, which is generally viewed as “all activities of a company dealing with the market” on one hand, and sales, which comprises the commercial interaction with the customers, on the other hand. In the fi ne-chemical industry, which is rather lean with regard to staff positions, marketing is understood more as an operational function. As such, it comprises sales, business development, pricing, and promotion. The organizational structure of the business units, like that of the company as a whole (see Section 8.3), should be designed primarily to enable satisfaction of customer needs effectively and efficiently. In the fi nechemical business, which has to cope with relative short lifecycles of individual products and, therefore, a rapid rejuvenation of the product portfolio, a clear separation between the sales and business development functions is recommended. The two functions are focused on present and future sales, respectively [6]. As illustrated in Figure 12.1, the task of sales is to sell existing products to existing customers; business development identifies, evaluates, and realizes new business with new products in existing markets and existing products in new markets. The endeavor to sell new products in new, hitherto unknown markets (see rectangle no. 3, i.e. the “forbidden zone” in Figure 12.1) is a high-risk task, which usually is assigned to corporate development, that is, a function outside the P&L responsibility of a business unit. Internally, sales have the task of optimizing profits at present (i.e., meeting the budget targets for the current year); business development is accountable for future profits, in particular, establishment and realization of the business plan. Business development generates ideas for new products and services and follows them through to successful realization. The important differences in the functional specification of sales and business development are described in Table 12.1. For a job description for a business development manager, see Appendix A.5.

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

123

124

MARKETING (2)

New Products / Existing Markets

(1)

Existing Products /

New Products /

Existing Markets

New Markets

(3)

Existing Products /

(2)

New Markets sales

(1)

business dev.

(2)

Figure 12.1

Table 12.1

corporate dev.

(3)

Product/market matrix.

Sales and Business Development: Specifics

Differentiator Time horizon

Sales

Business Development

Present (budget)

Future (5-year business plan) a

Product category

Catalog or standard

Customers per product

Many (nonexclusive)

One (exclusive)

Unique selling proposition (USP)

Product price, quality, reliability

Service, project management

Qualification of salesperson

Business school

Chemical degree (+ business acumen)

Pricing

Market price

Individual (bottom-up approach)

Process ownership

Seller

Customer (tech transfer)

Prime internal contact

Production

R&D

Production site

Plant

Lab → pilot plant → plant

Specifications

From seller

From customer

Technical assistance

Sporadic

Close cooperation

Production planning

Maximum/minimum stock

Order

Distribution channelb

Local office or agent

Direct

a b

Listed in the company’s product brochures. See Section 12.4.

Exclusive (CM and CRAM)

ORGANIZATION AND TASKS

125

Both sales and business development report to the general manager, respectively to the division head in larger companies, either through the inter-mediary of a VP (vice president) of marketing and sales, or—preferably— directly. In many companies there is an intrinsic lack of understanding between business development and R&D. Business development pretends that “R&D develops primarily new products for which there is no market,” whereas R&D’s position is: “Our resources do not allow the development of a suitable synthesis for the kind of new products that business development proposes.” In order to overcome this impasse, the creation of a “new product committee” has proved very useful. The committee has the task of evaluating all new product ideas following a standard checklist (see Appendix A.2). It decides whether a new product idea should be taken up in research, and thus becomes a project (see also Section 6.2, on project initiation), and whether an ongoing research project should be abandoned. A warning signal would be if the chance of both a commercial and a technical process diminish continuously over a period of several months! The committee is chaired by the head of business development; full-time members are experienced researches and business development managers. Ad hoc members are specialists from controlling, production, QC/QA, and the legal department. The committee should meet every 2–4 weeks. An interesting variety of the organization scheme is the combination of the positions of head of business development and R&D in one and the same person. It eliminates the above mentioned friction. This structure is particularly suitable for small to midsize fi ne-chemical companies, where the total number of researches and business development managers does not exceed 10. The ideal candidate for this position is a scientist with several years of experience in industrial R&D and pilot plant production, plus a commercial flair. DEFINITION OF BUSINESS DEVELOPMENT Develop profitable new business, by •

• •

Identifying potential customers on the basis of a fit between their needs and your company’s competences Offering targeted products and services Initiating, developing, and completing joint projects, building on your company’s capabilities and resources

Whether business development should transfer new products to sales when they become mature (e.g., once a multiyear supply contract has been concluded) is a controversial issue. From the perspective of customer orientation, the product stewardship should not be transferred, particularly if the

126

MARKETING

responsibility for the procurement remains with the same persons at the customer company. In terms of having “the right person at the right place,” a business development manager should concentrate on its primary mission, namely, the acquisition of new business. The same problem arises within R&D: Should a researcher be confi ned to the laboratory, or move with a new product project from lab to pilot plant, and ultimately to the plant? As a compromise, the lab scientist who developed the new product process in the laboratory, introduces it into the pilot plant and is responsible for demonstrating the feasibility on this scale. The development of new products for new markets (e.g., electronic chemicals for a fi ne-chemical company thus far dealing only with life sciences) is the task of corporate development. The latter is a staff function reporting to the CEO. It deals with activities outside the authority of the operating divisions. Apart from “new products for new markets,” it also looks after joint ventures, mergers and acquisitions, and divestitures. A limited competition and substantial unmet needs would describe a favorable working environment for business development. For custom manufacturing, neither is the case nowadays. The number of fi ne-chemical companies and the global GMP fi ne-chemical production capacity have increased more rapidly than demand since 2000. Also, the reluctance of pharma to outsource has increased (see Chapter 10). In order to determine the adequate number of sales and business development managers needed, it is helpful to refer to the—present, respectively future—sales, which each individual can manage. As a rule of thumb, this number is about $10–$15 million per year. Thus, a fi ne-chemical company that presently has $100 million in sales would need 7–10 marketing managers (sales and business development combined). An example in point is SAFC (Sigma Aldrich Fine Chemicals). It presently has sales of $250 million and a staff of 27. It is subdivided according to the two criteria small/big (billion) molecules, and USA/Europe. The net result is 17 managers in charge of small molecules, 9 of which are for the US and 8 for the European markets; and 10 for big molecules, 6 of which are for US and 4 for the European markets.

12.2

TARGET PRODUCTS AND SERVICES

The products offered by the fi ne-chemical industry fall into two broad categories: (1) “exclusives” and “standard” or (2) “catalog” products. Serviceintensive “exclusives”, provided mostly through contract research or custom manufacturing arrangements, prevail in business with life science companies; “standards” prevail in other target markets. As mentioned before (see Section 11.1), the lifecycle of a specialty chemical lends itself for the identification of business opportunities. This is particularly the case for PFCs, but, mutatis mutandis, it also applies for agrochemicals and other target products.

TARGET PRODUCTS AND SERVICES

127

During the lifecycle of a drug there are four “windows of opportunity” for identifying target products (see Figure 12.2). The number of possible product candidates, the chances of success of the drug to make it to the marketplace and the chances of a specific fi ne-chemical company to get the business to change substantially along the product lifecycle. The fi rst three opportunities span a period of approximately 20 years, during which the drug is under patent protection. At the beginning there is a huge number of development drugs in the R&D laboratories of the world’s pharmaceutical industry . . . with only a minuscule chance for any individual molecule to make it to the marketplace and therefore ultimately requiring substantial product quantities. The emphasis is on quickly producing small-scale samples by simple processes without economical or ecological considerations. This “quick and dirty” approach is the domain of the contract research organizations (CROs; see Section 2.2). During the subsequent clinical development, chances of a commercial success become gradually more tangible (see Table 12.2). This is where custom manufacturing kicks in. Phase II of clinical development constitutes a pivotal point. Pharmaceutical companies lock in the fi nal route to be used for manufacturing their new APIs. For a systematic search for product candidates, the single most important information sources are IMS Health for pharmaceuticals, Agranova for agro, and Wood Mackenzie for veterinary chemicals (see Appendix A.1). Useful information for both existing and developmental products can be found on the Websites of the pharma and agro companies. Particularly the larger companies publish ample details, including the sales figures for their major products. A deeper insight into new product projects within the life science industry is provided by a number of comprehensive project databanks. A selection is also listed in Appendix A.1.

volume

Ethical pharma

Generics

3

4

2

0

5 development II I III

Figure 12.2

launch

1

10

15 maturity

20

years

pat. exp.

Product opportunities along the drug lifecycle.

time

128

MARKETING

Table 12.2

Drug Development Phases

Development Stage

Preclinical a

Phase I b

Phase IIc

Phase III d

Prelaunche

Number of drugs in development

∼5000

∼1000

∼1500

∼500

—

Success rate (%)

<<5

10–15

20–25

2

3

1

50–70 3

4

Volume needs

10 kg

10 kg

10 kg

10 –10

Costf ($ million)

80–120

60–120

50–150

135–270

Timing (months)

12–24

12–16

18–24

30–36

Key activities

CR Synthesis sequence selection

Development of second-generation process

90 10 4 –105 20 72–100 Regular production

a

Lead discovery; in vitro testing. Small-scale clinical trials with healthy volunteers to determine safety, tolerability, and ADME. c Trials with 100–500 volunteer patients to determine the drug’s efficacy in treating the disease that it is intended to cure. d Double-blind trials with hundreds to thousands of patients suffering from the relevant disease to get more information on efficacy, safety, and side effects; preparation of registration documents. e Prelaunch marketing and production of stock; launch. f Total drug development cost $535–$920 million. Source: M. Bloch et al., Pharma leaps offshore, McKinsey Quarterly Newsletter (July 2006). b

12.2.1

Exclusives: Custom Manufacturing

Custom manufacturing (CM) signifies the “Königsdisziplin,” that is, the most prominent activity of the fi ne-chemical industry. Because of their long experience in safeguarding the intellectual property interests of its customers, it is the stronghold of the Western companies. CM is the antonym of outsourcing.

DEFINITION OF “OUTSOURCING” The transfer an industrial activity—production or service—that thus far was carried out in-house to a third party through a contractual arrangement. note: If outsourcing is done with an overseas partner, it is also referred to as offshoring

TARGET PRODUCTS AND SERVICES

129

In custom manufacturing, a specialty-chemicals company outsources the process development, pilot plant, and, fi nally, industrial-scale production of an active ingredient, or a predecessor thereof, to one, or a few, fine-chemical companies. The intellectual property of the product, and generally also the manufacturing process, belong to the customer. The supplier is bound to an exclusive supply agreement. At the beginning of cooperation, the customer provides a “tech package,” which in its simplest version, includes a laboratory synthesis description and safety recommendations. In this case, the whole scaleup, which comprises a scaleup factor of about one million (10-g → 10-ton quantities), is done by the fi ne-chemical company. Toll manufacturing is a variety of custom manufacturing. As in CM, the know-how is provided by the customer, frequently a backward-integrated agrochemical company. The starting material is generally supplied free of charge. The toller, therefore, must take great care to reach the agreed-on yield. Also total sales revenues of a toll manufacturer are much lower (typically less than half) than those of a custom manufacturer, which purchases the starting materials. Contrary to CM, a full-fledged industrial-scale process is provided, meaning that technology transfer occurs on a one-to-one scale. Only a minor involvement of R&D is necessary. Adaptation of the process to the specifics of the supplier’s plant is a task of chemical engineers rather than R&D chemists. This is, for instance, the case in a solid–liquid separation step, if a switch has to be made from a centrifuge to a fi lter dryer.

Custom and toll manufacturing account for the majority of business between fi ne-chemical and life science industries. The specialty chemicals industry outside life sciences sources mainly standard products. For established fi ne-chemical companies, phases II and III are most attractive. Here the so-called fi rst-generation manufacturing process for the new API is determined and the make-or-buy decision (i.e., in-house production or outsourcing) is taken by the potential customer. At the same time, the chances for a successful launch are also becoming tangible. The price at which a daily dosage can be sold is a pivotal element in the new drug project. Particularly for high-dosage drugs, this puts pressure on the price of the embedded API. If the outsourcing decision is positive, pharmaceutical companies generally entrust CM projects at the phase II/III stage only to approved suppliers. Newcomers must start their business development effort already at phase I. In order to do so, fledgling fi ne-chemical companies offer a “one-stop shop,” or contract research and manufacturing (CRAM), service (see Chapter 2). This allows them to build up a reputation by supplying samples early on. The third gateway is located at the peak level of the drug production volume. Drugs that are introduced in the same therapeutic class by competitors start to negatively impact on the market share at this point. COGS, costs of goods sold, become a major concern, and therefore more cost-effective secondgeneration processes are urgently needed. This presents a chance for a new supplier.

130

MARKETING

The fourth gateway is linked to the decline phase of the lifecycle, when patent expiration is approaching. In order to stave off generics competition, it becomes a question of survival for the originator company to develop the most economic process. Business opportunities surface with both (1) the ethical pharma company that holds the patents, and attempts to keep at least a portion of the market, and (2) generics houses that are preparing for the launch of generic versions [9]. The forthcoming generic competitors are vying for market share—and also looking for competitive suppliers. In order to identify the success factors for custom manufacturing, an antagonistic approach is recommended; the selection criteria for outsourcing partners, as established by a major pharmaceutical company, are listed in Appendix A.6. Those fi ne-chemical companies, which best comply with the 28 criteria, obviously have the best chance to become suppliers. The ranking is typically based on an extensive audit of the prospective supplier. 12.2.2

Nonexclusives: API-for-Generics

Many fi ne-chemical companies are active in both custom manufacturing and API-for-generics, albeit with quite different proportions. The divergences are driven mainly by the history of the patent legislation in a country or region. In Europe, companies located in countries that have adhered to international patent legislation for a long time, particularly those in Germany, The Netherlands, Switzerland, and the United Kingdom, and those in the United States, are active predominantly in custom manufacturing. Fine-chemical companies in southern Europe, particularly in Italy and Spain, having benefited from a privileged patent regime for many years, are involved mainly in API-for-generics [4]. Product patents were enacted in Italy in 1978, in Spain in 1992. The same applies for China and India, which joined international patent legislation in 2005 only. Before, they were at liberty to produce and sell APIs for patented drugs in their home markets, as well as in other nonprotected markets. This is the main reason why the fledgling fi ne-chemical companies in these countries started their activities with API-for-generics. Globally, the four largest API-for-Generics producers are China, with a market share of 30%, followed by Italy, 20%; India, 13% and Spain, 7.4%. From a production perspective, it makes little difference whether a fi nechemical company manufactures PFCs for patented or off-patent drugs. Nonetheless, it must be stressed that these are two different businesses. Apart from the same hardware, multipurpose plants, which is shared, there are substantial differences in the way to conduct business between custom manufacturing PFCs for proprietary drugs and supplying API-for-generics (see Table 12.3). The former is a project business, involving a close cooperation between customer and supplier and extending from the supply of samples for the fi rst clinical trials all the way to pilot plant and large-scale industrial manufacture of PFCs for commercial drugs. The latter is a product business. Apart from some legal and regulatory intricacies, it has the characteristics of

TARGET PRODUCTS AND SERVICES

Table 12.3

131

Characteristics of PFCs for Patented and Off-Patent Drugs Exclusives (= Custom Manufacture)

Generics (= API-for-Generics)

Business model

Project-driven

Product-driven

Products

Advanced intermediates

End products (APIs)

Pricing

Bottom-up approach

Market price

Distribution channels

Direct

Agent

Customers

Ethical pharma companies

Generic pharma companies

Competitors

Captive production, 1–2 suppliers per product

Asian producers

Competitive advantage

Project management

Price, quality, DMFa

Origin of know-how

Customer

Supplier

Technical assistance

Close cooperation

Sporadic

Legal assistance

Sporadic

Intensive

Production planning

On order

Minimum/maximum stock

a

Drug master fi le.

a normal commercial deal. Within exclusives, advanced intermediates are most important, followed by standard intermediates. There is only a limited market for APIs, as these are usually produced in-house by the customers for quality, IPR, and tax considerations. The situation is different for PFCs going into generics, where APIs constitute the major part of the traded products. Plagued by a sluggish demand for their custom manufacturing business (see Section 10.1), many fine-chemical companies are considering starting or expanding their own API-for-generics business. The main justification is the much brighter outlook for demand growth (see Section 16.2). The combination of the CM and API-for-generics activities can lead to better capacity utilization. Whereas the production schedules for exclusive products are rigid, there is more freedom in planning campaigns for API-forgenerics. There is much debate within the industry as to whether it makes good business sense to supply PFCs to both ethical and generic pharma companies, which are competitors. The answer is that it can be done, provided the following basic rule is observed: A custom manufacturer must never supply a specific API, or precursor, that it is producing for an ethical pharma company, to a generic house. This applies even if the supply contract has expired and the legal situation would allow it. The position of the pharma customer is that the custom manufacturer would unfairly benefit from the know-how gained during the cooperation period. On the other hand, there are a large number of old generics that are sourced by both ethical and generic companies, and where there is no objection to production and marketing.

132

MARKETING

As most generic companies are only formulators and marketers, their share of outsourcing chemical manufacturing is higher than with ethical pharmaceutical companies, most likely about 70% versus about 40% (see Section 9.2), which is good news for API suppliers. All this, plus the fact that APIfor-generics do not require any technology for their manufacture different from that of API for patented drugs, are attractive aspects of this option. There are, however, also major challenges to be dealt with. First, low prices are the raison d’être for generics. Because of the relatively low entry barriers, the competition in generics in general and their active ingredients in particular is fiercer than in custom manufacturing. Asian companies are in an excellent position to compete on the basis of price. Confidentiality considerations are much less relevant. Consequently the Chinese, Indian, and South Korean fi ne-chemical companies have been aggressively penetrating this market. Asian companies have been aggressively investing in fi ne-chemical manufacturing capacity, equal to an estimated 33% of the worldwide total. Most of it is used for API-for-generics. Their market share has attained 15–20% (2005). According to another source, the Chemical Pharmaceutical Generic Association in Italy, European fi rms produced about 45% of the worldwide merchant market for APIs in 2005, down from nearly 65% in 1990. As the customer base is different, existing customer relations are of no value. There is no customer loyalty. In most cases, agents are used as intermediaries. Also, the argument that the intrinsic added value is highest for API-for-generics has to be reviewed. It is correct that the APIs represent the last stage in the synthetic pathway, whereas in “exclusives” the last step is seldom outsourced and performed by the customer. One has to consider, however, that the APIs of modern proprietary drugs have a more complicated chemical structure. Therefore, making an advanced intermediate for a proprietary drug may require more steps, and consequently more added value, than making an API-for-generic. In order to be (or become) a successful player in the API-for-generics market, a fi ne-chemical company must excel in the following six areas: 1. Picking the Winners. More than 2000 APIs are on the market today. In order to fi nd a suitable candidate for its own product portfolio, a fi nechemical company has to carefully screen and evaluate all of them on the basis of commercial, legal, and technical criteria. Whereas the technical evaluation can be carried out by in-house experts, third-party advice is recommended for legal and commercial aspects. In the United States, specialized agents with a profound knowledge of the generics market are Aceto, Betachem, Davos, Gyma, Interchem, SST, and Vinchem. In Japan, the most proficient, knowledgeable carriers are the big trading houses Mitsubishi Corporation, Mitsui & Co., Nagase, and Sumitomo Corporation. Within the technical criteria, products needing only “pots and pans” for their manufacture should be ignored in favor of those requiring one or more niche technologies, such as energetic chemistry, low-temperature/high-pressure reactions, chiral synthe-

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sis, or separation. The commercial parameters should include the sales revenues (products with either very high or very low sales should be excluded— (see end of chapter), the competitive situation, and the growth prospects. 2. First on the Market, Respectively “First-to-File.” As market prices for generics and API-for-generics erode very rapidly after patent expiration of the originator product (see Figure 12.3), good profits can be made only during the fi rst months following the launch. In order to take advantage of this situation, a generic company must be ready to commercialize its product virtually the day after the patent expiration. For instance, in its 2002 annual report, Barr Laboratories mentions as major highlight of the year: “Launched and shipped 100 million generic Prozac® capsules in fi rst 48 hours of FDA approval.” KUDCO, the US subsidiary of the German Schwarz Pharma, launched a generic version of Prilosec (omeprazole) on the day after the patent expiry (Dec. 20, 2002), and matured sales of $150 million until the end of the year, bringing the turnover up by 20% (!) for the full year, and YULE CATTO, producer of the API for omeprazole, reported a 30% increase of its EBITDA for 2002.

This means that the API-for-generics producer has to prepare both the manufacturing process and the dossier for the ANDA (abbreviated new drug application) submission well in advance of patent expiry. European fi nechemical companies, where the Roche/Bolar ruling does not apply (see Table 12.4), are at a big disadvantage, because development work cannot start prior to patent expiration. Therefore they are looking for possibilities of doing at least the last step of the synthesis outside EU countries. Macao, Malta, Turkey, and even the United States are chosen as sites for the fi nal stage of production. In contrast, when Asian companies launch their API-for-generics on Western markets, they benefit from many years of production experience gained while they marketed the products in their home markets. 3. Intimate Knowledge of the Patent Situation. The generics business is regulated by a large number of patent laws, some in favor of the patentholders, Table 12.4

Generics Patent Legislation (Examples)

Name of Law

Content

SPC (Supplementary Protection of Certification)

Allows for a patent extension of approximately 5 years or longer

Roche/Bolar Provision

Consents the preparation of (among other things) “experimental quantities” of API-for-generics prior to patent expiration

30-month postponement of FDA approval

Takes effect if an originator pharma company sues a generics company for patent infringement

180-day market exclusivity

Granted to the fi rst generics company challenging the validity of a brand name

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and some in favor of the generics companies. An insufficient knowledge of the patent situation for any given drug can trigger lengthy and expensive lawsuits. The generics company can also be obliged to withdraw the product. Four examples of the legislation are given in Table 12.5. Ethical pharma companies undertake every effort to extend the patent protection for their most important moneymakers. Over the years, they have developed a large arsenal of weapons for this purpose, on both legal and technical sides; on the legal side, patent extensions are sought by filing new patents for the manufacturing process, or for new applications (e.g., BMS’s pediatric exclusivity extension for glucophage). By suing the generics companies for patent infringement, they are granted a patent extension. On the technical side, specifications for pivotal intermediates are tightened, combination drugs (e.g., Schering-Plough/Merck’s Vytorin, a Zetia/Zocor combination cholesterol-lowering drug) are developed, numerous polymorphous crystal forms—for which no claims were made in the original application—are patented (e.g., Pfi zer’s Sertraline), or racemic switches are used. The latter refers to the development of the single isomer form of a racemic compound. An interesting example in case is AstraZeneca’s anti–stomach ulcer drug Nexium (esomeprazole), which is one of the enantiomers of the precursor Prilosec (omeprazole). After having patented Nexium, AstraZeneca sued the generics companies selling Prilosec on the basis that it was containing the—patented—Nexium active ingredient. 4. Low-Cost Producer. The price competition in generics is fiercer than in custom manufacturing, primarily because low prices are the raison d’être for generics, and because the Far East companies have been penetrating the market aggressively. The average cost of a prescription for a generic is 30% or less that for an originator drug. Whereas confidentiality and IPR (intellectual property rights) considerations constitute an entry barrier to custom manufacturing, fi ne-chemical companies in this region can fully exploit their

Table 12.5

API-for-Generics: What’s in It for a Fine-Chemical Company #1

#200

Originator Drug

Lipitor/Pfi zer

Fraxiparin/gsk

Therapeutic class

Cholesterol-reducing

Antihypertension

Finished drug sales 2005

$12,200 million

$384 million

API value (5%/5%)

$600 million

$19 million

First-year price drop (55%/35%)

$270 million

$12 million

Drug market share drop (50%/50%)

$135 million

$6 million

Market share of Fine-Chemical company (10%/100%)

$13 million

$6 million

Earning on sales (10%/25%)

$1.3 million

$1.5 million

TARGET PRODUCTS AND SERVICES

135

“high skill/low cost” advantage in API-for-generics. Moreover, they benefit from the learning curve experience, as they were allowed to produce APIs for patented drugs under the former legislation. The new legislation applies only to pharmaceuticals whose patents expired after 2005. An example is the AstraZenecas anticholesterol drug Crestor (rosuvastatin). Although the patent expires only in 2012, there are already about 25 manufacturers in India, including famous names such as Ranbaxy (Rosuvas) and Dr Reddy’s Laboratories (Rosvat).

