May 2006 Clariant Unloads Pharma Fine Chemicals Business Private equity group TowerBrook Cpaital Partners purchased the pharmaceutical fine chemicals business of Clariant, which makes raw materials, intermediates, and active pharmaceutical ingredients for the pharmaceutical industry, for approximately $86 million (Euro 70 million, SF 110 million). The deal is expected to be finalized by the second quarter of 2006. According to the two companies, the new independent Clariant Pharmaceutical Fine Chemicals, which will be headquartered in Frankfurt am Main, Germany, will be one of the largest pharma fine chemicals based businesses in the world. TowerBrook plans to grow the businesses through capital investment and further acquisitions.   Famous Quotes of the Month - If you have integrity, nothing else matters. If you don't have integrity, nothing else matters. (Alan Simpson) - The truth is more important than the facts. (Frank Lloyd Wright) - Willingness to change is a strength, even if it means plunging part of the company into total confusion for a while. (Jack Welch) - I recommend you to take care of the minutes, for the hours will take care of themselves. (Lord Chesterfield) - The power of imagination makes us infinite. (John Muir) Why Do Teens Sleep Late? They're not lazy; they can't help it. During childhood, melatonin, the hormone that regulates the wake-sleep cycle, is secreted by the pineal gland early in the evening. When puberty hits, from around ages 10 to 14, melatonin is released later, around 9 P.M. or 10 P.M. This shift often makes many teenagers incapable of falling asleep before 11 at night, and as we know, often stay up even later than that. Since teens still need about nine or more hours of sleep, they try to make up for the time they've lost at night by sleeping in. Aggressive Pharma Plan for Akzo Nobel Akzo Nobel has new product submissions, four drugs in Phase III clinical trials, and eight compounds in Phase II trials. The company hopes to make at least one major filing per year based on its pharma pipeline. Currently Akzo is waiting for U.S. FDA determinations on its contraceptive Implanon and hormone therapy Livial. The company expects to submit filings for two of its Phase III drugs - Asenapine for mental health and Sugammadex for anaesthesia in 2007. In 2008 and 2009 it plans submissions for additional contraceptive drugs (Org 36286 and NOMAC/E2, respectively), and in 2010 hopes to file for an insomnia treatment (Org 50081). Lower Margins Hurt ExxonMobil Chemical Profits ExxonMobil's chemical earnings fell by $333 million from $1.282 billion in the first quarter of 2005 to $949 million in the first quarter of 2006. The company attributes the decrease in earnings to reduced margins. The company reported a total profit of $8.4 billion as compared to $7.9 billion in the first quarter of 2005. Higher crude and natural gas sales account for the growth. Polymers Business Impacts Eastman Profits Higher raw material and energy costs and expenses related to disruptions in operations at its Longview, Texas plant lead to significantly lower earnings for Eastman's polymers business during the first quarter of 2006. The polymers business reported operating earnings of just $17 million, $67 million lower than the year-earlier quarter. These results impacted the company's overall first quarter operating profits, which totaled $184 million (Euro 147 million), down from $244 million in the first quarter of 2005, while overall sales were up 2 percent as compared to the first quarter of the year before. Private Equity Owners Could Sell Cognis The attractiveness of the current chemical market has led SV Life Sciences, Permira Funds, and GS Capital Parnters, the private equity owners of Cognis, to consider selling the business. Other possibilities include an initial public offering or formation of an alliance. A final decision is anticipated by the end of 2006. In 2004, Cognis had revenues of $3.72 billion (Euro 3.07 billion) based on sales of its chemical products to the personal care, home care, modern nutrition, high-performance and industrial markets. Worldwide Restructuring Continues at Lanxess A third stage of Lanxess' restructuring plan will involve realignment of styrenics and synthetic rubber production in North and South America. The company will reduce its global workforce by 250 positions by 2007. Plants in Addyston, Ohio and Orange, Texas in the U.S. and Camacari, Brazil will likely be affected. All styrenics production in North America will be moved to the Addyston facility. Future options for Lanxess' textile processing chemicals business are currently being considered. Degussa Appoints new Chairman Degussa appointed Klaus Engel, managing director of Brenntag, to replace Utz-Hellmuth Felcht as chairman effective June 1, 2006. Felcht's departure could be related to the development of a difficult relationship between himself and