Report of the Directors
Business Review

Financial Review of Operations
Fine Chemicals

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Description of the Business

Fine Chemicals Division supplies active pharmaceutical ingredients (APIs), fine chemicals and other speciality chemicals to a wide range of chemical and pharmaceutical industry customers and research institutes globally. Its products help relieve pain, treat cancer and alleviate other medical conditions, thus improving the quality of life for many people around the world. It comprises two areas:

API Manufacturing

Our API Manufacturing businesses supply APIs and intermediate products for the pharmaceutical and fine chemical industries and provide contract research services to the pharmaceutical industry. Macfarlan Smith, based in Edinburgh, UK is the world’s leading manufacturer of opiate alkaloids which are used for pain management and other pharmaceutical applications. Our US based Pharmaceutical Materials and Services business specialises in the manufacture of APIs for controlled drugs and for platinum based anticancer treatments. It also provides a full range of commercial scale manufacturing services for APIs to both generic and branded pharmaceutical companies.

Research Chemicals

The Research Chemicals business is a globally integrated supplier of speciality inorganic and organic chemicals and biochemicals. The business supplies chemicals into both industry and research institutions in small scale research quantities, via its catalogue, and bulk scale shipments. Around 50% of its sales are to pharmaceutical companies. It operates under the Alfa Aesar brand name and is based in the UK, USA, Germany, China and India. The operations in the UK and China have manufacturing capability servicing the catalogue and the needs of external bulk scale customers and provide custom synthesis of key pharmaceutical intermediates for both external and internal customers.

Performance in 2011/12

Fine Chemicals Division exceeded our expectations in 2011/12 with very strong growth in its API Manufacturing businesses and continued good growth in Research Chemicals. Revenue in the year increased by 15% to £292 million. Sales were 16% ahead at £285 million and operating profit was 24% higher at £69.7 million boosted by increased demand. In our North American API manufacturing operations we are beginning to realise the benefits of the acquisition of the Riverside facility in Conshohocken, USA in November 2010. The division’s return on sales also improved, up 1.6% to 24.5%.

API Manufacturing Businesses

The division’s API Manufacturing businesses, which represent 72% of Fine Chemicals’ sales, had a very good year with sales up 18% to £206 million and stronger growth in operating profit.

The businesses continued to benefit from the trend towards the use of generic APIs by the healthcare industry. Sales at Macfarlan Smith grew steadily this year, particularly due to higher demand for its bulk opiate based products, such as codeine which is used in pain management. Increased stability in narcotic raw material supplies allowed the business to recover market share in bulk opiates outside North America. The business also saw an improvement in operational efficiency as a result of a restructuring programme completed in the first half of the year.

Pharmaceutical Materials and Services performed very well this year, benefiting from the additional capacity afforded by the Riverside facility and some acquired legacy business. The new plant, which more than doubles our manufacturing capacity in North America, has been successfully integrated with the business’ other US operations. This purpose built facility is enabling us to manufacture products more efficiently, allowing us to capitalise on new opportunities to grow sales and increase our market share, particularly in the supply of opiates used in pain management and amphetamines used in attention deficit hyperactivity disorder (ADHD) drugs. During the year we have focused on transferring technology to Riverside to optimise our API production in North America. Product transfer from Macfarlan Smith to Riverside is now also underway as the division works to optimise its API production globally.

The business also benefited from strong sales of the generic version of ADDERALL XR®, which is used in the treatment of ADHD, and from the launch of a niche, high value ophthalmic drug. Drawing on its manufacturing and contract research expertise and working in collaboration with generic pharmaceutical companies, the business has developed several other niche products that have been filed with the US Food and Drug Administration and which should support a steady stream of new products over the next few years.

The results of our API Manufacturing businesses also benefited from revenue from Endo, the US based healthcare company, relating to an oxymorphone patent.

Research Chemicals

Research Chemicals performed well in 2011/12 benefiting from an increase in market share and the continued introduction of new products. Sales were 10% ahead of prior year at £79 million with good growth across North America, Europe and Asia. Operating profit grew ahead of sales. Sales growth in Asia was particularly strong, up 24% on prior year, supported by an increase in R&D spend by pharmaceutical companies in the region. The business has expanded its range this year, adding 4,500 new products, and its rate of new product introduction continues to increase. Our manufacturing capability, together with the strong synthetic chemistry expertise in Research Chemicals and more widely across Fine Chemicals Division, position the business well to further increase its portfolio of products.

In July 2012 the business launched a new biochemical product catalogue in North America, targeting the life science R&D market. This market offers opportunities outside North America and as a result the business plans to roll out its biochemical range to other regions in the coming year, supported by its global sales and manufacturing infrastructure.

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