Percentage of pre pat. exp. sales price

Western companies should shy away from products where they can expect minor reductions of the COGS only and go for those where they can achieve breakthrough process improvements. As a result of the highly competitive business climate, prices for API-for-generics drop significantly as soon as the relevant originator product patent expires. The price collapse is a consequence of the loss of the monopoly position due to patent expiry and a lower cost base of the generics industry; the slump in market share is caused by the lack of promotional support and the launch of new drugs in the same therapeutic category. As illustrated in Figure 12.3, the price decrease is particularly dramatic in year 1 after patent expiration, where they already dropped to between 75% and 45% of the original level, and for those drugs that had achieved high sales volumes when they held the proprietary status. These drugs are obviously targeted by a large number of API-for-generics manufacturers. As illustrated in Figure 12.3, prices for APIs for drugs with sales exceeding $400 million per year in the last year prior to patent expiration drop to about 30% of the original value after 5 years and to 20% (!) after 10 years. APIs for drugs in the sales category of $150–$400 million drop to 47%; and those with sales below $150 million, to 59% in the same period. patent exp exp.. 120

100

Drug Sales:

< $ 150 mio $ 150–400 mio > $ 400 mio

80 60 40 20 0 1

2

3

4

5

6

7

8

9

10

years after patent expiration

Figure 12.3 Price decrease of APIs after patent expiration. (Source: European Association of Generic Producers, IMS Health Service, CGEY, 2002.)

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5. GMP Culture. For the manufacture of API, the rules for GMP (Good Manufacturing Practice) must be observed. Plants for the production of APIs are subject to FDA inspection, regardless of whether they are used for patented or nonpatented drugs. Compliance with GMP regulations, therefore, does not constitute an entrance barrier for fi ne-chemical companies that thus far produced APIs only for patented drugs. However, the capability to prepare the regulatory documentation necessary for a successful ANDA (Abbreviated New Drug Application) is a key differentiator. 6. Financial Muscle. The developmental work for a new API-for-generic has to start 5–8 years before patent expiry of the originator drug. This means a substantial investment in both human resources and R&D funding many years before any revenues are generated. In conclusion, going after APIs for proprietary blockbuster drugs with forthcoming patent expirations is not a valid business proposition for a fi nechemical company. It would require a large upfront investment in R&D, coupled with a high risk of failure. This applies not only to Western companies but increasingly also to their Asian competitors. This category is the domain is the “chasse gardée” of the leading generic companies. An example of this is outlined in Table 12.5. For a fi ne-chemical company, the generic ranking number 200 in sales, gsk’s Fraxiparin (nadroparin), has a profit expectation similar to that of the world’s number 1, Pfi zer’s Lipitor (atorvastatin)—at a lower risk! Instead of vying for a small piece of the market for atorvastatin, which will become accessible in 2010, the efforts should rather be directed to fi nd a more economic synthesis for the API for Atenolol, which is already generic. For obvious reasons, going after APIs-for-generics with small sales is not attractive, either. Business opportunities exist in the areas of niche products with average sales, especially if special technologies are required, and in “continuing to make” a PFC for a proprietary drug that is becoming generic. 12.2.3 Standard Products Standard products, also known as “catalog products” or “building blocks,” pop up fi rst, if one browses through the Websites or brochures of finechemical companies. Except for laboratory chemical suppliers (see Section 2.3), they play only a minor role in the product/service portfolio. Contrary to exclusives, standard products derive from a “reaction” rather than an “action” approach: •

They are developed by big chemical or petrochemical companies in order to extend their value-added chain, for instance, in the sequence methanol → acetic acic → acetoacetates → γ-chloroacetoacetates → 2aminothiazolyl acetates, or benzene → cumene → phenol → salicylic acid.

TARGET MARKETS: GEOGRAPHIC REGIONS AND CUSTOMER CATEGORIES •

•

•

137

Process technologies used primarily for the production of large-volume commodities, such as phosgenation or ammonoxidation, are further exploited for fi ne-chemical production. Byproducts of large industrial-scale processes are valorized; for instance, in the DuPont process for adiponitrile, the byproduct αmethylglutaronitrile is upgraded to β-picoline and further to niacinamide. Intermediates from synthetic pathways carried out to produce exclusive products are offered to third parties.

Other examples are acetoacetates; alkylamines and alkylhalides/acid halides; ethers; esters; chloroformates; ketones; lactames; lactones; malonates; mercaptanes and orthoesters in aliphatics; catechol/hydroquinone/resorcinol, cresidines; haloaromatics in aromatics; and coumarines, cyanuric chloride, picolines, quinolines, and thiazoles in heterocylics. In most cases standard products are commodities, as they are produced in large volumes in dedicated plants and cost less than $5–$10/kg. 12.3 TARGET MARKETS: GEOGRAPHIC REGIONS AND CUSTOMER CATEGORIES The attractiveness of specific product categories, as discussed in the previous section, by and large defi nes the attractiveness of target markets as well. Besides its absolute size, the pharmaceuticals market comes first, because of its inherent elevated added value, the relatively high innovation rate, which leads to a steady demand for new products and for a manageable number of customers. The attributes for the agro fine chemicals market are similar, albeit less pronounced, specialty chemicals, in contrast, are needed by almost all industries and, therefore, virtually cannot be approached proactively. Also, the innovation rate in terms of new chemical entities is generally rather low, except in the electronic industry. In a “customer category/geography” matrix, “pharma” and the United States are the most attractive combination for fi ne-chemical companies. The location of the headquarters of the pertinent companies is the main selection criterion. Many large pharmaceutical companies have established pharmaceutical manufacturing sites in tax havens like Ireland, Puerto Rico, and Singapore. However, the decisions regarding the production programs and the procurement of, for example, PFCs are taken at the companies’ headquarters. In many cases, these overseas locations are important destinations for the goods supplied under contracts concluded with the headquarters.

Of the top 20 pharma companies, 9 are based in the United States, accounting for just over 50% of the $350 billion sales (see Table 11.2). As there are only a few domestic suppliers, the market is also attractive for non-USAbased fi ne-chemical companies. Europe follows in second place with 7 of the

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top 20 companies and a market share of 43%. There are big differences among individual countries. The United Kingdom and Switzerland are most important. In England, both AstraZeneca and Glaxo SmithKline are large purchasers both for custom manufacturing services and API-for-generics. AstraZeneca is the result of the merger of Astra (Sweden) with Zeneca (a spinoff of I.C.I.). Whereas Astra was traditionally fully oriented toward inhouse production, Zeneca always also had third-party suppliers. Thus, many fi ne-chemical companies had been trying hard to become suppliers for intermediates for the cholesterol lowering agent Crestor (rosuvastatin). The “happy few” that were selected were not so lucky after all, as Crestor did not live up to the very optimistic sales forecasts. Glaxo SmithKline, which has maintained also the former Smith Kline & French headquarters in Philadelphia, USA, has pioneered the concept of a “suppliers’ day.” The purpose of these one-day events is to align vendors with the procurement policy of the company. The statement of the head of Global Supply: “If you want to remain a supplier to our company, you must commit— in writing—to a 20% reduction of the price of every single product you sell us within the next three years, 7% per year to be precise” has left its mark in the fi ne-chemical industry. With the merger of Bayer HealthCare and Schering AG to form Bayer Schering Health Care in 2006, a German pharmaceutical company again made it to the top tier. The successors of Germany’s once-famous chemical giant IG Farben, BASF, Bayer, and Hoechst, were no longer playing in the major league of the global pharmaceutical industry for many years. With the sale of Knoll AG to Abbott, BASF has exited pharmaceuticals completely. Bayer still successfully capitalized on the fi rst synthetic drug ever invented, aspirin. In the same context, it also had acquired Roche’s OTC business, but has suffered serious setbacks with its proprietary drug business after the withdrawal of Baycol/Lipobay (Cerivastatin) in 2001. Hoechst’s pharma business, like the one of Rhône-Poulenc and Sanofi, is now part of Sanofi-Aventis, and thus moved from Germany to France. Thanks to Sanofi-Aventis, France now holds the third place in the European pharmaceutical industry. Germany also prides itself on a number of sizable generics companies: Merck KGaA, Ratiopharm, Schwarz Pharma, and Stade. They benefit from the large home market. Japan ranks third with regard to both pharmaceuticals and agrochemicals. There are 2 Japanese pharmaceutical companies among the top 20, namely, Takeda and Astellas, formed by the merger between Fujisawa and Yamanouchi in 2005. Whereas the United States are the biggest agrochemicals market, the top three companies, Bayer CropScience, Syngenta, and BASF Agricultural Products & Nutrition, are located in Germany and Switzerland (see Table 11.6). The United States follows in importance. Out of the top—albeit mainly small ones—20 companies, 8 companies are based in Japan. Despite its small size, Switzerland holds a very prominent position in the global life science community. Four world-class life science companies are

TARGET MARKETS: GEOGRAPHIC REGIONS AND CUSTOMER CATEGORIES

Table 12.6

139

Breakdown of the Merchant Fine-Chemical Market Position on Drug Lifecycle Patented Phase IV Access Point 3 a

Generic Access Point 4 a

$1.0 billion

$5.0–5.5 billion

$1.5–2.0 billion

“Medium pharma”

$<0.5 billion

$2.0–2.5 billion

$3.0–3.5 billion

“Small pharma”

$>0.5 billion

$0.5 billion

—

$2.0 billion

$8.0 billion

$5.0 billion

Type of Company “Big pharma”

Subtotals Building blocks Grand total

Phase II/III Access Point 2 a

$5.0 b billion $20 billion

a

See Figure 12.2. Do not require production under cGMP. Source: Adapted from Prochemics, Zürich, April 2004.

b

based in the small town of Basel (with 200,000 inhabitants), namely, the pharma rivals Novartis and Roche, and the world’s number 2 agrochemical company, Syngenta, formed from the former pesticide divisions of Zeneca (respectively I.C.I.) and Ciba-Geigy, which is also the predecessor, jointly with Sandoz, of Novartis, and Lonza. Contrary to its peers, Roche originally was a pharmacy. The fi rst successful product was a cough syrup, SirolinRoche, launched shortly after foundation of the company in 1896. Therefore, it has traditionally been more open to outsourcing than the industry average. An example here is the enduring relationship that Roche forged with the Italian finechemical company F.I.S. It goes back to 1985. At that time, a F.I.S. salesman visited Roche trying to get some business. He was told by purchasing that Roche had wellestablished relationships with a number of companies and was not looking for a new vendor. The only chance to develop business would be if F.I.S. were in a position to supply Aditoprim, a veterinary version of the antibiotic trimethoprim at a lower price than Roche’s internal manufacturing cost. The R&D department of F.I.S. evaluated the process and concluded that there was no chance to meet the price target. At this point, the president-founder of F.I.S., Dott. G.-F Ferrari, overruled the conclusion of the R&D department and decided that the business was to be done. Roche was so impressed with the performance that it concluded a 10-year frame manufacturing contract, under which F.I.S. custom-manufactured precursors of Roche’s famous diazepine antidepressives. Dott. Gian-Franco Ferrari was always received with great respect for his entrepreneurship at Grenzacherstrasse in Basel.

Roche was also one of the fi rst companies to formulate an outsourcing strategy in the mid-1990s. The basic concept was to outsource APIs for

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MARKETING

mature drugs and use the freed capacity for new drugs, which were to be produced in-house. A tangible outcome of this strategy was the construction of a launch site in Florence, South Carolina, USA. It made history as the most expensive primary pharmaceutical manufacturing plant, on a $/m 3 basis, ever built. After the acquisition of Syntex, USA, and Boehringer-Mannheim, Germany, Roche obtained access to large PFC production capacity. The fi rst concern of the head of global manufacturing, which also included procurement, was to fi ll this capacity. Novartis is relying primarily on in-house production, recurring to third-party manufacturing only if technologies are required that Novartis does not want to perform in-house. An example in point is the blockbuster antihypertensive drug Diovan (valsartan). Novartis has expanded its in-house production capacity for the steps requiring only conventional chemistry, but is outsourcing an intermediate whose synthesis requires energetic sodium azide chemistry. Novartis was also relatively late in employing chemists in its purchasing department, a prerequisite for outsourcing. Contrary to common belief, none of the Basel giants is giving a right of fi rst refusal to Swiss fi ne-chemical companies, like Dottikon Exclusive Synthesis, Lonza or Siegfried. The mere fact that the staff of the Swiss life science giants are very international rules this out. Japan, the world’s second largest pharmaceutical market, has opened up to overseas fi ne-chemical companies lately. On one hand, laws forbidding imports of APIs have been shelved; on the other hand, Japanese pharmaceutical companies are approaching outsourcing with a more positive attitude. Also, the generics market is growing, albeit from a very small base. Offshoring the chemical manufacturing of PFCs for proprietary drugs is still the exception rather than the rule. It is a last resort only if the local fine-chemical companies—which often are part of the same industrial conglomerate as the pharmaceutical companies themselves—are not in a position to satisfy the demand because of lack of either capacity or special technologies. Wellknown cases of custom manufacturing deals concluded with European fi nechemical companies were involved in the supply of PFCs for Sankyo’s Noscar, respectively Warner-Lambert’s Rezulin (troglitazone), which, unfortunately, was withdrawn in 2000, and more recently to Takeda’s blockbuster drugs Blopress (candesartan) and Prevacid (lansoprazol). Japan’s number one pharma company, Takeda, has closed chemical manufacturing at its large Osaka site, and is relying more on outsourcing. It must be realized, however, that it takes many years to develop an important business relationship with a Japanese company. Only the large fi ne-chemical companies have the means to sustain a yearlong business development effort. Once established, the Japanese partner will honor its obligations beyond the letter of a supply contract. The structure of the pharma industry (see Section 11.1 and Table 11.1) serves as basis for identifying which customer categories should be served. Each of them—big, medium, and small pharma—has advantages and disadvantages (see Table 12.6). In terms of potential business volume, “big pharma”

TARGET MARKETS: GEOGRAPHIC REGIONS AND CUSTOMER CATEGORIES

141

ranks highest with a share of about 55–60% of the total PFC market (mainly “exclusives”), “medium pharma” ranks second with a share of about 40% (mainly API-for-generics), “small pharma” comes last with about 10% (only “exclusives”). On a “business potential per company” basis, “big pharma” obviously is most attractive. Also, companies are easy to identify. However, competition for business is very strong, and those involved in procurement are well aware of the company’s purchasing power. Only fine-chemical companies that have a proven track record of superior performance and may have even achieved “preferred supplier” status have a realistic chance to be considered for new business. Small or virtual pharma typically do not have established products and a limited new product pipeline. Therefore, they offer few business possibilities on an individual company basis. This is compensated by the large number of companies (well over 1000 in the USA alone) and their lack of manufacturing assets and expertise. Also, the number of approvals for NCEs originating from virtual pharma companies surpassed that of the top 20 for the first time in 2003. A substantial amount of deskwork is required in order to identify developmental drugs that have both a good chance of success and a fit with the technologies of a given fi ne-chemical company. Also, its business is at risk once the small pharma company licenses its new drug to big pharma. The portion of new drugs licensed-in by big pharma increased from 15% to 55% of all new drugs between 1969 and 2001! The licensing agreement usually has a clause that gives the licensee full freedom to adopt its own purchasing policy. This includes also in-house manufacture. On the positive, small pharma’s share of the total business is growing above average, the competition for business is smaller, its procurement is less hard-boiled, and, last but not least, depends totally on outsourcing. Small or virtual companies are attractive for CROs. They require experienced specialists to assist them with various chemistry-related research services and are willing to sign on FTE agreements more easily than are big pharma companies. The sales cycle is short, and the headaches are minor in selling to virtual pharma. Also, they prefer to deal with local companies.

Midsize (medium) pharma plays a modest role in blockbuster drugs (only three pharma companies outside the top 20 had blockbuster drugs in 2004!), but are important users of API-for-generics. In conclusion, all three customer categories have advantages and disadvantages, and none should be excluded. The selection of the most appropriate distribution channels and key account management (see Sections 12.4 and 12.9, respectively) are useful tools for managing the universe of potential and existing customers. Selection of the most important geographic region is obvious. The statistical evidence proving the number 1 position of the United States pharma market is overwhelming; out of the top 20 pharma companies, 9 are based in the United States. The same applies to drug sales. In the United States,

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MARKETING

they account for $264 billion out of the world’s $550 billion, corresponding to 48% (2005). This share has increased steadily because of an above-average growth of the US pharma market (CAGR 99-04: USA, 12.5%; world, 9.4%). In generics, the US share is even 55%. Furthermore, non-US fi ne-chemical companies are attracted by the US market because of the limited local competition. Actually, there is a trade deficit for pharmaceutical fi ne chemicals. Within the United States, big pharma is concentrated on the East Coast, particularly the state of New Jersey. Out of the roughly 1200 US virtual pharma companies, 500 are located at the West Coast. With a share of 30%, Europe is the second most important market. Because the European big pharma companies are located in England (AstraZeneca, Glaxo SmithKline), Switzerland (Novartis, Roche) and France (Sanofi-Aventis), these countries are most important for developing a fi ne-chemicals/custom manufacturing business. The attractiveness for API-for-generics ranks by and large according to the population of the countries, which means, in decreasing order, Germany > UK > France > Italy > Spain > other countries. Although Japan, with a share of 11%, is the world’s third largest pharma market, there are only 2 companies among the top 20. They hold a share of about 5% of the global turnover. The corresponding numbers for Japanese agrochemical companies are 7 companies among the top 20 with a share of 8% of the global turnover. Japan is an arid place for non-Japanese fi ne-chemical companies. Despite the fact that legislation protecting local pharmaceutical fi nechemical manufacturers has been abolished recently, non-Japanese companies have a long way to go to get a significant stake in this traditionally protected market. A rapid decline of Japanese fi rst launches from 19% in 1999 to scarcely 5% in 2004 does not help, either. All in all, few examples of major supply agreements for PFCs between foreign fi ne-chemical companies and Japanese pharma companies have been concluded. Pharmaceutical and agrochemical companies in Asia, Africa, and Australia have only a local reach. As more and more people can afford Western medicine in China and India, an above-average demand growth is expected in these highly populated countries. Because of a substantial and very competitive, albeit extremely fragmented, local production, the markets in these developing countries are practically inaccessible to Western fi ne-chemical companies, unless they enter into joint ventures.

12.4

DISTRIBUTION CHANNELS

International commerce prevails in the fi ne-chemical industry because suppliers and customers are often located in different countries, or even continents, and because transportation costs are almost negligible. For managing their international business, fi ne-chemical companies have to choose the most appropriate distribution channels. Basically, they can do it with their own means—either directly from their headquarters, or indirectly through a local

DISTRIBUTION CHANNELS

143

office—or with the help of an agent or distributor. The total control of the supply chain is the main argument in favor of an in-house solution. Also, it avoids a confl ict between the principal’s goal of a long-term profit optimization and the agent’s interest in short-term profit maximization. For this reason, agents generally are not interested in business development activities, which generate commissions after several years only. The main advantages of agents are their longstanding networks of customer contacts and knowledge of the local conditions. This is particularly important if customers and suppliers are part of different cultures, like East and West. Japanese trading houses, like Mitsubishi Corporation, Mitsui, Sumitomo Corporation, and Watanabe, have an immense experience in bridging the gap. By representing different companies, agents can offer a large range of products and services. They are in a position to “open the doors” at accounts that otherwise would not be accessible, particularly for small companies with a limited product/services range. The disadvantages are potential confl icts of interest because of overlapping product ranges of principals and concerns regarding leakage of intellectual properties. For selection of the most suitable distribution channel, the following elements should be considered: •

•

•

•

Knowledge of the country of destination, entailing both familiarity with the culture in general and the extent of business experience in particular. If a European fi ne-chemical company wants to enter the Japanese market for the fi rst time, the services of an agent are almost mandatory. On the other hand, if the same company has gained many years of experience selling its products and services to the United States through an agent, it will consider setting up its own office. When an agency agreement is prepared, care should be taken to formulate the “exit clause” in a way that not unduly penalizes the principal! Actual, respectively potential size of the business. If there is only a small sales potential in a given country, let’s say in Taiwan, an agent is the distribution channel of choice. The minimum sales proceeds that are needed to justify a local representative is about $5 million per year. Customer categories. Big pharma companies, which are mainly customers for exclusive products and have extensive logistics departments of their own, prefer to deal directly with the supplier’s headquarters, regardless of its location. Midsize and virtual pharma companies welcome the logistic assistance from agents, for example, for custom clearance and local transportation. Product categories. Contract manufacturing projects, which require multiline and multilevel contacts are better managed through direct contacts; API-for-generics are preferably channelled through agencies, whose assistance for local registration is a valuable asset.

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MARKETING

As not all elements coincide in actual business life, a compromise has to be made. A solution is gaining ground, whereby the key accounts are served directly from the headquarter (see Section 12.9), the other customers requiring contract manufacturing services by the local office, and the generics companies by specialized agents. In the United States, some leading agents like Interchem and SST Corporation are active mainly in dealing with API-for-generics.