RAG chairman of the board Werner Muller. Dow's Liveris Now Chairman of the Board President and CEO Andrew Liveris was appointed Dow's Chairman of the Board, replacing the retiring William Stavropoulos. Liveris became president and CEO in 2004. China, U.S. Discuss Trade Progress was made between the U.S. and China regarding intellectual property protection issues and access to markets, but revaluation of China's currency will not be accelerated. Chinese President Hu Jintao indicated that China is working to increase domestic consumer demand and expects to maintain economic growth through domestic consumption. Revaluation will not be accelerated, though, because China fears a quicker rate would destabilize its domestic economy. In an agreement signed by China's vice premier Wu Yi and U.S. commerce secretary Carlos Gutierrez, China did commit to establishing special courts to deal with intellectual property complaints, working to eliminate discrimination against U.S. companies, and taking steps to stop counterfeiting of U.S. goods. China has also agreed to review U.S. concerns about production of active pharmaceutical ingredients and bulk chemicals in the country. Higher Interest Rates in China In order to slow down its domestic economic growth rate, the People's Bank of China raised interest rates for the first time since October 2004. Rates were hiked on one-year loans by 27 basis points, to 5.85 percent effective April 28th. Commodity stock prices fell in response to the announcement. Deposit rates remain unchanged at 2.25 percent. Private Equity More Involved with Chemical Acquisitions According to Michael Ducey, president and CEO of Compass Minerals International, private equity firms are abandoning their traditional approach of buying low, improving margins, and exiting the business in the chemical industry. Instead they are switching to tactics that are based on significant involvement in the chemical operations they acquire. Many PE firms are hiring chemical industry experts and are participating more extensively in strategic decision making. This approach still requires that the PE firm have a clear exit strategy and a means for creating a sustainable business model for generating cash and paying dividends. Indian Pharma Companies Investing in R&D Profits generated by Indian companies from activities in the generic pharmaceutical arena are being funneled into R&D for new drug development, particularly on non-infringing patent processes for active pharmaceutical ingredients soon to come off-patent. According to the Council of Scientific and Industrial Research India, 15 or more Indian pharma companies are involved in drug discovery. Patent legislation (Trade-Related Intellectual Property Rights or Trips) introduced in India in 2005 recognizes patents on both products and processes, which will prevent the sale of 'copycat' drugs based on different manufacturing processes to the domestic market. To fill the gap, Indian companies must develop novel products. In addition to investing in their own R&D programs, many are investigating in-licensing deals as well. The new patent law is also making India attractive as a place for contract research and development and clinical trials. Ranbaxy Makes European Acquisitions Ranbaxy has taken steps to establish itself as a global player in the pharmaceuticals market with several acquisitions of European generic drug producers. Two recent purchases include Belgian company Ethimed NV and Romanian firm Terapia. Ethimed provides Ranbaxy with access to the Benelux markets, while Terapia is the largest independent generics company in Romania, which is the fastest growing pharma market in Central and Eastern Europe. Schering Management Agrees to Bayer Bid Bayer's $20 billion (Euro 16.5 billion) bid for Schering has been accepted by Schering's management and supervisory boards. According to BASF, the bid is Euro 200 million higher than initially proposed due to the issuance by Schering of shares to fulfill employee options. As part of the deal, Bayer has agreed to keep the Schering name and the company will remain headquartered in Berlin. Approximately 6000 positions will be cut from the merged company over the next several years. The offer is now open to shareholders until May 31, 2006. It could be extended into June if the 75 percent minimum acceptance threshold is achieved. The transaction will be subject to approval by regulatory agencies in the U.S. and Europe. BASF Still Hoping to Acquire Engelhard After extending its offer of $37 per Engelhard share for the fourth time, BASF increased its cash offer for the company to $38 (Euro 31)/share. Engelhard's board of directors rejected this hostile takeover bid as well and announced that it will buy back 20 percent of its stock (26 million shares) at $45 (Euro 36)/share beginning in May. The company is also pursuing a cost cutting program designed to achieve