12.5 PRICING Whereas controlling determines the cost of a product or service (see Section 7.2), marketing sets the price. Depending on the overall market situation in general, and specific customer–supplier relationships in particular, the axiom that prices must be higher than costs has to be violated and a reduced profit or even a loss have to be accepted in some cases. A number of “freebies,” respectively services without an immediate return, are part of the market strategy. In order of increasing expense, they range from free offers, free samples, free pilot plant tests, free pilot plant quantities, pilot plant quantities at “industrial scale” prices, execution of not qualifying projects, capital investment in special equipment, plant adaptation, and capacity expansion all the way to new plant constructions. Three different methods are used for the pricing of fi ne chemicals (see Table 12.7). They are adopted depending on the development status (laboratory/industrial-scale) and on the business type (exclusive/standard). A volume priced approach, either “bottom-up” or “top-down,” is used for fi ne chemicals produced on an industrial scale; a time-based one is used for those produced on a small scale, or for process research. The most frequently used unit for the former is “$/kg,” respectively FTE (full-time equivalent) for the latter. In volume-based pricing, one must be aware that the specialty-chemicals industry makes formulated products, of which the active ingredients represent only a fraction of the COGS. This is particularly the case for the pharmaceutical industry. The active ingredients of the drugs are considered as raw

Table 12.7

Pricing Models Sample Preparation/ Laboratory Research

Industrial Scale Production

Exclusive products/services

Time-based bottom-up approach

Volume-based bottom-up approach

Standard products (e.g., API-for-generics)

N/A

Volume-based top-down approach

PRICING

145

materials. They account for less than a 10% fraction of the sales price of a drug. The latter is composed of four main elements: COGS (API + formulation), ∼20%; R&D, 15–20%; marketing and general administrative expense, ∼35–40%; profit, ∼25% (see Figure 12.5). The exact share of the API cost depends on many elements, including the patent status (the share is much lower for proprietary drugs than for generics), the strength, the frequency of administration, the therapeutic category (it is higher for anticancer or anti-AIDS drugs than for more traditional categories, such as cardiovascular and CNS drugs), and the country in which the drug is sold. The pharmaceutical industry and the fi ne-chemical industry uses completely different approaches for determining the API prices. As illustrated in Figure 12.4, the drug industry follows a top-down approach, starting from the patient and focusing on the daily medical cost, expressed in $/day within a given therapeutic category. The custom manufacturer applies a bottom-up calculation, starting from the raw-material and conversion costs and ending up with a unit price, expressed in $/kg. For high-dosage drugs made of complex molecules, the two approaches can lead to big spreads with regard to the drug industry’s expected target cost on one hand and the sales price expectation of the fi ne chemical company on the other hand. A comparison of the daily medical costs for the drugs made for the largest therapeutic class, antihypertensive drugs, illustrates the pharma industry’s approach. Regardless of the sales revenues of the drugs, which varied between $4.7 billion for Pfi zer’s Norvasc and $30 million for Solvay Pharma’s Teveten, the medical cost was in the range of $1–$1.40/day for the low dose—typically 20 mg—and $1.50–$2/day for the

Patient Disease Medication / treatment Daily medical cost

API cost

Profit Conversion cost (capital, labor, utilities, overheads, …) Raw materials Plants

Figure 12.4 Costing mechanisms of the pharmaceutical and fi ne-chemical industries.

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high dosage. Within these ranges, the oldest subcategory reported, namely, βblockers, introduced in the 1970s, where the cheapest at $1/day (at the low-dose level), followed by ACE (angiotensin-converting enzyme) inhibitors, $1.05/day; calcium antagonists, $1.28/day; and fi nally the latest subcategory, the angiotensin II receptor antagonists (or simply “sartans”), $1.40/day.

This example confi rms that the pharmaceutical industry prices a drug primarily on the basis of the daily medical cost of competitive drugs in the same therapeutic category. Neither the complexity of the molecule nor the dosages are determining factors. Also, the prices of different strengths of the same drug differ only marginally in most cases. For instance, a package of thirty 50-mg tablets costs only a few percentage points more than one with the same number of 25-mg tablets. This is another indication of the small relevance of the API unit cost. Minor price variations may occur on the basis of specific advantages in terms of the risk profi le, the convenience of administration, the image of the brand, and other variables. Whereas for the pharmaceutical industry the patient, respectively the daily medical cost, is the driving force for establishing the target price for an API, it is the manufacturing cost for the fi ne-chemical/custom manufacturing company. Awareness of the “daily medical cost” is all the more important for the supplier, as typically there are no reference prices that can be used as a guideline for checking the figure with which the internal controlling has come up. Furthermore, the confidentiality agreements, which exclude any information exchange with third parties, prevent suppliers from applying traditional marketing principles in order to determine whether their prices are competitive. At the end of the day, the likely winner of the impasse is the innovative fi nechemical company, which invents a breakthrough process enabling drastically reduced COGS. These reflections discredit the conventional wisdom that drug prices are open-ended. At least for “we too” drugs, there is competitive pressure within the same therapeutic category. Bottom-up and top-down pricing models are also used within the fi nechemicals industry to determine the price of a product made on industrial scale. For exclusive products, where no established market prices exist, the bottom-up approach, as described above, is adopted by the suppliers, whereas a top-down model is used for standard products, such as API-for-generics, where reference market prices do exist. In the former case, the target price is calculated on the basis of the raw material and the conversion costs—which individually account for about 35% and 55%, respectively, of the sales price and together represent the COGS—and a profit margin is added. As the raw materials are the single most important cost element, particularly if the synthesis starts at a late stage, they require particular attention. Issues that have to be addressed are “how the consumption can be reduced,” “which are the minimum specifications,” “make or buy,” and, in the case of “make,” whether

PRICING

147

the internal COGS or the market price should be used for the comparative calculation. The attainable profit margin depends on both customer- and supplier-driven factors. The former include the competitive situation for the fi nal drug (therapeutic category, innovation, dosage, risk/reward profi le, etc.); the latter, the competitive intensity for the product sold. Last but not least, the dollar value of the business and the overall business condition should be considered. Given all these elements, the profit element can vary substantially. In the worst-case scenario not even all fi xed and overhead costs can be recovered; in the best-case situation, the markup can be to 100% or more, if a supplier is in a particularly favorable situation. In order to narrow this uncomfortably wide range, a “value pricing” approach can be helpful. It is used frequently in the specialty-chemicals industry and consists in analyzing the value that a product or service presents to the customer. Questions that should be addressed in this context are What is the share of the price of your product as compared with the end product? Does the quality of your product allow the customer to differentiate from the competition? Are you the only supplier who can guarantee on-time delivery and sufficient default production capacity? In the case of a tolling contract, where the customer supplies raw materials “free of charge,” the markup for profit is calculated as if the material were purchased, provided that the material cost does not exceed the conversion cost.

In Figure 12.5 the price structures for a PFC and for a pharmaceutical are combined. Particularly noteworthy are the differences between the cost items “R&D” and “marketing and general administrative expense” (>50% for a fi nished drug; 25% for a PFC) and “raw materials” (10% vs. 35%). A price calculation is relatively easy for a product with a track record of a regular industrial-scale production. On the other hand, it is difficult, if only a laboratory procedure exists and a calculation has to be made based on the virtual scaleup to industrial-scale production. The ability to perform this desk exercise in a quick and reliable fashion is an important competence criterion of a fi ne-chemical manufacturer. When setting a price, a separation of tasks must be made between the controller, who calculates the manufacturing cost, and the sales manager, who determines the sales price. If mistakes have been made and prices have to be changed, you will need facts to support your request. If a pivotal product is supplied, a supply contract is concluded. The time-based approach factors in the time spent on a project, rather than the material cost of a sample, as the key cost element in the laboratory research phase. FTE, the price unit of choice, is driven by the salaries of the researchers and varies considerably between developed and less developed

148

MARKETING % 100

profit 80

% 100 profit

R&D M&S admin.

80

capital

60

labour 40

marketing and general admin.

40

R&D drug formulation raw material

raw material

60

20

20

0

0

Pharmaceutical Fine Chemical Company

Company

Figure 12.5 Integration of fi ne chemicals and fi nished drugs price structures.

countries (see Chapter 14). In order to allow customers to control the appropriate spending of the research that they are funding, “milestone payments” are mutually agreed on. They condition FTE payments on the fulfi lment of certain preestablished objectives, for instance, yield, throughput, or quality targets.

12.6

INTELLECTUAL PROPERTY RIGHTS

Intellectual property rights are the most sensitive interface between a fi nechemical company and its customer. This is particularly the case if the latter is a pharmaceutical company. Most of the profits of the industry derive from drugs protected by patents. Any dissipation or misuse of IP, on either the product or the manufacturing process, can cause serious damage. The company, its board, executives, and employees may be held liable. It is, therefore, imperative that strict procedures for safeguarding the IP are put in place, such as the following: 1. A one-way nondisclosure agreement (CDA) has to be signed by board members, management, employees, and external consultants. The individuals are bound to the CDA also in the case, that they leave the company (see also item 7, below).

SUPPLY CONTRACTS

149

2. Documents that contain confidential information (e.g., laboratory journals, batch records, campaign reports), have to be earmarked and signed at regular intervals by the project manager. The latter surveys the circulation and copying. 3. Sensitive information has to be saved exclusively in these earmarked documents, which are maintained in a secure place and remain within the premises at all times. 4. All documents and samples must be maintained for at least 5 years. 5. Customers’ names, projects, and compounds must be coded so that only the management knows these details. The laboratory, pilot plant, and industrial-scale plant chemists and engineers know the codes and refer to each project accordingly. 6. Customers must be immediately notified of any breach in confidentiality. 7. Particular attention must be paid to employees leaving the company. They must not carry any written documentation with them. A controversial issue is the ownership of IP arising from the cooperation between customer and supplier. The customer holds the position that all IPRs resulting from a joint project belong to him. His arguments are that (1) without his input there would have been no invention anyhow and (2) that he has paid for the development of the IP, either directly by funding the supplier’s R&D work or indirectly through the price that he pays for the product. The supplier maintains that IP is an essential prerequisite for her business. If she cannot advance her know-how, she will drop out of business sooner or later. Also, the customer would not have entrusted her with a project, if he had not been attracted by the supplier’s know-how. These opposite views are a critical element in contract negotiations and can become a deal breaker. A pragmatic approach to resolve the problem is to allow the supplier to use the IP outside the area of the customer’s direct interest. This can be defi ned, for instance, by a therapeutic category. Thus, the supplier is restricted to use the IP for the synthesis of PFCs outside the specific therapeutic category of the drug that is the object of the joint project.

12.7

SUPPLY CONTRACTS

In custom manufacturing, supply contracts are product-based (unit price in $/kg), whereas in contract research agreements they are service-based (FTEs in $/scientist-year). The two types of contract are discussed in more detail below Agreeing on the price for a fi ne chemical is only one, albeit essential, element of a custom manufacturing deal between the supplier (fi ne-chemical company) and the customer (specialty-chemical company). The supply

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MARKETING

contract entails a considerable financial exposure (sometimes hundreds of millions of dollars), covers an extended period of time (typically 3–10 years), and must factor in a number of imponderable elements of the cooperation. It is mandatory, therefore, to defi ne the obligations of the partners and to hedge against unpredictable events by concluding a supply contract. Prior to entering into the contract negotiations, the partners should clearly defi ne the scope and objectives that they wish to achieve. It should have the necessary provisions to cope with “what if”s such as delays in drug approval/startup of production, substantial increase or decrease in demand (in the worst-case scenario, withdrawal of the drug), failure to meet the agreed-on yield and throughput figures, unsolicited offers from third parties, subcontracting, takeover of one partner by a competitor, exchange rate fluctuations, force majeure incidents, and so on. The main elements of a contract are the “commercial clauses” (i.e., substantially quantities, prices, and supply logistics), the “technical clauses” (i.e., specifications or description of the services the custom manufacturer has to provide, including milestone plan), and the “legal clauses” (i.e., IP ownership (see Section 12.6) warranties, indemnities, exit, and other boilerplate clauses that lay out the parties’ reciprocal responsibilities). The commercial and technical clauses are drafted by specialists from the involved activities. Key commercial, technical, and legal elements of a supply contract are listed in Table 12.8. Independently of the degree of elaboration of the contract, a successful deal will rely on the mutual trust of the parties. This also means that arbitration rather than court litigation is the usual way of

Table 12.8

Key Elements of a Supply Contract

Commercial

Technical and Regulatory

Legal

Product

Product specifications

Quantities

Process description

Prices (price/quantity/ third-party offers)

Analytical methods Process improvements

Investment guarantees Force majeure

Currencies

Change control

Insurance coverage

Forecasts

Plant description

Confidentiality

Provision of starting materials

Quality control and assurance

Intellectual property rights Liabilities a

Calloff orders Shipments

Batch records Audits and inspections

Compliance with laws and regulations

Packaging/labeling

DMF (drug master fi le)

Applicable law/arbitration

Backup capacity

Safety, health, environment

Exit strategy

a

Duration (extension/ cancellation)

Liabilities for consequential damage, such as claims of patients against the drug company, are usually waived.

SUPPLY CONTRACTS

151

settling a dispute. As a consequence of the deteriorating business condition for the fi ne-chemical industry, the bargaining power of the customers has increased and the contract terms worsened for the suppliers (see Table 12.9). As part of a supply agreement, customers often ask for “cost transparency.” This is a biased request, which can cause unpleasant discussions on the just costs of goods sold. The key word that pops up most frequently is cost allocation. Typical problems are the fi xed cost allocation, for instance, the cost of nonutilized parts of a production train or a plant, or the allocation of overhead costs. Frequently asked questions by purchasing are “Why do you include an allocation for R&D costs, when we already have funded your R&D expenses through a milestones payment agreement?” or “Why do you charge 5% for marketing & sales, when all what you need to do is to ask your commercial assistant to call off a truckload once a month?” For contract research contracts, two cooperation modes are used: 1. Full-Time Equivalents (FTEs). A defi ned number of scientists are assigned full time to a customer’s project. Whereas the CRO provides the infrastructure, the tasks are given and the work is supervised by the customer. The FTE charge is inclusive of the scientist’s salary, raw materials, and other consumables (up to an agreed-on maximum), attending milestone meetings at the customer’s site, and analytical and shipping cost. Indicative numbers are $150,000–$200,000 for the United States and western European countries, around half this figure for former Eastern European countries, and $50,000–$60,000 per year for China and India. Table 12.9

From a Seller’s Market to a Buyer’s Market Prior to Year 2000

After Year 2000

Contract duration

5 years

1 year

Capital guarantee

Yes

No

Take-or-pay clause

Yes

What is this?

Number of suppliers

Sole

Several

Supplier loyalty

Partnership

“Auction”

Volume forecasts

Binding

Spot orders

Price adaptation

Increased price index, etc.

Decreased x% yearly reduction

Process improvements/ customer inventions

To supplier

To customer

Penalties for offtake delays

To supplier

To customer

R&D expenditures

To supplier

To customer

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The key elements of an FTE agreement for “chemistry type” work are: a. Obligations of the CRO (1) Perform synthetic chemical research, process development and optimization for any projects entered in (2) Provide technical consultation and assistance (3) Utilize existing and develop new analytical methods (4) Prepare samples, together with certificates of analysis (5) Provide progress reports at regular intervals and a final report (6) Provide all experimental records and laboratory notebooks b. Obligations of the customer (1) Provide appropriate technical assistance (2) Organize project review meetings at regular intervals (3) Fulfi ll its fi nancial obligations c. Confidentiality as per separate CDA d. Payment terms and invoicing e. Duration and cancellation f. Arbitration 2. Time and Materials. This is more of a consulting business model. The customer is being charged for the total time spent by the CRO on a particular project. Material used, travel expenses, and other out-of-pocket expenses are also billed to the client. 12.8 PROMOTION Promotion is an indispensable marketing tool in the fine-chemical industry. Three particularities have to be duly considered. (1) as the business transactions occur within the chemical industry, specialized—and not mass—media have to be chosen for conveying the message; (2) the small size of most companies calls for a very careful management of the promotional budget; and (3) in contrast to advertisements of the consumer goods industry, a direct generation of sales cannot be expected. The primary scope of promotion is to cultivate the “brand recognition” of a company. It should give customers the confidence that they have made the right choice. In Figure 12.6, a number of promotional tools are listed in a cost–reward matrix. The underlying consideration was the capability to attract and keep customers. For other objectives, such as attraction of investors or young talents, the ranking would be different. Under these premises, key account management, cultivating personal contacts at all hierarchical levels, publishing articles in trade magazines, and having top executives interviewed by editors of well-known news media are the most cost-effective promotional tools. Personal contacts with existing and potential customers, either as visits to their offices or as tours at the suppliers’ plants, are equally efficient, but more costly. The participation at the leading trade shows, namely, CPhI (Chemical and Pharmaceutical Ingredients), Informex, and Chemspec, are expensive, but they allow a large number of contacts. It is recommended to arrange appointments ahead of time and also to take advantage of the presence of many customers for organizing an evening event. Websites have

NETWORK AND CONTACT DEVELOPMENT

high reward/ low cost

high reward/ high cost

at Booths airs f trade

sing Adverti

mt. c‘t mg key ac / g in k r zines Netwo e maga in trad visits s r ves e le ti c m u ti Ar Custo . exec ents views w v r e te r n e I Custom sites ny web Compa ses s s relea session ess/new r r P te s o P chures ny bro Compa ngs ct listi Produ ly month ” from … “News

low cost/ low reward

low reward / high cost

Figure 12.6

153

Cost-Efficiency of Promotional Tools.

become useful in providing fi rsthand information. In order to be effective, they must be updated regularly and be accessible with a few mouse clicks. The latter is a challenge for large chemical companies, which have a small fi ne-chemical business unit only. Advertising is a somewhat controversial promotional tool. On one hand, a customer will hardly place an order on the basis of an ad; on the other hand, it assures existing customers that they have chosen a valuable supplier. Rather than generating inquiries from new customers, the advertiser will receive a lot of mail from agents looking for an additional principal. The magazines with the largest target groups and thus the fi rst choice for advertising are Chemical & Engineering News, Chemical Week, Scrip, ICIS Chemical Business and Specialty Chemicals Magazine. Company newsletters are the least efficient promotional tool. Recipients will receive dozens of monthly newsletters from all kinds of stakeholders, which usually are discarded immediately. The contents of the promotional material are provided by business and corporate development. As the case may be, they will seek assistance from technical functions. The form of promotional literature and the organization of events are the task of the advertising department in a larger company, respectively of specialized agencies for smaller ones. There is no room for amateurism here any more! The budget for the out-of-pocket expenses for promotion typically represents not more than 0.5% of sales. 12.9

NETWORK AND CONTACT DEVELOPMENT

The network of a fi ne-chemical company constitutes a very valuable intangible asset. As it is the sum of the individual networks of its employees, a con-

154

MARKETING

servative company with long-tenure employees, who are prepared to share their know-how with their peers, is defi nitely in an advantageous position. Apart from enabling direct contact between proficient business partners, it is of great help for resolving problems outside the daily routine and thus a powerful facilitator for the future development of the company. It extends from issues such as obtaining authorizations or tax incentives from local authorities, to resolving legal questions in the United States, or establishing a foothold in China. In the context of the supplier–customer interface, it helps to get a better understanding of the customers’ needs by opening information channels outside the normal business contacts in general and gaining knowledge of the importance of a particular project in particular. Face-to-face customer contacts have been indicated above as the most efficient tool for the safeguarding of existing and acquisition of new business. Customer visits are a three-step effort, namely, preparative deskwork, the visit itself, and the follow-up, which all need careful attention. For details, see Appendix A.7, Checklist for Customer Visit. A tailored 20–30-min company presentation is the centrepiece of the visit. An example for the contents is given in Appendix A.8, Outline for a Company Presentation. Depending on the type (standard vs. exclusive products) and the importance of a business transaction (small single-order vs. major multiyear supply contract), the levels of customer intimacy can vary between purchasing through the Internet with no personal contacts between the parties involved on one hand and frequent face-to-face meetings between the commercial (and other pertinent) functions of the involved companies on the other hand (see Figure 12.7):

Developing and purchasing exclusive products (multifunctional / multi-level)

Preferred Supplier Strategic Alliance

Face-to-face interactions

No personal contacts

Purchasing through internet

Figure 12.7

Ordering from a price list

Purchasing readily available commodities

Levels of Customer Intimacy.

KEY ACCOUNT MANAGEMENT AND COLLABORATIVE RELATIONSHIP

155

As a general rule of thumb, the more important the deal, the closer the customer intimacy. If a research laboratory buys a 100-g flask of sodium bicarbonate from a laboratory reagent company, it will place the order through email. If a virtual pharma company entrusts the total production of the API for its only drug to a custom manufacturer, a strong personal relationship is mandatory. Customer–supplier contacts are facilitated if their respective organizations mirror each other. Various functions of the companies have different frequencies and intensities of contact. They are most intense between the commercial functions. Whereas only these counterparts should discuss business aspects of a project, other functions, such as R&D, logistics, back office, production, legal, and regulatory, are encouraged to have direct contacts regarding specific issues of their particular competence.

12.10

KEY ACCOUNT MANAGEMENT AND COLLABORATIVE RELATIONSHIP

In order to manage the whole universe of customers, a differentiated handling according to their relative importance is advisable. In Figure 12.8, it is represented as a pyramid, which is subdivided into three tiers. Tier I comprises those three to five companies that are considered as preferred customers, primarily on the basis of the importance of their present and future business. Tier I customers generate approximately 75–80% of total sales. They benefit from key account management and are prime candidates for a collaborative cooperation, as explained below. Tier II customers comprise those companies with which there is either regular, albeit not spectacular, business or where there are good prospects for important future business. Companies with

strategic alliance

defend & develop

opportunistic

Figure 12.8

Tier I preferred 3-5

Tier II current & potential ≈ 20

Tier III minor & peripheral > 100

Key account management.

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MARKETING

occasional small deals are grouped in tier III, “minor & peripheral.” They constitute the largest number but the smallest share of total sales. Tier I customers are accommodated by the headquarter (see Section 12.4, on distribution channels); tier I and tier II customers are visited regularly according to a standard annual program; tier III customers, on an opportunistic basis only. The customer mailing list has to be set up in a way to allow a differentiation according to this classification. In due consideration of their importance, key accounts are granted special attention. The preferential treatment consists in 1. Establishing a strategic alliance or collaborative relationship 2. “Three-level contacts” between top and middle managers, and specialists of the two parties 3. Priority in resource allocation (people and assets) 4. Assignment of the most qualified specialists 5. Accommodating special customer needs (product quality, delivery times, terms of trade, type and size of package) 6. Cost transparency 7. Exchange of specialists (typically several days to several months) 8. Joint patents 9. Granting of freebies, such as free offers, free samples, free pilot plant tests, free pilot plant quantities, pilot plant quantities at “industrial scale” prices, execution of nonqualifying projects, capital investment in special equipment, plant adaptation, capacity expansion, new plant construction 10. Cultivating VIP relationships with decisionmakers, such as taking particularly good care of personal contacts at all levels, entertaining in a personalized fashion, keeping fi les on family events and hobbies, and assisting with travel arrangements. Provision 1 above, “establishing a strategic alliance or collaborative relationship,” is the most difficult to implement. In fact, few arrangements of this kind exist between fi ne-chemical companies and their customers. There are two main stumbling blocks. From the perspective of the fi ne-chemical company, it is the request of the customer to have the liberty to switch to other suppliers if these are able to grant better prices or other contractual terms. From the perspective of the customer, it is the desire of the fine-chemical companies to keep the intellectual property rights on discoveries that they make in the context of an alliance. This is especially the case if the customer is an ethical pharmaceutical company (see Chapter 14). Whereas key account management is driven primarily by the supplier, strategic alliances and collaborative relationships are a joint effort to add value for both the supplier and the customer:

KEY ACCOUNT MANAGEMENT AND COLLABORATIVE RELATIONSHIP

157

A strategic alliance, or collaborative relationship, is a close, long-term relationship where customer and supplier work together to secure for each other and the end customer the best sustainable advantage

A well-known example is BASF’s efforts to identify new sources of value for its automotive OEM (original equipment manufacturer) customers, which ultimately led it to install and run their paint shops as an integral part of their customers assembly lines—a far cry from just supplying paint.

The prerogative for a successful collaborative relationship is an explicit will of the partners to assign experts to teams that meet regularly, identify opportunities for synergistic business solutions, and develop and implement programs for their execution. The success of this relationship also depends on a highly skilled collaboration manager who has a deep understanding of the partner’s business and can break down internal and external barriers, align the various players, and drive out waste. The manager has to meet the twofold challenge of aligning the participating companies both individually and collectively across geographies, product families, and business units. As collaborations that are profitable as a whole can adversely affect the balance sheets of individual business units, appropriate metrics have to be developed to adequately compensate the participants. In the abovementioned example of BASF’s paint shop, the business unit “automotive paints” could lose from the new concept, depending on the transfer price for the paint.

BIBLIOGRAPHY

Further Reading P. Pollak and E. Habegger, Fine chemicals, in Kirk-Othmer Encyclopedia of Chemical Technology, 4th ed. Wiley, New York, 2004. Online version www.mrw. interscience.wiley.com The Merck Index, 14th ed. Merck & Co. Inc, Whitehouse Station, NJ, 2006. D. S. Tomlin, ed., The Pesticide Manual, 14th ed., BCPC, Alton, Hampshire, UK, 2006.

Cited Publications 1. D. Aboody and B. Lev, R&D Productivity in the Chemical Industry, New York University, Stern School of Business, 2001. 2. B. Lev, Journal of Applied Corporate Finance 21–35 (winter 1999). 3. M. Angell, The Truth About the Drug Companies, Random House, New York, 2004. 4. R. Bryant, Beautiful South, Scrip Magazine 34–35 (May 2005). 5. A. D. Little, Specialty Chemicals Magazine 18 (May 2005). 6. P. Pollak, Business development in fi ne chemicals—an unfulfi lled promise? Chimica Oggi (Chemistry Today) 29–31 (July/Aug. 2005).

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

158

PART III

OUTLOOK

CHAPTER 13

General Trends and Growth Drivers

The future of the fi ne-chemical industry as a whole depends primarily on two drivers: the destiny of the pharmaceutical industry on one hand and the globalization of the fi ne-chemical industry itself on the other hand. While the pharma(ceutical) industry will remain the major customer segment, its demand for PFCs is becoming more volatile and therefore less predictable. This is not so much the case for biopharmaceuticals (see Chapter 15) and API-for-generics (see Chapter 17), where a “low double-digit growth” can be expected, but for the industry’s main business activity, custom manufacturing of APIs for proprietary drugs. The blurred outlook is due primarily to the uncertainties regarding the outcome of the ongoing reviews of the business model by several big pharma companies and the development of the ailing R&D productivity (see Chapter 16). These factors will determine the future demand for custom manufacturing services. Depending on the—optimistic or pessimistic—views, either an increase or a decrease in demand is possible (see Table 13.1). The ongoing globalization either can develop to the benefit of the emerging Chinese and Indian fi ne-chemical companies or, if these companies do not succeed in becoming partners of the global life science industry, will allow the top-tier Western companies to maintain their “preferred supplier” status. As a surrogate to presenting discrete growth figures for the industry, which would be presumptuous given the wide gap between positive and negative scenarios, the drivers will be discussed in detail in the following chapters. The focus will be on exogenic factors (viz., the demand from pharmaceutical and agrochemical industries) on one hand, and endogenic factors (globalization and biotechnology) on the other hand. Industry experts indicate a growth of 6% per year for the fi ne-chemical industry. This figure is based on an anticipated total revenue growth of 9% per year of the pharmaceutical industry, a third of which results from price

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

161

162

GENERAL TRENDS AND GROWTH DRIVERS

Table 13.1

Key Growth Drivers: Optimistic/Pessimistic Outlook Optimistic

Pessimistic

New drug launches

The new R&D technologies adopted by pharma come to fruition and revert the slump in new product launches

↔

Outsourcing policy

Pharma abandons chemical manufacture of APIs in favor of outsourcing

↔

Pharma does not succeed in “collecting the high-hanging fruit,” and more stringent rules (e.g.,economic ones) further hamper new product launches Pharma reverts to outsourcing only as last resort in case of capacity constraints or hazardous chemistry

increases, which are not passed along to the suppliers, and two-thirds of which represent volume increases. The 6% per annum figure does not take into account the imponderabilities of the future development of the pharmaceutical industry, as outlined above.

CHAPTER 14

Globalization

The fi ne-chemical industry, too, is affected by the global shift of mobile manufacturing and service activities from high-cost to low-cost regions. In a historical perspective, the increasing importance of Asia does not come as a surprise. The Eastern part of the world, especially China and India (Chindia), has held superpower status throughout most of the history of humankind. The twentieth century was an exception. Actually Asia’s share of the world GDP developed as follows over the last 135 years: 1870, 38%; 1913, 25%; 1950, 19%; 1973, 25%, 2001, 37% (of which China, 12%; India, 5%). As Asia is becoming the “workbench of the world,” an increasing number of fi ne-chemical plants and research institutes are emerging in this region. Apart from the developments on the demand side, globalization is the trend with the largest impact on the fi ne-chemical industry. Whereas the United States and Europe are loosing ground, Asia, especially Chindia, with its “high-skill/low-cost” advantage, is the main beneficiary. By any fi nancial measures, such as labor cost, investment cost, manufacturing cost per m 3 per hour, companies in Chindia fare much better. Labor costs in China and India are $4000–$5000 per year as compared with $40,000–$50,000 per year in the United States and Europe. The low labor cost advantage is somewhat mitigated—but by now means offset—by lower labor productivity of $65,000– $70,000 per year and employee in Chindia, as compared with $250,000–$280,000 per year and employee respectively in the USA and EU. Combining both sets 1 of numbers, the ratio is still close to 2–2 : 1 in favor of Asia (see Table 14.1). For an estimation of the price structures of fi ne chemicals in the two regions (see Table 14.2) based on these numbers it is assumed that •

• • •

Cost for raw materials is somewhat, and cost of utilities defi nitely, higher than in Europe. Productivity adjusted labor cost in India is 40% of Europe’s. Capital cost and overhead in India are 50% of Europe’s. Profit is the same in India as in Europe in absolute terms.

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

163

164

GLOBALIZATION

Table 14.1 Regions

Fine-Chemical Industry Labour Cost and Productivity in Key World

Country or Region

Labor Cost ($/year/operator)

Labor Productivity ($/year/employee)

Ratio

USA

40,000

250,000

6

Western Europe

50,000

280,000

6

Eastern Europea

16,000

126,000

8

India

5,000

70,000

14

China

4,000

65,000

16

a

Hungary.

Table 14.2 Europe

Price Structure for Pharmaceutical Fine Chemicals in India and

Cost Elements

detail

Raw materials

Raw materials, solvents, catalysts, utilities

Conversion cost

Direct labor Capital cost (depreciation + interests) Overhead (maintenance, R&D, QA/QC, SHE, M&S, general administration)

Profit

Return on sales before taxes

Total

Ex-manufacturer’s sales price

Europe

India

35 20 10 25

40 8 5 12

55

25

10

10

100

75

The net result of this comparison is a price advantage of about 25% of an Indian producer versus its Western counterpart. Chindia’s involvement in fi ne chemicals goes back to modest beginnings. After World War II, the local chemical industry initially produced only nonregulated intermediates and API-for-generics for the local life science industry. Whereas this situation still holds for China, India, following the entry into the new intellectual property rights (IPR) regime from Jan. 1, 2005, is moving forward to advanced intermediates. In the present arena, Indian finechemical companies do not yet deal directly with the big Western ethical life science companies. They supply active substances to generic houses worldwide and are subcontractors of European fi ne-chemical companies for lower value-added intermediates. Export volumes of Chindia are still modest with regard to both regulated and non-regulated intermediates. Western fi ne-chemical and ethical pharmaceutical companies typically source not more than 10% of their chemical requirements from there. An example is Syngenta, then the world’s number 2 agrochemical company. While Syngenta’s purchasing volume from Asian Pacific countries almost quadrupled in the

GLOBALIZATION

165

2001–2006 period, it is still relatively small, namely 16%, as a percentage of total “raw materials for synthesis” (China 10%, India 3%, Japan 3%). (Source: Syngenta 2006 Supplier’s Day.)

The situation is different for API-for-generics. About 50–60% of the global demand is originating from Asia, either in the form of bulk material or— increasingly—as formulated generics. In order to fight price erosion in APIfor-generics (Aurobinda’s and Ranbaxy’s sales were declining resp. flat between 2005 and 2004!), more and more Indian players focus on offering fi nished dosage forms. The rapidly escalating share of drug master fi les (DMFs) submitted by Asian companies [India 35%, China 8.4% (2005)] points to a continuation of the increase of market share. India is expected to take 30% of the increasing world market for generics by 2007/08. DMFs are generic dossiers fi led with the FDA in order to allow the API to appear in marketed drugs. Thus an API manufacturer fi les just one application for a product that can then be used to support approval of any generic based on that API.

Western life science companies thus far have been reluctant to transfer sensitive technology to Asia, allowing their European suppliers to maintain an important position in the attractive custom manufacturing business for regulated intermediates and active substances for new drugs and agrochemicals. However, as they gain confidence in the reliability and trustworthiness of the top Indian companies, direct business relationships, shortcutting the Europeans, will be established in the near future. Many big life science companies create “Indian hubs” to manage local procurement. In the more distant future, the domestic pharmaceutical and agrochemical markets in China and India will become comparable in size to the ones in major European countries. They will be served mainly by the local companies. A selection of parameters that show the growth of the Chinese and Indian fi ne-chemical industries is given in Table 14.3. Table 14.3

Key Data of the Chinese and Indian Fine-Chemical Industries China 2001

India 2005

FDA-inspected plants

22

DMF fi lings

72

API Domestic ($ billion) Exports ($ billion) Total ($ billion) a

2.2

1.0 3.2 4.2 b

2001

2005 74

30

1.0

280 0.5 1.3 a 1.8

Plus increasing sale of formulated generics. Some statistics give higher figures, but include also amino acids, citric acid, and other commodities. b

166

GLOBALIZATION

As shown in the table, the Indian API industry is smaller than the Chinese in terms of global turnover, but, more advanced, due to a series of factors, such as a minor fragmentation, a more advanced technological background, a major R&D effort, a major attention to IPR observance and a more Westopen mentality. China and India have other advantages, too. Although they now adhere to international patent legislation, they still can develop APIs for existing proprietary drugs and sell them on their rapidly growing home markets. Actually, nine of the top ten Indian pharmaceutical companies are now domestically owned (1994: four) and have their own Fine-chemical divisions. After patent expiration, they can immediately serve the Western marketplaces. Whereas they initially focused on producing simple, nonregulated fi ne chemicals and API-for-generics for countries that did not check regulatory compliance (this included Europe until recently), they now enter into advanced intermediates that have to be produced under cGMP regulations. There are thousands of small fi ne-chemical companies in Chindia. The annual sales of the leading players typically are in the range of several tens of million dollars per year, but if their double-digit growth rates continue, it is a question of only a few years until they join the ranks of the midsize and even large companies (see Figure 10.1). They correspond to the criteria of midsize companies, which have a competitive advantage over fine-chemical units of behemoths, regardless of their location. An example in case is Nicholas Piramal. Whereas its CM business has been in the range of $30–$40 billion since 2003, it is expected to reach $200 million on completing the purchase of Pfi zer’s Mopleth, UK plant. Also, with respect to adopting modern business models, Indian fi ne-chemical companies make rapid progress. Figure 14.1 illustrates the offering of Hikal Ltd., a leading Indian fi ne-chemical company. The ad gives a good insight in the company’s business model, which is fully up to the one of its Western competitors.

In order to get a stronger grip on the Western markets, cash-rich Indian pharmaceutical and fi ne-chemical companies continue on their acquisition spree of Western (European and US) fi ne-chemical and generics companies. It is only a question of time until Chinese companies will follow suit. Between 2004 and mid-2006, more than 20 deals were completed (see Appendix A.9). The drivers are • • •

•

Expansion of the value-added line Acquisition of know-how Creation of an overseas foothold for facilitating business development with European and US life science companies Attractive prices

Apart from these rational justifications, a kind of herd or pack instinct is also gaining ground (“If xy does it, it must also be good for me”), similar to the “irrational exuberance” of the Western M&A activities around the turn of

GLOBALIZATION

Figure 14.1

167

Offering of Hikal Ltd.

the century. In contrast to their global ambitions, there is a marked reluctance among Indian companies to sell out among themselves or merge with other companies. High stakes held by founder shareholders also prevent any hostile bidding in most cases. Both the high market capitalization and the high stakes held by founder shareholders prevent any hostile bid in most cases. Actually, the acquisition of Matrix (see also chapter 10.1) by Mylan, one of the top ten US generic companies, is the only major foreign takeover of an Indian fi ne chemical company. Mylan’s rationale was the backwards integration of the supply chain by a strong API-for-Generics manufacturer. Mylan paid $736 million for 71.5% of Matrix’ shares, corresponding to an striking 22 profit multiple. The exodus of the United States from the global fi ne-chemicals arena is almost complete. Cambrex, Eastman Chemicals, Great Lakes, Honeywell, Reilly Tar, and Solutia all have opted out. The remaining players, such as Ampac (formerly Aerojet), Dowpharma and Sigma Aldrich Fine Chemicals (SAFC), are the exception rather than the rule. Also, European companies had their share of misfortunes with their US subsidiaries. This was the case with, for instance, Bayer/Chem Design, Borregaard/Newburyport, DSM / Catalytica, Greenville NC & Wyckoff, South Haven, Mich.; Lonza, Bayport; Tx & Los Angeles, CA; Schweizerhall, Greenville, SC and Rhodia Pharma Solutions. Europe, the cradle of the fi ne-chemicals industry, is struggling to maintain its leading position with the massive inroads of the “high-skill/low-cost”

168

GLOBALIZATION

Asian companies in a market with modest growth. High labor cost, lack of skilled chemists and chemical engineers, stringent SHE regulations, and inadequate, heterogeneous structures all negatively impair the competitiveness. Guy Villax, CEO of Hovione describes the situation as follows: “With the downturn in business, globalization, and political haggling over REACH, Europe did not do terribly well.”

Over and above the generally unexciting business outlook, European producers must contend with a number of area-specific problems. The implementation of the REACH (registration, evaluation, and authorization of chemicals) legislation in the EU will further increase manufacturing costs. Thirtythousand existing chemicals will have to be registered EU-wide within 11 years at a direct cost between $3.5 to 6.5 billion. It is estimated that the larger chemical companies will be obliged to register 1,000 chemicals each. 60% of these belong to the low to mid volume range, where the impact of the cost would be particularly felt. Within the European Fine Chemical Industry, the CROs and Laboratory Chemical Suppliers (see Sections 2.3 and 2.3) will be particularly affected, as the number of laboratory chemicals could be severely restrained. Another concern relates to the import of APIs from China and India, which are estimated to account for 60–70% of all active ingredients used in generics. They are sourced from thousands of plants. The vast majority has not been inspected with regard to compliance with GMP rules. Not having an elaborate QA/QC system in place, gives them an unfair competitive advantage. This situation should improve with a European Union directive that came into effect on Oct. 30, 2005. After this date, all APIs going into drugs sold in Europe must be from GMP compliant sources. This will be comparable to the situation in the United States, where the API producer has the responsibility for GMP compliance and the FDA does the checking via inspections, about 10,000 per year. European fi ne-chemical companies are still concerned, however, that the new directive lacks teeth and represents little movement toward consistent and uniform enforcement, especially as the EU has no Foreign Inspection Service. On the human resources front, industry insiders are concerned that not enough young people skilled in science and engineering are entering the workforce. Last but not least, the strengthening of the Euro versus the dollar (which is also the reference currency for China and India) puts European companies at an additional disadvantage. The present strategy of many European fi ne-chemical companies, dubbed “horizontal integration,” is to concentrate domestic production on advanced intermediates and active substances for on-patent pharmaceuticals and agrochemicals. Nonregulated agro and pharma fi ne-chemical intermediates are sourced from India and China, either by straight purchasing, manufacturing agreements with selected partners, or from joint ventures, following the rule

GLOBALIZATION

169

“if you cannot beat them, join them.” The horizontal integration allows the European companies to reduce total cost and thus maintain their customer base. The collateral effects are a valuable gain of know-how for the Asian business partners on one hand, and a further reduction of the capacity utilization and thus increase of the unabsorbed fi xed costs for the products, which still are manufactured in-house for the Europeans, on the other hand. Different cooperation models for offshoring fi ne-chemical production are conceivable. They vary mainly with regard to the fi nancial and corporate integration. Four examples are described in Table 14.4. The underlying concept of a manufacturing agreement is that, along with the globalization of the fi ne-chemical industry, Asia will take the lead in intermediates and actives for off-patent drugs and agrochemicals, as well as early stages of proprietary drugs and agrochemicals. Europe and the United States will concentrate on the advanced steps, which require full cGMP compliance and contain sensitive intellectual property. The benefits for the customers of having their Western suppliers offshore early stages of fi ne-chemical manufacture are cost reductions without compromising the quality, trustworthiness, and intellectual property. The model is attractive for Asian companies as long as they lack direct access to the global life science industry, and as long they can benefit from the Western know-how in technology transfer. In both areas, Chinese and Indian fi ne-chemical companies are making rapid progress. The build–operate–transfer model is borrowed from the automotive industry, where parts suppliers install their plants as satellites on the premises of the fi nal assembler of the car. The main advantages are a “zero distance” supply chain and shared infrastructure. A joint venture (JV) allows a combination of tangible and intangible assets of the partners in a way to optimize the combined offering. JVs are popular in the chemical industry, particularly between Western and Chinese companies in China. It has to be pointed out, however, that the of JV failure rate is quite high. This is particularly the case for horizontal JVs, where all activities, such as R&D, production, and M&S, are shared. The main reasons are culture clashes that prevent the expected synergies and confl icts of interests with other activities of the partners. A fi nancial participation allows the acquiring party to become a shareholder. Depending on the percentage of the equity purchased, a minority, majority interest, or even a full ownership of the company is obtained. The high market capitalization of Indian fi ne-chemical companies, with EBTDA multiples of 15 and P/Es typically above 20, basically excludes this model for potential Western partners. It is, however, of great interest to Asian companies eager to get a foothold in the West, allowing them to assess the missing link in their offering, namely, the advanced PFCs for new drugs. All in all, a new world order for the supply chain of pharmaceutical fi ne chemicals is emerging. In terms of geographic distribution, the center of activity will shift from the West to the East, namely from the USA to Europe and

170

A is limited to manufacturing the fi rst steps of an advanced fi ne chemical

Cons

Public relations.

Pragmatic approach to take a business relationship to the “next-higher level” A takes advantage of W’s need to shift manufacturing to highskill/low-cost countries W reduces overall cost of a product Liberty to cooperate with other companies

Pros

a

A standard framework is prepared covering supply contracts for specific fi ne chemicals to be manufactured. by A according to W’s process and sold exclusively to W under a profit- sharing agreement.

Umbrella Manufacturing Agreement

Limited profitability for A

Low risk for A: coverage of fi xed costs ensured from the start W gets control of production A and W are free to conclude similar agreements with other companies

A builds a GMP multipurpose plant. Dedicated exclusively to manufacturing PFCs for W; A provides assets, utilities, and workforce

Build, Operate, and Transfer

Horizontal JV’s are seldom successful JV would compete with core businesses of the partners Value of tangible and intangible assets brought to the JV are difficult to valuate fairly

A can take advantage of W’s customer relations and know-how A and W could exit from custom manufacturing and concentrate on API-for-generics, etc. Positive PR a effect

Fine chemicals are produced in jointly owned assets and sold through a joint marketing organization; all costs and profits are shared on a 50/50 basis

Joint Venture

Financial Participation

W may have to pay a high premium because of high market capitalization of A Confl ict of interest can arise with traditional activities Danger of undue interference of W with A’s way of doing business

Influx of new capital and reduction of A’s fi nancial exposure W participates in A’s growth A can take advantage of W’s know-how Positive PR effect

W takes a participation in the share capital of A

Scenarios for Cooperation between Asian (A) and Western (W) Fine-Chemical Companies

Intent

Scenario

Table 14.4

GLOBALIZATION

171

Table 14.5 Contract Manufacturing Agreements between Indian and European Fine-Chemical Companies Indian Partner

European Partner

Cadila Healthcare

Altana Pharma

2 Protonix (pantoprazole) intermediates

Dishmann Pharma

Solvay Pharma

Teveten (eprosartan maleate) intermediate Nexium (es-omeprazole) intermediate Cozaar (losartan) intermediate

Astra Zeneca Merck Inc. Shasun Chemicals

Glaxo SmithKline Eli Lilly

Manufacturing Agreement

Zantac (ranitidine) API Nizatidine, methohexital, and cycloserine APIs

Source: Citigroup Analyst Report, Oct. 10, 2004.

particularly further to China and India; in terms of company structure, midsize pure players run by the founder shareholders will replace fi nechemical divisions of large, publicly owned conglomerates. The global supply chain for PFCs will develop as follows: Present Global pharmaceutical companies produce APIs captively and/or source advanced, exclusive PFCs from European fi ne-chemical companies. European Fine-chemical companies source basic, nonregulated PFCs from China and India. A description of the present status of PFC sourcing from Asia by Western “big pharma” companies is the following statement from a Pfi zer spokesperson: “Pfi zer is working intensively with Asian based companies to move there the manufacturing of old APIs (= commodities) because of cost containment goals, while the European based companies are mostly used for contract manufacturing on advanced intermediates for New Chemical Entities.”

Future Global pharma companies either (1) produce APIs in-house sourcing basic, nonregulated PFCs from China or (2) source advanced, exclusive PFCs from Indian fi ne-chemical companies (shortcutting their traditional European suppliers). Indian fi ne-chemical companies source basic, nonregulated PFCs from China Indicators of the things to come are half a dozen contract manufacturing agreements that Indian fi ne-chemical companies have concluded with Western big pharma companies (see Table 14.5).

CHAPTER 15

Biotechnology

As described in Section 4.2, traditional biotech processes—namely, biocatalysis and microbial fermentation—are used for the production of small molecules, whereas the modern cell culture methodology allows the production of HMW biopharmaceuticals. A growth rate of 10–15% per annum is expected for the biotechnological contribution, while the average increase of the pharmaceutical market remains below 10%. In terms of technologies, the demanding mammalian cell cultures are expected to grow fastest, followed by microbial fermentation.