savings of $15 million/year beginning in 2007. Analysts predict that BASF will need to make an offer of as much as $41/share or more to have any change of succeeding with its bid. BASF may turn directly to Engelhard shareholders in an attempt to expand the board and fill the new seats with its own nominees in order to gain a majority that could vote to accept the bid. Chemspec India 2006 Resounding Success Chemspec India 2006, recently held in Mumbai, attracted over 12,000 attendees (visitors and exhibitors), bringing together 291 exhibiting companies from 12 countries that offered products, services, and technology for the custom, fine and specialty chemical markets. While the facilities could have been better, the quality of attendees was excellent, with interest spread over a wide range of fine and specialty chemical industries. Many exhibitors reported that they made many new contacts at the show as well as met with existing customers. Several also found the show to be highly fruitful from a sourcing perspective. New Demand for Hydrocolloids Traditional markets for hydrocolloids will experience moderate growth, but new application areas could experience a measurable increase in demand. The global market for hydrocolloids is estimated to be $3.85 billion, according to IMR International. SRI Consulting estimates the average growth rate for hydrocolloid consumption to be 1.5-2.5 percent per year through 2008, with certain products such as Pectin, Xanthan and Carrageenan exceeding these numbers (4-6 percent annual growth). Starches account for about $1 billion of the total market and are mainly used in food and beverage applications. They are facing substitution by lower cost alternatives. Gelatins are the second largest type of hydrocolloids, with a market value of approximately $930 million. This segment is holding steady due to a lack of effective substitutes, despite the trend to move away from animal derived food ingredients. Sale of Rhodia's Custom Synthesis Business Finalized The sale of Rhodia's pharmaceutical custom synthesis business to India's Shasun Chemicals & Drugs has been completed. Through the transaction, Shasun acquires hydrolytic kinetic resolution, aromatic bond formation and radical trifluoromethylation technology. The business provides process development and custom manufacturing services throughout the world. According to the company, Shasun will use the acquisition to leverage its position in contract research and manufacturing. Strong Demand for Gallium Arsenide Devices Sales of Gallium arsenide (GaAs) devices are predicted to increase 36 percent from $3.0 billion (Euro 2.5 billion) in 2006 to $4.08 billion (Euro 3.4 billion) in 2010, according to Strategy Analytics. Demand for wireless products, multi-mode and multi-band cellular phones in particular, will drive this growth. GaAs technology provides enhanced data transmission rates and will play a role in the development of general packet radio service, a global system for mobile communications, wideband digital radio communications technology, pseudomorphic high electron mobility transistors, and other advancements, according to the consulting company. 2006 Revenue Looking Good for Commodity Chemicals Growing demand combined with reduced raw material costs should lead to higher earnings for commodity chemical producers in 2006. According to Deutsche Bank, Ethylene demand in particular is expected to be strong despite increased production, with peak margins continuing. Declines in Polyethylene prices are also expected to slow as exports and seasonal demand increase. Ethylene Spot Prices Climbing in U.S. Ethylene spot prices in the U.S. have increased more than 30 percent in recent weeks as a result of higher Ethane and Naphtha costs and plant shutdowns. Spot prices are near contract prices, according to U.S. gulf traders, with the gap being reduced to under 5 cents/lb. Typically the difference in spot and contract Ethylene prices is 10 cents/lb. or more. High Toluene Prices in Asia Rising demand, a tightness of supply, and higher energy prices have contributed to rising Toluene prices in Asia for the past six months. Plant turnarounds, low inventories at Asian traders, and a growing demand for Toluene in the U.S. as an alternative blending component in gasoline (to replace MTBE) have all been factors in the upward price trend. Sale of Refinery Could be Lucrative for Lyondell and Citgo Analysts estimate that the sale of a jointly owned 268,000 barrel-per-day refinery in Houston could net Lyondell and Citgo $3 billion to $5 billion. Lyondell's investment in the facility would be worth approximately $2 billion if the refinery sells for around $3.5 billion. Analysts expect strong interest in the refinery, which is a modernized facility that processes heavy, high sulfur oil from Venezuela. The companies will not proceed with the sale unless the market brings the desired value.