15.1

SMALL MOLECULES

The perspectives for an increasing use of biotechnology processes (biocatalysis, microbial fermentation) for LMW fi ne chemicals are promising. Substitution of traditional chemicals by biotechnology processes constitutes the most important means for reduction of manufacturing cost for existing fi ne chemicals. By 2010, 30–60% of fi ne-chemical production processes are expected to comprise a biotechnology step: The perspectives for the future are promising: In 10 to 15 years it is expected that most amino acids and vitamins and many specialty chemicals will be produced by means of biotechnology —BASF news release

15.2

BIG MOLECULES (BIOPHARMACEUTICALS)

Cell culture, particularly mammalian cell culture, processes enable the production of new, hitherto unknown drugs, the biopharmaceuticals. The year 2001 marked a turning point in the development of biopharmaceuticals, insofar as it was the fi rst time that more new biological entities (NBEs) than Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

172

173

BIG MOLECULES (BIOPHARMACEUTICALS)

new chemical entities (NCEs) were approved by the FDA. Today, biopharmaceuticals account for about $55–$80 billion, or 10–15% of the total sales of the pharmaceutical industry. Although their share will increase further, they are unlikely to ever fully replace their traditional counterparts. In many applications small molecules will remain the drugs of choice. Biopharmaceuticals are mostly made by mammalian cell culture technology nowadays. Its main disadvantages are the low volume productivity and the animal provenance. It is conceivable that other technologies, particularly plant cell production, will gain importance in future. A brilliant example for the industrial-scale application of plant cell fermentation is the new process for the production of the anticancer drug paclitaxel developed by Bristol-Myers Squibb (see Figure 15.1). It starts with clusters of paclitaxel producing cells from the needles of the Chinese yew, T. chinensis, and was introduced in 2002. The API is isolated from the fermentation broth and is purified by chromatography and crystallization. The new process substitutes the previously used semisynthetic route. It started with 10-deacetylbaccatin(III), a compound that contains most of the structural complexity of paclitaxel and can be extracted from leaves and twigs of the European yew, T. baccata. The chemical process to convert 10deacetylbaccatin(III) to paclitaxel is complex. It includes 11 synthetic steps and has a modest yield. The pros and cons of an involvement of a fi ne-chemical company in cell culture technology are listed below: Pros •

Rapidly expanding market—growth rate 10–15% per annum (pharma overall 9%). One-quarter of development drugs are biopharmaceuticals. HO

HO

O

HO O

OH

H

• 11 synthetic steps • Seven isolation steps O

O O

O

O

O

NH 10-Deacetylbaccatin III (natural product)

O

OH

O O O OH • No synthetic steps • Purified by chromatography and crystallization

Figure 15.1 Plant cell fermentation process for paclitaxel. Source: Bristol-Myers Squibb.

HO O

H

O O

O

Paclitaxel

O

174

BIOTECHNOLOGY •

• •

•

•

•

• •

• •

The likelihood of successfully developing a new biopharmaceutical is significantly greater than in traditional drug development. Because interactions, side effects, and carcinogenic effects are rare, 25% of biopharmaceuticals that enter phase I of the regulatory process eventually are granted approval. The corresponding figure for conventional drugs in no more than 6%. Traditionally large share of outsourcing. Small number of custom manufacturers with industrial-scale manufacturing capabilities in this demanding technology, primarily Boehringer-Ingelheim, Germany; Lonza, Switzerland, and Nicholas Piramal, India (through the acquisition of Avecia) as opposed to >1000 fi ne-chemical companies using traditional chemical synthesis. Asian competition is lagging behind. Examples for emerging companies are Biocon, India and Celltrion, South Korea. Same customer category: life science, especially pharmaceutical industry. Similar business types: custom manufacturing of proprietary drugs, biogenerics. Similar regulatory environment: FDA regulations, especially GMP. Basically similar manufacturing processes: raw-material preparation, reaction, isolation, purification, workup. Existing infrastructure (utilities, etc.) can be used. Growing demand, lack of suitable production capacity, limited competition → a seller’s market

Con’s • High entry barriers because of demanding technology. The construction of a plant for production of biopharmaceuticals by cell culture fermentation takes about 4–6 years, because it is so technologically, legally and scientifically demanding. Therefore, it must be planned even before the phase II studies begin. • High fi nancial exposure (see Table 4.4): (1) high capital intensity (“massive investments are needed at a time when chances of success are still very low” [4]) and (2) risk of batch failures (contamination). • As opposed to the biopharmaceutical startups, the newly emerged big biopharmaceutical companies start adopting the same opportunistic outsourcing policy as “big pharma.” Thus, Amgen, Biogen/IDEC, Eli Lilly, Johnson & Johnson, Medimmune, Novartis, Roche/Genentech and Wyeth Pharmaceuticals have begun investing heavily in in-house manufacturing capacity. The trend is also favored by the fact that cell cultures produce the API directly. Intermediates are not isolated. This is countercurrent to the industry’s preference to keep the last synthetic step in-house. Overall, the ratio between captive and third-party man-

BIG MOLECULES (BIOPHARMACEUTICALS)

•

•

175

ufacturing is approaching the 60/40 ratio prevailing in the traditional pharma industry. In terms of process technology, biotechnology differs substantially from traditional chemical synthesis. Biopharmaceuticals cannot be produced in conventional multipurpose fi ne-chemical plants. As shown in Table 4.4, the specifications of the two plant and process types are almost totally different. Therefore, the entry barriers are high. New developments in expression systems for mammalian and plant cell technology could reduce capacity requirements substantially. Therefore additional production capacity might not be needed.

Boehringer-Ingelheim stated that a monoclonal antibody titer of more than 4 g/L has been reached in process development. Along the same lines, Lonza had announced that it has increased the product titer from 2–3 to 4–5 g/L. •

•

New transgenic production systems are emerging that possess the potential to become industrially successful (e.g., transgenic moss, lemna, fungal or yeast expression systems, transgenic animals and plants) Legislation and regulation of biotechnology is not well defi ned yet and leads to differences in interpretation and other uncertainties.

The inherent risks of the mammalian cell technology caused several companies to opt out of mammalian cell technology or to substantially reduce their stake. Examples are Cambrex and Dowpharma, USA; Avecia and DSM, Europe. In conclusion, biocatalysis should be, or become, part of the technology toolbox of any fi ne-chemical company. Cell culture fermentation, on the other hand, should be considered only by large fi ne-chemical companies with a full war chest and a long-term strategic orientation.

CHAPTER 16

Ethical Pharmaceutical Industry/ Custom Manufacturing

Pharmaceutical companies, primarily “big pharma,” still maintain their position as the most profitable industry. The combined return on sales of the nine largest pharmaceutical companies was just over 20% on an aggregated turnover of $218 billion in 2005. The impressive performance is due primarily to the industry’s capability to translate the R&D successes of the 1970s, 1980s, and 1990s into sales of blockbuster drugs. Now that the “low-hanging fruit” (cures for acute diseases) have been harvested, it is facing serious challenges for the future and the continuation of the golden area is in jeopardy. With increasing government pressure on drug prices, blockbusters only dripping out of the dried-up pipelines, safety problems, and a deteriorating public image, the challenge of satisfying all stakeholders, shareholders, and patients alike becomes huge. The major issues the industry is confronted with are summarized in Table 16.1. The fi rst two entries listed in the table, namely, “Obsolescence of the big pharma business model” and “Slump in R&D productivity,” are of particular relevance to the fi ne-chemical industry and are dealt with in more detail in the following two sections. They impact the outsourcing policy and consequently the demand for new PFCs. The problems of the pharma industry have not gone unnoticed by the general public. They have provoked a paradigm change in public perception—from “most admired” in the 1990s to the bottom of public esteem. Big pharma increasingly face a confl ict between the goals of corporate wealth and public health: It is far more influenced by Wall Street than the public’s need for safe, effective and affordable medicines. —Paul J Reider, VP for Chemistry Research, Amgen

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

176

RESTRUCTURING AND OUTSOURCING

Table 16.1

177

Challenges for the Pharmaceutical Industry

Challenge

Description

Obsolescence of the big pharma business model

Big pharma companies have to foster two opposite cultures at the same time, namely creative, intellectually intensive research “à la Hollywood” on one hand and capitalintensive lean production “à la Detroit” on the other hand.

Slump in R&D productivity

Despite a high and rapidly raising R&D expenditure, the number of NCE approvals dropped from an all-time high of 51 in 1997 to an all-time low of 15 in 2005

Government pressure on healthcare costs and “Fourth hurdle” for new drug approvals

The three main initiatives taken to curb the cost of healthcare are 1. Obligation of physicians to prescribe generic equivalents to proprietary drugs after patent expiration. 2. Price control on prescription drugs; Japan, the world’s second largest drug market, has led the way by imposing yearly reductions on drug retail prices 3. Authorities in many countries no longer accept high prices for new drugs with only a marginal therapeutic benefit improvement; the British NICE a already has included economic considerations in their new drug approval process; the FDA and EMEA might follow suit

Loss of patent protection

About one third of the 200 top-selling drugs, accounting for aggregated sales of $120 billion in 2005, lose patent protection in the 2007–2012 timeframe

Contraction in market exclusivity

The most lucrative period in a drug’s lifecycle—that of market exclusivity for a pioneer drug—decreased by 90% from a peak of more than 10 years in the 1970s to 1.2 years during the 1995–1998 period

a

National Institute of Clinical Evidence.

16.1 RESTRUCTURING AND OUTSOURCING The total control of the whole supply chain, from discovery research and rawmaterial sourcing all the way to postlaunch monitoring of patients, has been a key element of the conventional business model for the pharmaceutical industry, particularly big pharma. In view of the challenges facing the industry, the question arises as to whether this business model is sustainable in the long run. Other industries, such as automobile companies, have shown the way to go. They are becoming “vehicle brand owners” concentrating on the design and marketing of the cars. The car producers have reduced their share of the added value to 35%. As the parts suppliers spend more on R&D (6–9%), than the care producers (4–6%), the share will diminish further.

178

ETHICAL PHARMACEUTICAL INDUSTRY/CUSTOM MANUFACTURING

In pursuit of the “total control of the supply chain” dogma, the industry has been applying an opportunistic outsourcing policy thus far with regard to chemical manufacturing of PFCs, despite compelling fi nancial reasons for outsourcing brought forward by independent experts (see Section 10.2). Three elements have supported this notion: (1) the low impact—typically <10%—of the COGS in the overall cost structure of a drug; (2) the tax advantages for the local production of PFCs offered by countries like Ireland, Puerto Rico, and Singapore; and (3) underutilized in-house production capacity. To add to the pain of the fi ne-chemical industry, several pharma companies, including Eli Lilly, BMS, Merck KGaA, Novartis, Roche/Genentech are expanding their chemical and biotechnological manufacturing capacities. Others, such as Abbott, Bayer HealthCare, Boehringer-Ingelheim, Pfi zer (through the acquisition of Pharmacia Upjohn), and Sanofi-Aventis, are developing their own custom manufacturing business. The imminent profit squeeze might change the thinking of the pharma industry and induce it to follow a famous statement of Peter Drucker: “The fundamentals of all business are innovation and marketing.” Major companies, such as BMS, Merck Inc., Roche, Pfi zer, and Schering, have cost reduction programs underway that go far beyond cutting isolate expense items. Pertinent manufacturing strategy reviews will are be part of the measures to restore profitability. Pharmaceutical companies are becoming more cost-sensitive with regard to in-house production. In order to reduce costs throughout the value-added chain, the industry will recognize that “just make it and don’t get us into trouble” is no longer a sustainable manufacturing strategy and recognize the benefits of the “buying instead of making” their drug substances, at least once the underutilized inhouse production capacities are fi lled. Pfi zer, for example, is embarking on a restructuring program of $4 billion. In the context of a program to reduce the number of plants from 93 (status as of 2003) to 66, the company sold its large manufacturing plant in Cruce Da Vila, Puerto Rico, where the API for Celebrex (celecobix) was made, to the biopharmaceutical fi rm Abaxis for $32.5 million. Abaxis will now lease the chemical raw-material plant back to Pfi zer for at least a year to continue the manufacture of the Celebrex API.

This “sale and back-lease” model is applied by many other pharmaceutical companies. It enables the company to dispose of assets without being forced to lay off employees. The net effect for the industry as a whole is that statistically, the share of outsourcing is increasing. However, the problem of underutilized capacity persists. For a fi ne-chemical company, the acquisition of an API plant from a pharma company is problematic. Once the supply contract, offered by the pharma company as an incentive for the acquisition, expires, the problem arises as to what the capacity should be used for. This is all the more the case as the plants usually are designed to manufacture just one product and therefore are not truly multipurpose. Last but not least, the plants have been run as cost centers and the implementation of a lean production

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will encounter resistance from the workforce. For these reasons, sales of API manufacturing plants are sluggish. As ultima ratio big pharma is also recurring to plant closings.

16.2

R&D PRODUCTIVITY

In order to safeguard a healthy development of the pharmaceutical industry, the revenue drain from drugs coming off patent (see Table 17.1) should be overcompensated by new drug sales. Unfortunately, this is not the case—by a far cry. From an all-time high of 59 NMEs (new molecular entities), 51 of which were NCEs (new chemical entities), approved by the FDA in 1997, the number dropped to an all-time low of 18 NME’s (15 NCE’s) in 2005. The situation looks even more alarming if one considers the truly innovative new drugs only. In the period from 1998 to 2002, 415 new drugs were approved altogether. Of those, 133 (32%) were NMEs; the others, mere variations of old drugs. And of those 133, only 58 were priority review drugs. That averages out to no more than 12 innovative drugs per year, or 14% of the total (see Ref. 3 in Part II). “To be a genuine advance, a new medicine . . . has to meet patients’ needs better than anything else that’s available” Source: Roche Annual Report 2005, p. 12

The agony of new drug launches in not caused by a reduction in R&D spending. Quite to the contrary, a rapidly increasing gap has developed between R&D spending, which rose from $33 billion in 1998 to $72 billion in 2005, and stalling new drug launches. This not only demonstrates the slump in pharma research productivity but also causes a dramatic increase in the development cost per new drug. Whereas the figure was less than $100 million per commercialized drug 20 years ago (i.e., in the mid-1980s), it has increased to $400 million or even to $800 million, if “lost opportunity costs” are also considered, by the beginning of the twenty-fi rst century. Only large-selling drugs can allow the pharma industry to recover these enormous expenses. As a consequence of “big pharmas” decreasing R&D productivity, an increasing number of new drugs are licensed-in from startup companies. For instance, 50% of big pharmas’ R&D budget is being spent on the development of drugs licensed-in from virtual pharma companies, independent research organizations, and so on. This huge investment is due to the lack of innovation stemming from their own internal R&D efforts, requiring these companies to actively search for new products from third parties, as well as drive further M&A activities. As new biotech-originated drug candidates for therapies targeting diseases such as obesity, central nervous system disorders, and cancer advance into clinical trials, the importance of partnerships between drug fi rms and small biotech specialists becomes more evident.

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ETHICAL PHARMACEUTICAL INDUSTRY/CUSTOM MANUFACTURING

It is expected that the top 10 pharma companies will generate more than half of their sales from products derived from other organizations’ R&D efforts in the future. Truly innovative research is also performed at governmental agencies, such as the National Institute of Health (NIH) in the United States. In an effort to revert the negative trend in innovation and productivity, Glaxo SmithKline has created the Centres of Excellence for Drug Discovery (CEDDs), in January 2004. They are focused on one therapeutic area each, such as oncology or respiratory disease. Individual CEDDs can start phase II development without recourse to any other body —Kenneth Batchelor from gsk

In line with the raise in pharma R&D spending, the total number of drugs in development in the global pharmaceutical industry has increased by 30%, from 3737 to 4826 in the 2001–2005 period (see Figure 16.1). The development within the individual phases, however, clearly confi rms the slump in pharma R&D productivity. Whereas the number of drugs in preclinical development increased by 45%, the number went down to 38% for phase I, and turned to a negative growth of −1% for phase II and −24% for phase III! The negative trend continued for the transition from phase III to launched drugs. Whereas 85% of the drugs that had passed phase III were commercialized in 2001, the number dropped to 50% in 2005. According to other experts, cumulative drug development success rates (phase I through approval) within major pharma have declined in recent years, from roughly 18% between 1996 and 1999 to 9% from 2000 through 2003. The fi nancial community is airing growing concern that the modern techniques for drug discovery and development, whereby researches disregard 6000 5000 324

4000 3000 2000 1000

324

332

796

801

482

500

2135

2277

2547

2001

2002

2003

884

232 744 597

248 788 690

584

Phase III Phase II Phase I pre-clinical

2950

3100

2004

2005

0

Figure 16.1 Development pharma pipeline, 2001–2005. Note: Rough estimate, biologics projects are excluded. Sources: Pharma projects; trend analysis, McKinsey, IMS Health, Degussa market information.

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natural sources and create and rapidly test a million or more chemical compounds for possible pharmaceutical activity, have failed to make good on their promise of bringing a flood of medicines to patients and profits to investors. Actually, these new technologies have yet to yield appreciable results in late-stage new molecular entities. There are several root causes for the slump in pharma productivity: •

•

•

•

•

•

•

•

•

The complexity of modern drug development. On its evolution from trial and error to systematic search for new drugs, the whole process has become extremely complex. Comparing it to the mechanical industry, it is like having a very well furnished toolbox on one hand and a very complicated machine with an unidentified defect on the other hand. The twofold challenge is to identify the site of the defect and to fi nd the right tool to repair it. Tighter, and to a large extent self-imposed, rules for the quality of the safety profi le of new drugs. Focus of the big pharma industries on developing we too blockbuster drugs in largely exploited therapeutic areas and neglect of acute diseases. High entry barriers in new therapeutic categories a.k.a. “high hanging fruit” like Alzheimer’s disease, metabolic syndromes, multiple sclerosis, and which develop over many years. The growth in launches of new biopharmaceutical entities has not compensated for the decline in new chemical entities. The powerful marketing engine of big pharma allows them to sell mediocre products. Culture shock within the R&D divisions of the megamerged pharma companies and a brain drain of talented young researchers. The “double exposure” on innovation and lean production of pharma’s present business model. New technologies for drug development have yet to yield appreciable results in late-stage compounds. Genomics are turning out great numbers of new, potentially useful drug targets; high-throughput screening allows the evaluation of large libraries of new molecules produced with automated laboratory reactors—but essentially have only created a massive amount of data so far. It will take several more years to produce commercial drugs.

Hereafter, five elements of modern methodology for drug development are examined: 1. Combinatorial Chemistry and High-Throughput Screening (HTS). The input for new drugs in development is determined by the number of new molecules made available as a whole—“libraries”—on one hand and “targets”

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ETHICAL PHARMACEUTICAL INDUSTRY/CUSTOM MANUFACTURING

for drug action on the other hand. Modern combinatorial chemistry (combichem) enables the preparation of large libraries of tens of thousands or even millions of potential lead compounds—still a “needle in a haystack” compared to the 1010 –1015 small molecules that theoretically can be made from the four elements C, H, N, and O. High-throughput screening (HTS) allows screening of these libraries for drug candidates. It emerged from a convergence of low-cost computer systems, reliable robotic apparatus, sophisticated molecular modeling, statistical experimental strategies, and database software tools. About a decade ago, the drug industry embraced combichem and HTS. The idea was that the rapid evaluation of large numbers of drug candidates might be easier and more efficient than the often tedious and time-consuming process of designing drugs one by one or screening compounds in small numbers and would offer a new way to discover drugs. However, both methods turned out to be a disappointment so far. They showed few tangible results, and the promised productivity enhancement has not materialized. The supporters say that the modest number of successes is due to the long development time for a new drug, rather than the inefficiency of the technology. It is, therefore, too early to discredit combichem/HTS for failure to produce new drugs. In small molecules, including proteins but excluding antibiotics, a major impact of HTS can still be expected. 2. Genomics and Personalized Medicines. The Human Genome Project, led by the (US) National Human Genome Research Institute, part of the National Institutes of Health (NIH), was an international research effort to sequence and map all the genes—together known as the genome—of members of Homo sapiens. It culminated in the completion of the full human genome sequence in April 2003. It gave the international scientific community the ability, for the fi rst time, to read nature’s complete genetic blueprint for building a human being. The challenge now is to discover the genetic basis for health and the pathology of human disease. In this respect, genome-based research will eventually enable medical science to develop highly effective diagnostic tools, to better understand the health needs of people on the basis of their individual genetic makeup, and to design new and highly effective treatments for disease. Individualized analysis on each person’s genome will lead to a very powerful form of preventive medicine. It will be possible to diagnose risks of future illness on the basis of DNA analysis. Through understanding of the underlying “chemistry” of diseases like diabetes, certain forms of cancer, heart disease, or schizophrenia, a whole new generation of drugs that are much more effective and precise than those available today will be found at the molecular level. Experts question whether it makes sense to discard completely the traditional cell- and organism-based strategy and to take the medicinal researchers out of the loop at a crucial phase in new drug discovery, replacing their ingenuity and intellectual capacity with the programmed mechanics of robots. As it takes more than a decade for a pharmaceutical company to conduct the clinical studies needed to win marketing approval from the FDA, most new drugs based on the completed genome

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are still perhaps 10–15 years in the future, although more than 350 biotech products—many based on genetic research—are currently in clinical trials, according to the Biotechnology Industry Organization. 3. Biomarkers. Biomarkers are measurable substances, such as proteins or metabolites, whose presence or concentration varies in response to a drug. Tools in the biomarker area will allow us to determine subsets of diseases, to predict individual patients’ responses to treatment, to screen out people at high risk for an adverse event, and to monitor people during therapy so that they can be taken off a drug quickly if they are not responding to it. Thus, biomarkers will not allow discovery of new drugs per se. They can indirectly influence the R&D productivity by enabling physicians to prescribe drugs only to low-risk patients. Therefore, they will allow improvement of the risk– reward profi le of a new drug. 4. Informatics. Many initiatives are underway to involve information technology (IT) in managing the enormous flow of data produced alongside drug development, such as combichem/HTS and genomics. NIH has identified bioinformatics as one new technological frontier in drug research: reengineering the clinical phase of drug development. Examples of this are • The project supported by seven big pharma companies to share internally developed laboratory methods to predict the safety of new treatments before they are tested in humans • The initiative-pooling experiences of big pharma companies, academic research, and biotech companies • FDA’s Critical Path to New Medicinal Products, also known as the Critical Path Initiative, aimed at networking clinical trials through integrative informatics

Before there is any chance of such a network coming to fruition, with IT paving the way to a global research network, a nonproprietary attitude toward research will have to emerge. 5. New Drug Approvals by Regulatory Bodies. Side effects developed with approved drugs that have shown up after launch have resulted in a number of clamorous product withdrawals, such as Bayer’s Lipobay (cerivastatin), Janssens’s Propulsid (cisapride), Merck’s Vioxx (rofecoxib), MerrellDow’s Seldane (terfendadine), Sankyo/Warner-Lambert’s Rezulin/Noscal (troglitazone), Wyeth’s Fen-Phen (the nickname for a combination of the drugs fenfluramine and phentermine; each of these medications had been approved by the FDA to be taken separately to treat obesity). These incidents have prompted the FDA to impose stricter requirements for drug assessment and approval. The observers of the doldrums in pharma innovation have raised the question as to whether new criteria applied are a root cause for the slump in new drug launches. Contrary to common belief, the FDA has not become more restrictive regarding New Drug Applications

184

ETHICAL PHARMACEUTICAL INDUSTRY/CUSTOM MANUFACTURING

(NDA) approvals. Since 1991, the FDA has persistently approved 70–80% of all NDAs submitted. Although the “quality bar” at the FDA has clearly been raised as clinical standards of care have improved, FDA is certainly not as much of a “bottleneck” as critics claim. The reason is that prior to deciding on an NDA submission, the pharma industry itself looks very carefully at the approvability of a developmental drug. The situation is likely to change, however, when economic criteria will also be taken into account in the drug approval process. The National Institute for Health and Clinical Evidence, UK (NICE), an independent organization responsible for providing national guidance on promoting good health and preventing and treating ill health, has pioneered the aspect of economy in drugs assessment, fi rst elating to reimbursements by National Health. The German “Institut für Qualität, Wirtschafltichkeit, Gesundheit” (IQWIQ) and about 40 more countries have similar institutions for implementing health technology assessment (HTA) methods. Along the same lines, a European Union initiative began last year (2006) to draw up common standards on HTA methods, which can increasingly make or break a new drug, even if it primarily addresses only the question of reimbursement by public health insurance. The hope is to bring greater rationality and speed to a process also known as the “fourth hurdle” for treatments to win approval, after safety, efficacy, and quality. Examples of drugs, respectively treatments, under investigation are • The use of Genentech’s Herceptin (trastuzumab) to treat early breast cancer, at a cost of close to ∼$50,000 per year per patient. • Pfi zer’s Exubera insulin inhalator treatment. It costs more than $2000/year. NICE sees no justification for reimbursing a 3 times higher treatment cost just for the convenience of inhaling rather than injecting the insulin. • In Germany, the IQWIG has ruled that there are no grounds for the clinical superiority of Lipitor claimed by Pfi zer to justify a higher price than for generic “statins.”

As things stand today, there are no shortcuts in drug development, regarding neither the overall development time—typically 12–15 years—nor the early identification of dropouts. The pharmaceutical industry will continue to have to contend with failure rates and timelines to bring products to market exceeding industry standards by far. Prominent scientists of the pharma industry, such as Malcolm McCoss, Merck; John Lamattina, Pfi zer; Robert Ruffolo, Wyeth; Steven Paul, and Lilly Research Labs; who were interviewed by Chemical & Engineering News [1], did not provide a clear answer to the key question, which stakeholders, shareholders, and patients alike, are most worried about: Will the new tools of pharma R&D allow the industry to also collect the “high-hanging fruit,” namely, new therapeutic categories like Alzheimer’s disease, different forms of cancer, metabolic syndromes, and multiple sclerosis, which develop over

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many years, and revert the downward trend in new drug launches that has been continuing for almost 10 years now? A recent report on the discovery of a new antibiotic by Merck scientists provides a good insight into the difficulties of developing a new drug: “The Merck team . . . found the molecule, called platensimycin, by fishing it out of a library of 250,000 natural products.” “The molecule is produced by Streptomyces platensis, a bacterium isolated from a South African soil sample.” The formula, which contains (among other things) an aromatic and an oligocyclic moiety, is so complicated that a chemist who is not an expert in nomenclature cannot determine the chemical name. The structural formula is C 23H 25O7: “The researchers custom-designed a screening assay to search for a FabF inhibitor in the extracts. They engineered a strain of Staphylococcus aureus to produce antisense RNA that gives them tight control of the amount of FabF produced.” “Because the drug is rapidly cleared from the body, it requires continuous intravenous delivery.”

It is conceivable, however, that the pharma research productivity does pass through a trough and that new drug launches will increase once the newly merged pharmaceutical companies become fully operational and the new R&D tools come to fruition. Two companies, Pfi zer and Wyeth, have communicated quantitative numbers for the improvement of their R&D productivity that they expect from reengineering. There are 142 NCEs in the pipeline at Pfi zer. First clinical tests of compounds in humans where initiated every 2 weeks, and phase II studies were launched every 24 days in 2004. Pfi zer’s most aggressive goal is to fi le 20 new drug approvals (NDAs) over a 5-year period by 2006; 12 have been fi led so far since 2001. Through a series of efficiency improvements, Wyeth expects to introduce 12 new drugs to early-stage development per year, up from an average of about 3. In addition, Wyeth plans to submit 8 investigational new drug (IND) fi lings, up from 2; begin phase III trials on 3 new candidates per year, and market 2 new drugs per year.

CHAPTER 17

Generics Industry/API-for-Generics

Approximately $120 million of aggregated sales of the “top 200” drugs (reference year: 2005) will fall into the public domain within the 2007–2012 period (see Table 17.1). The largest-selling drugs affected in each year are J&J’s Risperdal ($3.6 billion) and Wyeth’s Effexor ($3.5 billion) in 2007, AstraZeneca’s Nexium ($4.6 billion) and gsk’s Advair ($5.5 billion) in 2008, Pfi zer’s Lipitor ($12.9 billion) in 2009, and Wyeth’s/Altana’s Protonix/Pantozol ($3.4 billion) in 2010. These six drugs alone generated revenues of more than $30 billion in 2005. As they are also producing above-average profits, the effect on the bottom line of the affected companies, Pfi zer in particular, will be substantial. The $120 billion figure of proprietary drugs facing patent expiry must not be mistaken for the business potential for the embedded API-for-generics. Assuming a price drop of 75% for the formulated drug (see Figure 12.3), a 50% slump of market share, and a 15–20% API share of the price of the formulated drug, one arrives at a total API-for-generics market value of 2–2.5% or approximately $2.5 billion [$120 billion × (0.020–0.025)] for the year 2012, when all the patents will have expired. The number represents 50% of the present free market for API-for-Generics (see Table 9.3). As about 70 products will loose patent protection, sales of about $30 million on a per product basis can be expected. The sales potential for the individual fi ne-chemical company preparing the launch of a new product is further reduced by the strong competition. The FDA gets about 10 ANDAs each time a patent expires. The price collapse is a consequence of the loss of the monopoly position due to the patent expiry and a lower cost base of the generics industry; the slump in market share is caused by the lack of promotional support and the launch of new drugs in the same therapeutic category. As the generics market becomes more and more dominated by distributors and wholesalers (see the recent deals with supermarket chains), the position of API suppliers within the whole supply chain is weakening. Within the $120 “top 200” proprietary drugs that face patent expiry, there is also $20 billion worth of biopharmaceuticals. Blockbuster biopharmaceuFine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

186

187

21

Total

Advair Nexium Topamax Depakote Casodex Genotropin Keppra Cymbalta Neurontin Serevent Altace

Product

18

5.5 4.6 1.7 1.1 1.1 0.8 0.7 0.7 0.6 0.6 0.6

$ billion Lipitor Cozaar/ Hyzaar Aciphex Lexapro Valtrex Arimidex Xenical Epivir Lidoderm VFEND

Product

2009

25

13.0 — 3.0 2.4 2.0 1.3 1.2 0.5 0.5 0.4 0.4

$ billion Protonix Taxotere Aricept Levaquin & Floxin Gemzar

Product

2010

10.0

3.4 2.0 1.9 — 1.6 1.3

$ billion

2011

Plavix Zyprexa Protonix Seroquel Avandia/ Avandamet Actos Actonel Atacand Tricor Lescol Avelox Xeloda Femara Alimta Magnevist

Product

Note: 2005 sales of proprietary drugs loosing patent protection during the 2007–2012 period = $120 billion. Sources: MedAdNews 39–42 (June 2006); FDA Electronic Orange Book.

3.6 3.5 3.2 2.2 1.7 1.7 1.2 0.9 0.7 0.5 0.5 0.5 0.4 0.4

$ billion

2008

Patent Expiries of Top 200 Drugs, 2007–2012

Risperdal Effexor Fosamax Zyrtec Prilosec Toprol XL Zometa Camptosar Clarinex Provigil Visudyne Exelon Xatral Kytril

Product

2007

Table 17.1

29.0

6.3 4.2 3.4 2.9 — 2.4 2.3 1.7 1.0 0.9 0.8 0.7 0.6 0.5 0.5 0.4

$ billion

Diovan Singulair Lovenox Allegra Crestor Evista Kaletra Detrol Premarin Sustiva

Product

2012

17

3.7 3.0 2.7 1.7 1.3 1.1 1.0 1.0 0.9 0.7

$ billion

188

GENERICS INDUSTRY/API-FOR-GENERICS

ticals scheduled to come off patent in the next few years include erythropoietins, interferon, granulocyte-colony-stimulating factor (G-CSF), and human insulin. However, apart from the fi nancial and technical hurdles that biopharaceutical production must overcome, getting FDA approvals for biogenerics also means running the gauntlet. Primarily because the regulatory framework has not been established yet in the United States, only one “biogeneric” produced in living cell lines has been launched so far. Sandoz got clearance from both the EMEA and FDA to commercialize the growth hormone omnitrope, which is “biosimilar” to Pfi zer’s proprietary Genotropin. In order to curb imports of APIs, from mainly Asian producers, which do not comply with GMP standards, the European Union has issued EU directive 2004/27/EC in Q3 2005. The legislation states that from now on it will be the responsibility of the holders of drug-marketing authorizations or pharmaceutical companies—and specifically of the relevant “qualified person” within these companies—to ensure that their APIs comply with GMP standards. A written and signed declaration certifying that each API supplied is made under GMP to the requirements of the international regulation ICH Q7 as described in the drug master fi le fi led with a country’s health authority or with the European Directorate for the Quality of Medicines is requested henceforth. Obviously, it now all depends on how rigorously the new directive is implemented! Another regulatory provision aimed at eliminating a competitive disadvantage of European API producers refers to the European Supplementary Protection Certificate (EPC). Adopted in 1992, it prevented de facto Europebased API producers from being qualified as bulk sources before the effective marketing exclusivity date in their home country. By extension of the Bolar Roche Provision in the Waxman–Hatch Patent Restoration Act to Europe, the situation will be remediated.

CHAPTER 18

Agro Fine Chemicals

Agrochemicals have traditionally been viewed as less attractive than pharmaceuticals for fi ne-chemical companies. The need for food will obviously increase in direct proportion to population growth. It is expected that the arable land will diminish by 10% until 2020, whereas the world population will grow by 25%. This, however, does not necessarily mean an equal increase in the demand for agrochemicals. Actually, the expanding use of pest-resistant, gene-manipulated crops (60% of the worldwide soybean acreage is GM) will have a negative effect on the demand for traditional pesticides. As “rich countries do not need agrochemicals, and poor countries cannot afford them,” the demand for pesticides is expected to grow at an annual rate of only 1.8% over the next 10 years (i.e., until 2016). It has been, however, unnoticed by many that a considerable substitution is taking place. Approximately 40% of older products have been removed from the market, leaving room for the introduction of new active ingredients. The industry has not suffered from a slump in new product launches as the pharmaceutical industry. The number of NCE introductions has remained fairly stable at around 10–15 per year over the past 20 years. This is a very impressive number compared with the new launches of the pharma industry, which spends much more on R&D. Old, large-volume products with an unfavorable risk/reward profi le are replaced by newer, safer, more specific, and more active ones. At present there are more than 100 new agrochemicals in advanced development. Whereas the old products were manufactured in multi-10,000 tons per year in dedicated plants, the requirement for the new molecules is in the range of several hundred tons per year. They also require more production steps, command higher unit prices, and are manufactured in multipurpose plants, which is the domain of the fi ne-chemical industry. Typical examples for this transition are given in Table 18.1. With the Food Quality Protection Act, calling for reevaluation of the safety of more than 10,000 pesticides, the U.S. government is expediting this trend. In Europe it is estimated, that out

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

189

190

AGRO FINE CHEMICALS

Table 18.1 Substitution of High-Volume/Low-Activity by Low-Volume/HighActivity Agrochemicals Conventional Products a Category

Group

Application Rateb

Modern products Group

Phenoxies (older) Cyclohexanediones (older) Triazines

500–2,500 200–500

Imidazolines c Sulfonlyureas c

200–3,000

Phenoxies (newer) a Cyclohexanediones (newer) c

Insecticides

Organochlorines Organophosphates

100–10,000 200–5,000

Pyrethroids a Neonicotinoids c

Fungicides

Dithiocarbamate Morpholines

250–3,500 750–1,000

Triazoles a Strobilurins c

Herbicides

Application Rateb 50–100 10–100 100–200 50–100 5–250 5–200 5–250 50–200

a

Key patents expired prior to 2005. Grams per hectare. c Key patents expiring after 2005. Source: Agranova. b

of the well over 800 compounds approved in 1993 only 200–240 will remain on the market after 2008. On the other hand, generic agrochemicals continue to gain ground in Asia Pacific and South American countries.

CHAPTER 19

Contract Research Organizations CROs provide tailored product development services to the chemical—in particular life science—industry, allowing their customers to manage product development more efficiently and cost-effectively. This is a rich reservoir of opportunities. Not only has the R&D expenditure of the pharmaceutical industry in particular been increasing at an annual rate of close to 15%, but also the modern tools of pharmaceutical research are creating an enormous amount of new lead compounds (see Section 15.2). Furthermore, there is a trend toward more outsourcing of noncore R&D activities in the life science industry. The attractiveness of offshoring CRO activities depends on the particular task to be performed. As illustrated in Figure 19.1, custom synthesis, where the competitive advantage of Indian CROs comes to full fruition, is part of the “high attractiveness” category. As a result, the offering of “chemical” contract research services is an attractive business proposition. The market is expected to grow at a rate of about 20% to year to reach approximately $30 billion in 2011. A note of caution is necessary for companies seeking to enter contract research in Western countries and Japan. Because of the low salaries of Chinese and Indian scientists and their longer work hours, the cost advantage of Asian competitors is even more dramatic than in other segments of the fi ne-chemical industry. Whereas the prime cost of Indian custom manufacturers is about 40% of their Western competitors, it is only 20% for contract research! Attracted by FTEs of $60,000 in the East versus $200,000 in the West, big pharma in particular is gravitating to these firms at the expense of their traditional USA- and EU-based CROs. Contrary to big pharma, the small and medium, chemistry-poor biotech companies, which often are betting on just one compound, are not willing to run the risk of a long-distance relationship that could go wrong. A number of US and Canadian CROs located on the West Coast of North America, where there is also a high concentration of virtual pharmaceutical companies, are specifically targeting this niche market. In the United States, the decision of Adesis, New Castle, DE to cut its staff from 40 to 25 and that of ArQule, Woburn, MA, one of the largest

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

191

192

CONTRACT RESEARCH ORGANIZATIONS

Offshoring attractive-

CRO Activity

ness

small

medium .

Target identif.

Target validation

Lead generation

Lead optimiz.

Toxicological and Metabolism studies

high

Custom synthesis

In vitro tests

In vivo tests

Clinical tests

Data computing

Registration

Data management and Informatics

Figure 19.1

Offshoring attractiveness of CRO activities.

USA-based CROs to exit from the chemical services business altogether, speaks volumes about the state of the business today. In China, fully equipped, “ready for use” technology centers have and are being built. Flamma, a small Italian fi ne-chemical company specializing in amino acid derivates, leased laboratory space at Shanghai, Zhangjiang Hi-Tech Park, the so-called “Medical Valley” of China. The R&D group comprises eight chemists with a bachelor’s or master’s degree, headed by one PhD, a former US expatriate. The cost of the chemists amounts to less than 30% of their European peers.

In India, Jubilant Organosys, after having opened an impressive new research facility, now operates three laboratories staffed with nearly 250 scientists at its Noida site, 40 minutes from New Delhi. Hyderabad’s GVK Bio is constructing a new R&D center that includes laboratories for 150 scientists. Hikal announced plans to build a state-of-the-art, ecosystem-friendly research center for contract research at Puna. Once it is fully operational, it will house 250 scientists. Hikal thus will join the ranks of integrated contract research/ manufacturing companies. India is an R&D “hotspot,” defi ned as a place where (1) companies are able to tap into existing scientific and technical expertise networks, (2) there are good links to academic research facilities, (3) the environment supports innovation, and (4) it is easy to commercialize. Costs of pharmaceutical innovation in India are estimated to be as low as one-sevenths of their levels in Europe. —Economist Intelligence

CHAPTER 20

Conclusion: Who Is Fittest for the Future?

Despite the assimilation of the offerings, substantial differences in the fi nancial performance of individual fi ne-chemical companies persist (see Section 8.1). The question, therefore, that arises is: “What does it take for a fi nechemical/custom manufacturing company to survive in this harsh business climate?”; respectively, “What are the important differentiators that distinguish the winners?” The author is taking an unconventional approach to defi ne the key success factors (usually the elements described refer to confidentiality, reliability, quality, response time, state-of-the-art plants, technology toolbox, innovative research, cost improvement, customer orientation, etc.). Actually, in an attempt to develop a classification, just three decisive criteria have been chosen. Each has been given a rating from 0 to 2 or 3. The sum of the ratings is the basis for the ranking of the 12 companies described. The three elements are 1. Relative Size of the Fine-Chemical Business (within a large company) and Ownership. The underlying thought is that unless fi ne chemicals is the core business, it will not be run successfully. The main reasons are that “big is not beautiful” in this industry, which is deprived of economy of size on one hand and the longer-term perspective of family-owned companies that are not under Wall Street’s wing. Whereas the time horizon of the latter is the next quarter, it is the next generation for the former. Moreover, a small unit of a big company just does not get the necessary attention from management and is at a disadvantage in terms of resource allocation. In fact, in retrospect, tracking the previous performance of the industry, it has become evident that midsize, family-owned fi ne-chemical companies outperform small fi nechemical business units of large companies. 2. Differentiating Technologies, Especially Cell Culture Fermentation. Within conventional chemistry, there are a number of niche technologies that

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194

CONCLUSION: WHO IS FITTEST FOR THE FUTURE?

are more competitive and offer better growth potential than do their widely used conventional counterparts. This applies, for instance, to the handling of hazardous gases, such as cyanogen chloride, diazomethane, fluorine, hydrogen cyanide/sulfide, mercaptanes, nitrous oxides, ozone, and phosgene, which the risk-adverse pharma industry prefers to avoid. Examples are azide chemistry, which is used, for example, for the synthesis of nucleotides; high containment facilities, used for the synthesis of HPAIs; microreactors, predestined for energetic reactions; and simulated moving-bed (SMB) technology, used, for instance, for racemate separation. Despite the high growth rate, the accessible (outsourced) market for each of these technologies is expected to stay within a few hundred million dollars per year in the foreseeable future. Also, the entry barriers are relatively low as, for instance, the number of companies building high containment laboratories shows. The situation is quite different for cell culture technology. The market potential is in the order of billions of dollars, the entry barriers are very high (e.g., demanding technologies, strong regulatory constraints, high capital intensity), and there are only three serious competitors (see Chapter 15). 3. Presence in Asia. Globalization is the single most important trend affecting the fi ne-chemical industry. Chindia’s share PFC’s is expected to triple from less than 10% to about 30% by 2010. If a company does not take advantage of the “high-skill/low-cost” opportunity advantage in Chindia and the rapidly expanding domestic demand in this 2.3 billion population region, the chance of survival is at stake. As described in Chapter 14, the US fi nechemical industry already has become insignificant. Also the playing field for the hitherto dominating Western fine-chemical companies is retrenching— and might even disappear for those companies that do not have at least cooperation with Asian peers. Adopting these criteria to 12 leading fi ne-chemical companies (resp. business units) leads to the classification as per Table 20.1. shows a wide spread between the best performer, Lonza, with a total score of 5 (out of a theoretical maximum of 7), and the worst performer, Clariant (now Archimica), which scored 0. Other conclusions are that fi ne chemicals are the core business of the two tier I companies. Moreover, companies with unfavorable prospects prevail; twothirds total a score of 2 or less. The majority of them have undergone a substantial reshuffl ing lately; five have changed ownership or have been split off or sold. Evidently management has recognized that they were not fit for the future. In a keynote address delivered at Informex 2003, Andrew Liveris, now CEO of Dow Chemical, presented a list of seven companies that would still be top players in 2006, namely, Akzo Nobel/Diosynth, Avecia, BASF, Degussa, DSM, Dowpharma, and Lonza. Implicitly, he predicted that Bayer, Boehringer-Ingelheim, Cambrex, Clariant, and Rhodia Chirex would fall behind. The underlying metrics for the classification were not given [2].

195

Lonza Siegfried

Degussa Shasun Chem. BoehringerIngelheim Diosynth Novasep Saltigo Merck KGaA

BASF DSM Clariant

II

III

Company

Differentiating Technologies

➁ ➀ ➀ 0 ➀ ➁ ➁ ➀ 0 ➀ ➀ ➀ ➀ 0 ➀

Relative Size of Business

➀ ➁ 0 ➀ ➀ 0 ➀

0 ➀ ➀ ➁ 0 ➀ 0 ➀ 0 ➀ 0 ➀ 0 ➀ 0 ➀ 0 ➀ ➀ 0 ➀ 0 ➀ 0 ➀

➁ ➀ ➁ ➁ 0 ➀

Presence in Asia

0

➋ ➋ ➋ ➋ ➊ ➊

➎ ➍ ➌ ➌ ➋

Total

Leading European Fine-Chemical Companies—Fitness for the Future

I

Tier

Table 20.1

Business sold to TowerBrook and renamed Archimica

Orgamol integration?

Being split off from AkzoNobel Business acquired from Dynamit-Nobel Newly formed company Fine chemicals for liquid crystals soaring

Joint venture in China Formerly Rhodia Pharma Sol. Cell culture powerhouse

Plants in China and Singapore Pharma heritage

Remarks

196

CONCLUSION: WHO IS FITTEST FOR THE FUTURE?

Legend to Table 20.1 Score

0 ➀

➀

➁

Relative size of Fine-chemical business and ownership

Fine-Chemical business as percentage of total company sales <25% 25–75% >75%

Differentiating technologies, especially cell culture fermentation

Standard reactions only

Bench-scale cell culture or other niche technologies

Industrialscale cell culture fermentation

Presence in Asia

No business in Asia

Cooperations but no assets in Asia

Assets in Asia

➂ >75%; president/ CEO is major share holder

Note: Fine chemicals are defi ned in Section 1.1 (complex molecules sold on the basis of “what they are” within the chemical industry for the preparation of specialties like pharmaceuticals and agrochemicals).

BIBLIOGRAPHY

Cited Publications 1. Pharma’s road ahead, Chemical & Engineering News 24–99 (June 19, 2006). 2. A. Liveris, Has the outsourcing phenomenon fulfi lled its promise, Specialty Chemicals Magazine 28–30 (May 2003).

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ABBREVIATIONS

ADMET

Absorption, distribution, metabolism, excretion, and toxicology

a.i.

active ingredient

ANDA

Abbreviated New Drug Application

API

Active pharmaceutical ingredient

API-for-generics

Active pharmaceutical ingredients for generics

BRIC

Brazil, Russia, India, and China

CDA

Confidentiality disclosure agreement

CAGR

Compound annual growth rate

CDER

Center for Drug Evaluation and Research (department of FDA)

Chindia

China and India

CHO

Chinese hamster ovary

CM

Contract (also custom) manufacturing

CMO

Contract manufacturing organization

COGS

Cost of goods sold

combichem

Combinatorial chemistry

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200

ABBREVIATIONS

CPhI

Chemical and Pharmaceutical Ingredients (exhibition)

CRAM

Contract research and manufacturing

CRO

Contract research organization

DQE

Design qualification estimate

EBIT

Earning before interest and taxes

EBITDA

Earnings before interests, taxes, amortization, and depreciation

EFCG

European Fine-Chemicals Group

EMAS

European Union Eco-Management and Audit Scheme

EMEA

European Medicines Agency

EVA

Economic value added

FDA

U.S. Food and Drug Administration

F&F

Flavors and fragrances

GM

Genetically modified; general manager

GMP

Good Manufacturing Practice

HMO

Health management (also maintenance) organization(s)

HMW

High molecular weight

HPAI

High-potency active ingredient(s)

HPLC

High-pressure liquid chromatography

HTA

Health technology assessment

HTS

High-throughput screening

IP

Intellectual property

IPR

Intellectual property rights

ABBREVIATIONS

201

IQ

Installation qualification

IQWiG

Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen

IT

Information technology

JV

Joint venture

LC

Liquid crystal

LCD

Liquid crystal display

LMW

Low molecular weight

mAbs

Monoclonal antibodies

MHRA

Medicines and Healthcare Products Regulatory Agency (United Kingdom)

MP

Multipurpose

NAI

No action indicated

NBE

New biological entity

NCE

New chemical entity

NDA

New drug approval (or applications)

OLED

Organic light-emitting diode

OQ

Operational qualification

OTC

Over-the-counter (drugs)

PAT

Process analytical technology

PBB

Peptide building block

PFC

Pharmaceutical fi ne chemical

P&L

Profit and loss

POLED

Polymer light-emitting diode

202

ABBREVIATIONS

PQ

Performance qualification

QA

Quality assurance

QC

Quality control

RDA

Recommended daily (or) dietary allowance

REACH

Registration, evaluation, and authorization of chemicals

R&D

Research and development

RONOA

Return on net operating assets

ROS

Return on sales

RS

Requirement specification

SFC

Supercritical fluid chromatography

SFDA

State Food and Drug Administration (China)

SHE

Safety, health, and environment

SMB

Simulated moving bed (chromatography)

USP

Unique selling proposition

UHTS

Ultra-high throughput screening

APPENDIX

A.1

Information Sources/Life Sciences

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206 www.business.com/ directory/pharmaceuticals_ and_biotechnology/ biotechnology www.prous.com www.pharmalive.com www.epocrates.com www.fda.gov fda.gov/cder/da/da.htm www.reutershealth.com www.drugstore.com www-fdcreports.com www.ims-global.com

CIPSLINE, Prous Science, Barcelona, Spain

eKnowledgeBase/Engel Publishing Partners West Trenton, NJ, USA

ePocrates RX TM (accessible only with Palm handheld)

FDA, Food and Drug Administration, USA

Drug Database, Reuters Health

Drugstores, USA

F-D-C Reports Inc., Chevy Case, MD, USA

IMS Health, Dorfplatz 4, CH-6830 Cham, Switzerland

www.arthurdlittle.com

Databanks and Consultants

Website

Biotech companies

pharma Arthur D Little International, Inc., B-1150 Brussels

Company, Organization, Publication, or Other Source

Global statistics on drug sales Pioneer databank on developmental drugs

Pharma information

Drug retail prices in the USA

Brand names, dosage, therapeutic category, and more on drugs, USA

Regulations and studies FDA new drug approval list (CDER) a Orange book listing drug patents

Clinical drug database

Online development drug database with more than 20,000 listings

Developmental drugs database

List of biotechnology companies

Market research, strategy consulting, “round robin” fi nancial data of major fi ne chemical companies

Contents

207

www.pharma.org www.pjbpubs.com

Pharmaceutical Research & Manufacturers of America

Pharmaprojects, PJB Publications, Surrey, UK

www.beckerdata.com [email protected] www.alanwood.net

www.woodmacresearch.com

ENIGMA Marketing Research, Goostrey, UK

Alan Wood, London, UK

animal health Wood Mackenzie, Edinburgh, UK

www.agranova.co.uk/ agrall1.asp

Becker & Associates, Paris, France

www.agranova.co.uk

agro Agranova

www.pjbpubs.com

Agranova Alliance, a consortium of agchem information providers

www.cas.org/SCIFINDER

SciFinder

Agvet Reports, PJB Publications, Richmond, Surrey, UK

AgChem New Compound Review (NCR);

www.scientificupdate.co.uk

Scientific Update

Animal health market research

Pesticide Compendium

Agro market research

Agrochemicals database

News on the agrochemical industry

Scientific literature/patents/new technologies

Training courses, esp. for process development

www.reutershealth.com

Brand name, dosage, therapeutic category, etc.

Developmental drugs database

Pharma-industry-sponsored, patient-oriented information on existing and new drugs

Developmental drugs database (with chemical structures)

Reuters Health (see Drug database)

Pioneer, (see IMS Health)

www.current-drugs.com

Investigational Drugs Database, Current Drugs Ltd., London

208 pubs.acs.org/cen www.chemweek.com www.teconscience.com www.icis.com medadnews.com www.performancechemicals. com www.pharmaceuticaltechnology.com www.pjbpubs.com www.specchemonlin.com

Chemical Week, New York

Chimica Oggi (chemistry today), Milan, Italy

ICIS Chemical Business, New York

MedAd News, Newtown, PA, USA

Performance Chemicals Europe

Pharmaceutical Technology/Advanstar Communications, Iselin NJ, USA

Scrip Magazine/Informa Healthcare, London

Speciality Chemicals Magazine/dmg world media, Redhill, Surrey, UK

Magazines

Website

Chemical & Engineering News, ACS, Edison, NJ

Company, Organization, Publication, or Other Source

Articles on speciality and fi ne chemicals

“Yellow pages” = pharma newsletter

Articles and press releases on the pharma and FC industries; investment projects

General chemistry, emphasis on processes

List of world’s 200 best-selling prescription drugs (May issue)

General chemical industry, emphasis on business issues, fi ne-chemical sector

General, fi ne, and specialty chemistry

General chemistry

General chemistry, emphasis on R&D

Contents

209

www.ml.com jpmorgan.com www.ssmb.com

Merrill Lynch

J. P. Morgan Securities Inc

SalomonSmithBarney

www.scientificupdate.co.uk

Scientific Update, Mayfield, East Sussex, UK

www.opdsearch.com www.chinachemnet.com

Chemical Market Reporter Buyer’s Guide

Buyer’s Guide—China

Center for Drug Evaluation and Research (department of FDA).

www.informex.com

Informex

a

www.cphi.com

CPhI, Chemical & Pharmaceutical Ingredients

Exhibition

www.buyersguide.com

Chemical Buyer’s Guide

Directories

www.ispe.org

ISPE, International Society for Pharmaceutical Engineering Tampa FL, USA

Training Courses

www-alexbrown.db.com

Deutsche Banc Alex.Brown

Financial Analysts, Banks

Annual custom chemical manufacturing trade convention in the US, organized by the Synthetic Organic Chemical Manufacturers Association (SOCMA).

Major fi ne-chemical trade show, annually

Chemical development and scaleup in organic chemistry training courses

Containment of potent compounds, pharmaceutical engineering, computer control, etc.

Pharmaceutical Outsourcing Trends (e.g.)

Global healthcare equity research,

Fine Chemicals, Sifting for Gold (2001) (e.g.)

Global Fine Chemicals (1999) (e.g.)

A.2

Checklist for New Product Evaluation

Product name, structure

Raw material, advanced intermediate, API Market Information

End product

Brand name

Therapeutic category

Novelty; me, too

Competitive products

Product, company advantages/ disadvantages

Status

Phase I, II, or III

Year of launch Customer(s)

Big, medium, or virtual pharma; existing customer; previous business

Competition for A

Who else has been contacted; competitive advantages/disadvantages

Total demand potential for A additional information

A’s expected market share at maturity

Project Status Negotiations

Secrecy agreement, R&D agreement, order for trial quantity supply agreement

R&D work

Worker-months spent vs. worker-months needed Total R&D budget, ratio R&D cost vs. sales

Samples

Samples sent/approved

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CHECKLIST FOR NEW PRODUCT EVALUATION

Year

2005

2006

2007

2008

2009

211

2010

Sales volume (tons)

Past/expected sales volume

Sales price ($1 kg)

A’s offer, customer expectation

Turnover Raw materials Plant/ investments

Environment

Key raw materials, availability plant

mp

special

investment

existing

additional

new

new

pp

works

Fit with existing plant, adaptation investments

Safety/toxicity; waste volume/disposal Conclusion

Pros and cons mp = multi purpose pp = pilotplant

Profit expectations/fit with in-house technologies/chances of success

A.3

Project Schedule, Custom Manufacturing Project

Preparation and submission of a preliminary offer, based on desk evaluation

•

(After acceptance by customer) go/no go decision

•

Outline of project task

•

Conclusion of CDA and technical discussion with customer

•

Formation of project organization; nomination of project champion, manager, and team members

•

Fixing of the research program with objectives, milestones, resources, budget, etc.

•

Sample preparation and submission to customer

•

Preparation of a detailed offer with the following sections: 1. Executive summary 2. Project history (fi rst contact, preliminary agreements, etc.) 3. Technical part: R&D program; production schedule 4. Commercial part: detailed offer for laboratory (basis: FTE), pilot plant phase, and supply of industrial quantities; assumptions; investments for plant adaptation 5. Project organization and communication channels; reporting 6. Timelines 7. Blueprints of the pilot plant and production trains

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1–2 months

Note: this program will constitute a central part of the offer

During R&D phases monitoring by “new product committee”: Is project “within budget and timelines,” are milestones completed, have customer expectations changed, etc.?

•

Management

Timing

Main activities

PROJECT SCHEDULE, CUSTOM MANUFACTURING PROJECT

(After acceptance by customer) 

|

•

213

project start •

Technology transfer customer → supplier Process research; route and sequence selection, analytical method development

•

Process development: identification, exploration, and optimization of critical parameters

•

Safety & ecology data

•

Conclusion of laboratory phase  Proof of concept of the laboratory process

•

HAZOP analysis

•

Validation of analytical methods

•

Defi nition of fi nal specifications

•

Production and supply of trial batches

•

Regulatory submissions

•

Conclusion of pilot plant phase 

•

Plant adaptation

•

Production scheduling, operator instruction

•

Start R&D work on a second-generation process

•

Master batch records

•

Optimization of cycle times

•

Start of industrial-scale production

•

Administration of the supply contract (updating of supply schedules, price adjustments, market intelligence)

Current business

Conclusion of supply contract Several years

Confi rmation/revision of the offer for industrial-scale supplies

•

|

transfer to industrial plant •

6–9 months

•

|

transfer to pilot plant

6–9 months

•

A.4

Company Scorecard

Rank

Activity

Target Financials

a

1

Development of EVA

2

Cost/m × hour

<$25

3

Reduction of working capital

Inventory turnover ≥4× per year (Note: capacity utilization!)

???

3

Manufacturing 5

Continuous cost improvement

COGSb reduced by 10–20% each time the yearly production volume doubles

6

Number of reworks/total batches

<1%

7

% on-time shipments

>99%

8

Number of quality complaints

To be determined R&D

9

New product sales as % of total sales

>20

10

Successfully completed projects as % of all projects initiated in R&D

>25 %

11

% of successful scaleups laboratory → pilot plant

To be determined

c

Marketing and Sales 12

Fulfi llment of budget/business plan

Sales & profit growth > benchmark

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COMPANY SCORECARD

215

13

Number of tier 1 customers

Frame supply contract agreed on

14

New business

≥2 phone calls per week ≥? new projects, of which? from new customer visits Engineering

15

% of projects “on time/on budget”

To be determined

16

Installation cost/m reactor volume

<$500,000/m 3

17

Plant availability

To be determined

3

Safety, Health & Environment 17

Yearly reduction of total emissions

To be determined

18

Number of lost hours due to accidents

To be determined

19

Hours of formation/employee per year

To be determined

Human Resources 20

Fluctuation rate

<5% per year

21

Absenteeism

Lost hours × 10 4 /Σ hours < 10

22

% of revenues spent on formation

To be determined

a b c

Economic value added. Cost of goods sold. of products introduced in the past 5 years.

A.5

Job Description for Business Development Manager

Primary responsibilities Sustains the growth of company’s business by Establishing new business relationships within the life science industry Acquiring ideas for new fi ne chemicals, API-for-generics, custom manufacturing arrangements Evaluating business ideas according to company criteria Carrying out supporting market studies Defi ning the scope of the project Assuming the “project champion” function for its realization Calculating sales prices in accordance with company rules for profitability Negotiating and concluding confidentiality agreements, R&D agreements, supply contracts for trial and industrial quantities Project management Chairs the “new product committee” Customer relations management Implements effective key account management Monitors and updates quality performance database (scorecard) Identifies decisionmakers at the major accounts Cultivates the relationship with the major accounts Ensures flawless flow of communication Assures proper administration of supply contracts Market intelligence in the following areas Life science industry in general New product pipelines of major potential and existing customers Competitor intelligence Advertising and promotion Edits company literature, product profi les, company Website Organizes participation at trade shows Organizes customer events

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JOB DESCRIPTION FOR BUSINESS DEVELOPMENT MANAGER

217

Support functions Strategy/corporate development/investment requests assists GM a in strategy development and review assists GM in establishing and reviewing the 5-year business plan assists GM in search and evaluation of acquisition partners assists GM in preparing and submitting investment requests for plant extensions, new plants, etc. Training Covers the section “business development” in internal training programs Competencies Establishment, together with GM of the yearly sales budget The yearly budget for the department Initiation of new R&D projects Conclusion of confidentiality agreements, R&D agreements, supply contracts (up to $. . . . /year) Business trips, customer entertainment (within yearly budget) Participation at pertinent educational programs Measures of performance (MOP) Fulfi llment of budget (EBIT, RONOA, ROI, etc.) Fulfi llment of business plan (growth targets) Customer satisfaction (scorecard) Number of successfully established new business relationships Number and size of approved new product projects Candidate profi le Advanced degree in organic chemistry Several years’ experience in a similar position (minimum annual sales: $10 million) Flair for commercial activities Familiarity with basic fi nancial principles Staying power Perfect knowledge of a second language (written and spoken) a

General manager.

A.6

Selection Criteria for Outsourcing Partners

Criteria

Subcriteria

Relevance

Innovation and technology

Plant/facilities Technology toolbox Process development capability Analytical development capability Project management

****

Quality

FDA record Quality systems Performance measures Change control

****

Risk and security of supply

Financial stability Backup capacity Approach to inventory SHE approach Global Risk Management audit Political situation

***

Business attitude

Secrecy Reliability (on time/on budget) Continuous improvement Risk sharing Capacity/lead time Flexibility Communication

****

Strategic fit

Conformity with tax optimization policies Conformity with market access strategies Culture match

***

Price

Total cost Price reduction performance Cost breakdown availability

**

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A.7

Checklist for Customer Visit

Timing

Action

−1 year

Prepare general plan for proactive visits for next year (A and B customers, new prospects)

−1 month

Agree with customer on date, purpose, and participants

−4 weeks

Prepare visit: 1. Customer company information: a. Study customer’s Website (esp. annual report & news releases) b. Study customer’s fi le and recent email exchange c. Check sales statistics d. Ask other departments [R&D, purchasing (!), fi nance, legal, etc.] for pending issues 2. Product information: a. Current business—check product fi les, esp. sales statistics for individual products and active contracts b. new business—check customer’s info on development products, verify through consultation with databanks see appendix A.1, patent research 3. Agenda: a. Prepare agenda b. Depending on agenda, ask other departments to delegate specialist (e.g., local representative, R&D, production, legal)

−2 weeks

Confi rm date and place of visit with customer and send agenda Briefi ng with participating colleagues, defi ne main objectives, prepare a list of info you are looking for Adaptation of standard customer presentation Prepare gifts When visiting key accounts; study fi les of participants from customers

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220

CHECKLIST FOR CUSTOMER VISIT

On the road (0)

Assign roles within participants of your company, rehearse Read newspaper of customer’s country Create a pleasant atmosphere, allow customer time to familiarize with agenda Present participants, say something positive on the customer Give presentation Discuss specific topics and try to accomplish preset goals Summarize results of discussions and agree on next steps

+1 day

Confi rm “next steps” with customer in writing Discuss results (1) with other participants (to determine whether objectives are met, who does what, what can be done better next time) and (2) with other interested parties in your company Write visit report and bring fi les up to date

+1 month

Check execution of agreed-on actions

A.8

Outline for a Company Presentation

Slide 1

Title page [names of participants from A (supplier) and X (customer) and agenda]

Slide 2

Company A at a glance: ownership, sales (a % standard products, b % exclusives), employees (manufacturing, R&D, sales & administration, etc.), major locations

Slide 3

Mission statement: “We want to be . . .” Aspiration 2010: turnover $ . . . million/EBIT $ . . . million

Slide 4

Company history History of A (foundation, major expansions, ownership changes) History of the A–X relationship (1st contact, 1st product supply, development of sales, current business)

Slide 5

A figures: sales development, geographic distribution, product categories, personnel development and distribution, investments)

Slide 6

A facility overview I: site plan, manufacturing buildings, production trains, reactor volume

Slide 7

A facility overview II: R&D, QC, and pilot plant (general view and key equipment)

Slide 8

A technological expertise: name reactions with volume ranges and examples of processes done on industrial scale

Slide 9

A SHE policy, safety and health provisions: treatment of solid, liquid (aqueous and organic) and gaseous waste; responsible care, corporate governance

Slide 10

Organization of A (management team, key contacts)

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A.9

Overseas Expansion of Indian Fine-Chemical Companies

Acquirer

Acquired Company a

Activity

Purchase Price

Dishman (pharmaceuticals and chemicals)

Carbogen & Amcis (Bubendorf, Switzerland) Synprotec (Manchester, UK)

CRO and 100-kg scale CRO

$74.5 million (1.1 × sales) $3.8 million

Dr Reddy’s Laboratories

Roche’s API plant in Cuernavaca, Mexico Betapharm (Germany)

Naproxen, steroids Generics

$59 million

Glenmark (pharmaceuticals)

Instituto Biochimico Industriale, Brazil

CRO

$4.6 million

Hikal

Marsing (Copenhagen, Denmark)

API trader

$6 million (50.1% stake)

Jubilant Organosys

Trinity Laboratories (and its subsidiary, Trigen, USA) Cambrex, USA

Generics

$34 million

Fine chemicals

$500 million

Malladi Drugs & Pharmaceuticals

Novus Fine Chemicals (Carlstadt, NJ, USA)

Ephedrine, pseudoephedrine

$23 million

Matrix Laboratories

Explora Laboratories (Mendrisio TI, Switzerland) Docpharma (Heverlee, Belgium)

CRO

N/A (43% stake)

Generics

$263 million

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222

$570 million (3 × sales)

OVERSEAS EXPANSION OF INDIAN FINE-CHEMICAL COMPANIES

223

∼c25 million (sales c58 million)

Nicholas Piramal India (NPIL) Ltd.

Aveciab (Huddersfield, UK)

PFC (CRO)

NPIL (UK) Ltd.

Pfi zer’s Morpeth (manufacturing site at Morpeth, UK)

APIs and fi nished dosage forms

Shasun Chemicals & Drugs

Rhodia Pharma Solutions

CM

N/A

Ranbaxy Laboratories Ltd.

Allan (SpA, Italy) (gsk’s Italian generics business) Efarmes SA (Spain) Terapia, Romania

Generics

N/A

Generics Generics

$18 million $324 million

Able Laboratories (Bryan, OH, USA)

Generics

ICN (Hungary)

Morphine, codeine

$23 million (sales $100 million) N/A

Suven Life Sciences

Synthon Chiragenics (Monmouth Junction, NJ, USA)

Carbohydratebased chiral technology

N/A

Torrent Pharmaceuticals

Heumann (Pharma GmbH, Germany)

Generics

$30 million

Sun Pharmaceutical

a b

Solutia Pharmaceutical Services Division. Including Torcan CRO, Canada.

INDEX

Active ingredients in agrochemicals, 105 in animal health industry, 106–108 in biocides, 114 in biotechnology and, 34–37 in other specialty chemicals, 114 FDA approval of, 89, 91, 92 fi nancial investment issues, 136 fi ne chemicals, 4 fi rst on the market status of, 133 future trends in, 186–188 for generics, 91–92 geographic distribution and outsourcing of, 139–141 globalization of market for, 167, 168 GMP culture and, 136 low-cost production, 136 multipurpose plant design, 50–51 nonexclusives, development of, 130, 133–136 outsourcing trends in, 90–92 plant design, 45, 46, 50 pricing models for, 146 production volumes, 41 sales volume in, 186–187 selection guidelines for, 132–133 traditional chemical synthesis technologies, 27, 29–32 trends and growth drivers for, 161 value-added chain, 5 Added value, fi ne chemicals, 4 Adhesives industry, specialty chemicals in, 110 ADMET (absorption, distribution, metabolism, excretion, and

toxicity) studies, at contract research organizations, 16, 17 Advertising of fi ne chemicals, 153 Agents for chemical distribution, characeristics of, 142–144 Agrochemicals: company data and rankings, 102–103 customer base for, 93 future trends in, 189 globalization of market for, 168, 169 sales volume for, 89, 135 structural formulas for, 105 Alfa Aesar Company, 20 Amination, fi ne chemical synthesis, 29 Amino acids: as biocatalysts, 34 in food and feed additives, 119–120 molecular structure, 22 Analytical development, goals of, 59 Aniline purple, development of, 115 Animal health industry: biopharmaceuticals in, 99 farm animal, 183 Antibiotics, biosynthesis and, 34 Aroma chemicals, specialty development of, 115 Artificial sweeteners, specialty chemicals for, 120 Asian market for fi ne chemicals: future trends in, 165, 194 generics business, 92 global impact of, 163, 168 growth expectations, 87–88 Automation systems, plant design and, 46

Fine Chemicals: The Industry and the Business, by Peter Pollak Copyright © 2007 by John Wiley & Sons, Inc.

224

INDEX

Balanced scorecard management assessment, 70 performance metrics and benchmarking, 71 BASF Fine Chemical Division size and structural characteristics, 13 ranking, 193 Bench development, principles of, 59 Benchmark data: management assessment and, 73–75 risk/reward profi le, 69–71 Bench-scale laboratory and plant development, 60 Benzodiazepine derivates, ring structure, 23 β-lactam moiety, fi ne chemical molecular structure, 22 Big molecule compounds: biotechnology and, 172 structural properties, 24–26 BINAP catalysts: in aroma chemicals, 118–119 single-enantiomer fi ne chemicals, 29 specialty chemical development of, 114 Biocatalysts, fi ne chemical reactions, 33 Biocides: applications, 114 specialty chemicals for, 109 table of brand names, 112–113 Biomarkers, development of, 183 Biopharmaceuticals: agrochemicals, 102, 105 animal health industry, 106–108 cell culture process and, 35 customer base for, 95–101 manufacturing structure for, 13 molecular structure, 100–101 Biosynthesis, of fi ne chemicals, 34 Biotechnology: big molecule research, 172–173 contract research organizations in, 191–192 fi ne chemical reactions: biocatalysts, 33–34 biosynthesis, 38 cell cultures, 35, 39 multipurpose plant design, 45 small molecule research, 173

225

Boehringer-Ingelheim Corporation, size and structural characteristics, 13 Boehringer-Ingelheim, ranking Book of SEMI Standards (BOSS), 52 Bottom-up chemical synthesis, fi ne chemicals, 30 Bottom-up pricing, marketing of fi ne chemicals and, 146 Build-operate-transfer model, globalization of fi ne chemical industry and, 169 Business development business development and R&D, 125 business development manager job description, 217 defi nition, 125 Business conditions, fi ne chemicals market: demand conditions, 89–92 development specifics in, 123, 125, 126 growth expectations, 87–88 overview, 86–87 Business processes, in fi ne chemical companies, 15 Campaign reports, cost calculations and, 67 Capacity utilization: plant design and, 45 plant operation and, 54–56 Catalytic reactions: fi ne chemical synthesis, 30, 33 specialty chemicals for, 114 Cell culture process: big molecule compounds, 172–175 development strategy based on, 182 fi ne chemical synthesis and, 37, 38, 41 future trends in, 194 Chemical hybrid methods, peptide synthesis, 31 Chemical synthesis technologies, traditional techniques, 27–32 Chinese fi ne chemical industry, globalization and, 163–171 Chiral catalysts: in aroma chemicals, 118–119 single-enantiomer fi ne chemicals, 29–32

226

INDEX

Chiral Technologies, 21 Chlorination, fi ne chemical synthesis, 29–32 2-Chlorotrityl chloride resins, peptide synthesis, 32 Clinical research, at contract research organizations, 16–20 Clariant acquisitions, 10–11 ranking, 195–196 Codexis, specialty chemical development of, 114 Collaborative relationships: globalization of fi ne chemical industry and, 168–171 marketing of fi ne chemicals, 155–157 Combinatorial chemistry, drug development productivity and, 181–185 Commodities: fi ne chemicals as, 3–5 value-added chain for, 5–7 Condensation, fi ne chemical synthesis, 29–32 Connected measurement, balanced scorecard device, 72–73 Construction materials, plant design and, 44 Contact development, marketing of fi ne chemicals, 153–155 Containment area, multipurpose plant design, 49 Contamination management, plant design, 41–51 Contract research and manufacturing (CRAM) organizations: defi ned, 16, 19–20 globalization of fi ne chemical industry and, 170–171 target products and services and, 129–138 Contract research organizations (CROs): company size and, 141–142 future trends in, 191–192 size and structural characteristics, 16–20 supply contracts, 150–152 target products and services and, 127–128

Cooperative agreements, globalization of fi ne chemical industry and, 168–171 Corn syrup, as biocatalyst, 33 Cost allocations, supply contracts, 151–152 Cost calculations: investment costs, 64–66 manufacturing costs, 64, 66–67 pricing models for fi ne chemicals, 145–148 promotional tools, 153 supply contracts, 151–152 Cost structure, indicative, fi ne chemical production, 66–67 Costs of goods sold (COGS): globalization of fi ne chemical industry and, 168–171 low-cost production systems, 134–136 pricing models for fi ne chemicals, 146–148 restructuring and outsourcing issues and, 178–179 target products and services and, 129–138 Cryogenic reactors, plant design and, 44 Cultivation, cell culture process and, 37 Current Good Manufacturing Practice (cGMP): of fi ne chemical companies, 12–16 fi ne chemical regulations, 3–4 plant design, 41–51 plant operation and, 51–56 Custom manufacturing drivers, 10 Customer base: agrochemicals, 101–106 animal health industry, 106–108 customer visit checklist, 219–220 intimacy levels with, 154–155 key account management and collaborative relationships with, 155–157 network and contact development, 153–155 pharmaceutical industry, 93–101 for specialty chemicals, overview of, 109–122 target markets in, 137–142

INDEX

Customer-supplier cooperation: customer visit checklist, 219–220 intellectual property rights and, 149 supply contracts, 150–152 Custom manufacturing (CM) companies: acquisitions trends in, 10–16 characteristics of, 8–16 demand conditions for, 89–92 ethical issues facing, 176–185 globalization and, 166–171 niche technologies and, 13–16 nonexclusive APIs and, 131–136 performance metrics and benchmarking of, 71–73 project schedule for, 212–213 restructuring and outsourcing in, 177–179 sales development in, 13–16 size and structural characteristics, 9–16 supply contracts, 149–152 target products and services and, 126–137 “Daily medical cost” element, pricing models for fi ne chemicals, 146–148 Demand pull: for fi ne chemicals, 89–92 project initiation and, 60–61 Design qualification (DQ), procedures for, 42–43 Dietary supplements, specialty chemicals in, 119–120 Distribution channels, elements of, 142–144 Documentation systems: intellectual property rights and, 149 plant operation and, 51–56 Drug development process, productivity issues and, 179–185 Drug life cycle: company’s position in, 97 product opportunities along, 127–128 target products and services and, 128–137 Degussa acquisitions, 10–11 ranking, 195–196

227

Diosynth, ranking, 195–196 Dishman, sales development of, 88 Divi’s Laboratories production capacity, 88 sales development of, 88 DSM enzyme, specialty chemical development of, 114 enzyme, specialty chemical development of, 114 ranking, 195–196 Dyestuffs and pigments, specialty chemicals for, 115–116 Economy of size, in fi ne chemical companies, 15 Electronic chemicals: defi ned, 5 development of, 116–117 Embedded value, fi ne chemicals market, 84–85 Engineering plastics, specialty polymers, 120–122 Enzymes: as biocatalysts, 32–34 single-enantiomer fi ne chemicals, 29–32 specialty chemical development of, 114 Equipment size, plant design and, 43–44 Esterification, fi ne chemical synthesis, 29–32 Ethanol, as biocatalyst, 33 Ethical issues: for agrochemicals, 189–190 API-for-generics market, 133–136 pharmaceutical industry/custom manufacturing, 176–185 European market for fi ne chemicals: future trends in, 163–171, 194–196 globalization and, 163–171 Exclusive products, defi ned, 3 Expansion potential, plant design and, 42 Facilities and plants: bench-scale laboratory and plant development, 60 design criteria, 41–51 False manipulation risk, plant design and, 44

228

INDEX

Feasibility study, plant design criteria, 42 Fermentation, cell culture process and, 35 Fermenters, biosynthesis and, 33–34 Financial investment: big molecule technology, 172–175 generic drug development and, 128 globalization of fi ne chemical industry and, 169–172 productivity issues and, 179–185 Fine-chemical companies ownership/management dichotomy, 12 Fine chemicals. See also specific products BASF defi nition of, 13–14 contract research organizations, 16–19 custom manufacturing companies, 8–15 defi ned, 3–5 drug development stages, 9 value-added chain for, 5–7 “First-to-fi le” status, active pharmaceutical ingredients, 152 F.I.S., sales development of, 88 Flavors and fragrances, specialty chemical development for, 117–118 Food, Drug and Cosmetics Act, 92 Food and feed additives, specialty chemicals for, 119–120 Food Chemicals Codex (FCC), 48 Food-grade chemicals, standards for, 52 Formulation, cell culture process and, 38 Friedel-Crafts reaction, fi ne chemical synthesis, 23–26 Full-time equivalents (FTEs): at contract research organizations, 16–19 pricing models for fi ne chemicals, 147–148 supply contracts, 144–145 Fungicides, in agrochemicals industry, 101–103 Gap management, plant operation and, 51–55

Generics. See also Patented drugs agrochemicals as, 189–190 customer base for, 93–100 demand for, 90–92 fi nancial investment issues, 136 “fi rst-to-fi le” status and, 135 future trends in, 180–183 globalization of market for, 161–169 GMP culture and, 136 legislative issues with, 130–135 low-cost production, 134 nonexclusive APIs for, 130–136 patent status in, 97 sales volume in, 186–188 Genetic manipulation, of agrochemicals, 189–190 Genomics, productivity issues in development of, 182–183 Geographic distribution, in pharmaceutical industry, 138–145 Global fi ne chemical market: contract research organizations in, 191–192 current and future trends in, 174, 193 Indian fi ne chemical company overseas expansion, 222–223 pharmaceutical fi ne chemicals market structure, 84 Global chemical market structure of, 82 Good manufacturing practices (GMPs): generics market and culture of, 132 globalization of fi ne chemical industry and, 164–168 “Grass roots” plants, design criteria, 42 Grignard reaction, fi ne chemical synthesis, 29–32 Growth expectations, fi ne chemical market, 91–94 customer base and, 93–102 Halogenation, fi ne chemical synthesis, 29–30 Hazard analysis, research and development and, 58–62 Headblock area, multipurpose plant design, 45 Health technology assessment (HTA), productivity issues and, 184

INDEX

Heating, ventilation and airconditioning (HVAC) systems, plant design and, 46 Heat transfer, plant design and, 45 Herbicides, in agrochemicals industry, 105 N-Heterocyclic structures, properties of, 21–22 High-throughput screening (HTS), drug development productivity and, 181–183 Hikal, multiple activities, 167 sales development of, 87–88 “Horizontal integration,” globalization of fi ne chemical industry and, 168–169 Hybrid companies, customer base for, 93–96 Hydrogenation, fi ne chemical synthesis, 29–32 Hydrolases, as biocatalysts, 33 ICH Q7A guideline, plant operations, 52 Imidazoles, molecular structures, 22 IMS Health for pharmaceuticals, target products and services and, 127 Inclusion bodies, biosynthesis and, 34 Indian fi ne chemical industry: globalization and, 161–171 overseas expansion of, 222–223 Informatics, development of, 180 Information sources in life sciences, 206–209 Infrastructure systems, multipurpose plant design, 50 Innovative companies, customer base for, 94–101 Insecticides, in agrochemicals industry, 101–105 Installation qualification, plant design, 43 Intellectual property (IP): globalization of fi ne chemical production and, 169–170 marketing of fi ne chemicals and rights of, 148–151 risk/reward profi le, 69–71

229

Intermediate chemicals, specialty development of, 114–115 International Organization for Standardization (ISO): management system of, 51–52 performance metrics and, 71 International safety and ecology standards, plant operation and, 51–55 Inventory turn, working capital reduction and, 69–70 Investigational new drug (IND) fi lings, productivity issues and, 185 Investment costs, calculation of, 64–65 Isomerases, as biocatalysts, 33–34 Joint ventures, globalization of fi ne chemical industry and, 168–169 Key account management, marketing of fi ne chemicals, 153–157 Laboratory chemical suppliers, size and structural characteristics, 19–21 Labor costs, global market for fi ne chemicals and, 163–172 Legislative issues, globalization of fi ne chemical industry and, 169–176 “Letter acids,” specialty development of, 115 Life sciences information sources, 204–209 Lipases, as biocatalysts, 33 Lipitor (atorvastatin), value-added chain for, 5–6 Liquid crystals, electronic chemicals and, 116 Liquid phase synthesis, peptides, 32 Literature and patent research, functions of, 58 L-Lysine, as biocatalyst, 33 Lonza deal with Bristol Myers Squibb, 90 ranking, 193 sales development of, 88 Low-cost production, API-for-generics market, 134–136 Lyases, as biocatalysts, 33

230

INDEX

Mammalian cell culture. See Recombinant DNA technology big molecule technology, 173–175 Management guidelines: organization, 73–75 overview of, 68 performance metrics and benchmarking, 71 risk/reward profi le, 69 Manufacturing agreements, globalization of fi ne chemical industry and, 168–169, 172 Manufacturing costs, calculation of, 64, 66–67 Manufacturing standard, multipurpose plant design, 50 Marketing of fi ne chemicals: company presentation outline, 221 distribution channels and, 142–143 intellectual property rights and, 148, 150 key account management and collaborative relationship, 155–157 major applications categories, 83, 85 network and contact development, 153 nonexclusive APIs, 130 organization and task analysis, 123, 125 pricing models, 144, 146 product/market matrix, 124 promotion tools, 152–153 sales and business development issues, 124 Staffi ng, 126 standard products, 136–137 supply contracts, 149–151 target market geography and customer categories, 137, 139–141, 143 target products and services, 126–127, 129 trends and growth drivers in, 161–162 Market size for fi ne chemicals: big molecule technology, 173, 175 geographic distribution and, 141–142 overview, 57 Material flow, multipurpose plant design, 47

Material handling systems, plant design and, 46 Matrix, sales development of, 88 Mauveine, development of, 115 Measures of performance (MOP), management assessment, 68, 70 Medicinal research, at contract research organizations, 16–19 Merchant fi ne chemical market, breakdown of, 139 Merchant value, fi ne chemicals market, 82 Merck KGaA, size and structural characteristics, 13 position in liquid crystals, 116 ranking, 193 Mergers and acquisitions (M&A): fi ne chemical company size and, 15–16 globalization and, 166–171 trends in, 58 Microreactions: fi ne chemical synthesis and, 30–31, 33 recombinant DNA technology and, 35 Molecular structure of fi ne chemicals: biopharmaceuticals, 99–100 large molecules, 24–26 small molecules, 22–23 Molecular weight. See also Big molecule compounds; Small molecule compounds biosynthesis and, 34–35 of peptides, 24–26 recombinant DNA technology and, 35 Monoclonal antibodies, molecular structure, 24 Multinational chemical companies, acquisitions trends in, 10–11 Multipurpose systems, plant design and, 46–47 Networking, marketing of fi ne chemicals, 153 New biological entities (NBEs): big molecule compounds, 173, 175 demand conditions for, 89–92 New chemical entities (NCEs): animal health industry, 108 big molecule compounds, 173, 175 biocides, 114

INDEX

demand conditions for, 89–92 electronic chemicals, 116 productivity issues facing, 179–183, 185 risk/reward profi le, 69 New drug approvals (NDAs): demand conditions for, 89–92 productivity issues and, 183, 185 productivity issues facing, 183, 185 New molecular entities (NMEs), productivity issues facing, 179–183, 185 decline of, 130 New product evaluation checklist, 210–211 Niche technologies: custom manufacturing companies and, 13–15, 19 growth potential of, 31 Nondisclosure agreement (CDA), intellectual property rights, 148, 150 Nonexclusive APIs: demand for, 91–92 development of, 128–129, 133–134, 136 Non-life science specialty chemicals: applications of, 110, 112 overview of, 120, 122 Nonproprietary drugs, defi ned, 98 Novasep acanisitions, 10–11 ranking, 193 “Numbering up” process, microreactions and, 30 Off-patent drugs. See Generic drugs Offshoring. See Outsourcing Oligonucleotides, molecular structure, 26 “One stop shop” concept, at contract research organizations, 19 Open structure systems, multipurpose plant design, 47, 49 Operational qualification, plant design, 43 Organic light-emitting diodes (OLEDs), development of, 116 “Organic metal” polyaniline, development of, 119, 123

231

Organism-based drug development, productivity of, 182 Organizational structure, management assessment and, 73–75 Organometallic reactions, fi ne chemical synthesis, 29–32 Original equipment manufacturer (OEM) customers, key account management and collaborative relationships with, 157 Outsourcing: of active pharmaceutical ingredients manufacture, 90–92 by contract research organizations, 191–192 defi ned, 128 geographic distribution of, 141 of nonexclusive APIs, 131–133, 135–136 pharmaceutical industry/custom manufacturing, 178–179 selection criteria for partners in, 218 Ownership/management dichotomy, in fi ne chemical companies, 15 Oxidoreductases, as biocatalysts, 33 Paclitaxel development, big molecule technology, 173–175 Patented drugs. See also Generics market expiries table for, 187 fi ne pharmaceutical characteristics, 130, 132, 135, 137 “fi rst-to-fi le” status of, 133 legislative issues with, 133–134 sales volume and status of, 97 “Pay for service” arrangements, at contract research organizations, 18–19 Peptide building blocks (PBBs): large peptide molecule preparation, 25–26 synthesis technology for, 31–32 Peptides: molecular structure, 22, 24 synthesis technology for, 31–32 Performance metrics, management assessment and, 71 Performance qualification, plant design, 43

232

INDEX

Personalized medicines, productivity issues in development of, 182–185 Pesticides, in agrochemical industry, 101–106 Pharmaceutical industry: business conditions for, 86–92 company scorecard for, 214–216 as contract research organizations customers, 16–19 customer base for, 93–101 demand conditions for, 89–92 ethical issues facing, 176–185 as fi ne chemical customer base, 13–15 geographical distribution of, 142–147 globalization of fi ne chemical industry and, 166–171 market structure, 83–85 nonexclusives, development of, 130–136 pricing models for, 144, 146 restructuring and outsourcing in, 177 size rankings in, 95–97 structure of, 93–94 target markets for, 137–142 trends and growth drivers for, 161–162 Piping systems, plant design and, 46 Plant cell culture: big molecule compounds, 173–175 biopharmaceuticals and, 38–39 Plant operation systems, properties of, 51–56 Polymer chemicals, specialty polymers, 120–122 Polymer organic light-emitting diodes (POLEDs), development of, 116–117 Pricing models for fi ne chemicals, 144–148 globalization and, 163–164 Primary manufacture, active pharmaceutical ingredients, 7 Process analytical technology (PAT), 53–56 Process development, goals of, 58–59 Process research, functions of, 58

Production flow, multipurpose plant design, 47 Product/market matrix, marketing of fi ne chemicals, 124 Production planning, plant operation and, 53–56 Production time requirements, plant design and, 43 Productivity, in research and development, 179–185 Project champion, duties of, 61–62 Project management organization, research and development and, 61–63 Project portfolio, for research and development, 57–58 Promotion tools, marketing of fi ne chemicals, 152–153 Proprietary drugs: generics/API-for-generics industry and, 186–188 ranking of, 98 structural formulas for, 98–100 Proteins: glycosylation, 35–39 molecular structure, 22 Pteridines, molecular structure, 23 Public Health Service Act, 92 Purification, cell culture process and, 35–36 Purines, molecular structure, 23 Pyramidal organization model, functions of, 74–75 Quality control: globalization of fi ne chemical industry and, 168–171 plant operation and, 51–56 REACH (registration, evaluation, and authorization of chemicals) legislation, globalization of fi ne chemical industry and, 167–171 Reaction properties, fi ne chemical synthesis, 27–32 Reactor capacity, plant design and, 44–46 Reagent Chemicals - ACS Specifi cations, 52

INDEX

Recombinant DNA technology, fi ne chemical synthesis and, 35–39 Reduction reactions, fi ne chemical synthesis, 27–29 Regulatory issues: animal health pharmaceuticals, 108 fi ne chemicals, 3–5 generics/API-for-generics and, 186–188 productivity issues and, 183–185 Research and development (R&D): agrochemicals, 101–105 at contract research organizations, 17–20, 191–192 cost calculations, 66–67 expenditures in fi ne chemical industry on, 57 marketing of fi ne chemicals and, 125–126 objectives, 58–60 overview of, 57–63 productivity issues in, 179–185 project execution and management, 61–63 project initiation, 60–61 Risk assessment, and, 59–60 “Reshuffl ing” process, for biocatalysts, 33 Responsible Care trademark, plant operation and, 51 Restructuring issues, pharmaceutical industry/custom manufacturing, 177–179 Return on net operating assets (RONOA), management assessment and, 70–71 Return on sales (ROS) measurements, risk/reward profi le, 70–71 Ring structures, N-heterocyclic chemicals, 22–23 Risk/reward profi le, management assessment and, 69–71 “Sale and back-lease” model, restructuring and outsourcing issues and, 178–179 Sales channels: marketing of fi ne chemicals, 123–126 for pharmaceuticals, 100

233

Sales volume for fi ne chemicals, 4–5 agrochemicals, 101–105 animal health industry, 106–108 flavors and fragrances specialty chemicals, 117–119 generics/API-for-generics industry, 186–188 geographic and customer targets, 137–142 growth expectations, 87 pharmaceutical industry, 93–101 Saltigo, ranking, 195–196 Segregation of chemicals, plant design and, 42–51 Shasun acquisition of Rhodia Pharma Solutions, 223 ranking, 193 Siegfried ranking, 193 sales development of, 87–88 Sigma Aldrich Company, 20 Silicon wafers, electronic chemicals and, 116 “Silo” conditions, organizational structure, 75 Simulated moving-bed (SMB) separation, single-enantiomer fi ne chemicals, 29–32 Single-enantiomer fi ne chemicals, traditional synthesis of, 27–36 Size of fi ne-chemical businesses: big molecule development and, 172–175 contract research organizations, 16–20, 141 custom manufacturing companies, 9–16 future trends in, 193 geographic regions and, 139–141 mergers and acquisitions and, 10–11 overview, 81–83 rankings in pharmaceutical industry, 93–95 of specific companies, 13–14 Small-molecule compounds: biosynthesis of, 34–35 biotechnology and, 172 structural properties, 22–23

234

INDEX

Solid phase synthesis, peptides, 30–32 Specialty chemicals: adhesives industry, 109 biocides, 109, 112–114 catalysts and enzymes, 114 defi ned, 3–5 dyestuffs and pigments, 115–116 electronic chemicals, 116 flavors and fragrances, 117–120 food and feed additives, 119–120 overview of, 120 polymer development, 120–122 Standard products, marketing of, 136–137 Standards, for plant operations, 51–56 Strategic alliances, key account management and collaborative relationships, 157 Supercritical fluid (SCF), singleenantiomer fi ne chemicals, 29–32 Supplier-customer cooperation: globalization of fi ne chemical industry and, 170–171 intellectual property rights and, 150 supply contracts, 149–150 “Suppliers’ day” concept, market targeting and, 137–142 Supply contracts, elements of, 149–152 Supply push, project initiation and, 60 Suven, sales development of, 88 Synergistic effects in chemical research, acquisitions trends and, 11 Target products and services: geographic market regions and customer categories, 137–141 marketing of fi ne chemicals and, 126–137 nonexclusive APIs, 130–136 Technology differentiation, future trends in, 192–194 Technology package, project management and, 61–62 Terpenes, in aroma chemicals, 117–119

Therapeutic categories, biopharmaceuticals, 100 Thermo Fischer Scientific, 20 Thymidine, biosynthesis of, 35 Time and materials requirements, supply contracts, 152 Time-based approach, pricing models for fi ne chemicals, 147–148 Toll manufacturing, defi ned, 129 Top-down chemical synthesis, fi ne chemicals, 26–33 “Top-down” pricing, marketing of fi ne chemicals and, 144–148 Total value, fi ne chemicals market, 82–83 Train concept, multipurpose plant design, 48 Training programs, plant operation and, 52–53 Transferases, as biocatalysts, 33 Unique selling proposition (USP), project initiation and, 60–61 United States, exodus of fi ne chemical industry in, 167–171 United States Pharmacopeia and National Formulary, drug standards, 52 User requirement specification, plant design, 43 Value-added chain, fi ne chemical positioning in, 5–7 Veterinary drugs, sales volumes for, 107–108 Vitamins, specialty chemicals for, 119–120 Volume-based pricing, marketing of fi ne chemicals and, 144–148 “We, too” drugs, pricing models for fi ne chemicals, 146–148 Working capital: plant design and, 43 reduction assessment, 69