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. Our UK business, based in Edinburgh, is the world’s leading manufacturer of opiate alkaloids which are used for pain management and other pharmaceutical applications. Our US business, which operates from three locations in the north east of the USA, 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 2012/13

After two years of strong growth, the performance of Fine Chemicals Division was impacted by increased competition in the UK regulated market in 2012/13. The API manufacturing business in the US and Research Chemicals both performed broadly in line with last year. Overall, revenue was 2% down at £286 million, sales were 3% below last year at £277 million but underlying operating profit was 2% ahead at £71.1 million. The division’s underlying return on sales improved by 1.1% to 25.6%.

API Manufacturing

The division’s API Manufacturing businesses, which represent 71% of Fine Chemicals’ sales at £198 million, had a challenging year with sales 4% lower and underlying operating profit down by a similar amount.

During the year, higher levels of importation of controlled substance products into the UK led to increased competition in our market. Despite this we were able to maintain volumes at levels close to last year, but prices fell particularly for bulk opiates used in pain relief, such as codeine and dihydrocodeine. In response to this increased competition we undertook a review of our global API manufacturing and, as a consequence, have restructured the business to improve its efficiency. A charge of £14.2 million, which is excluded from the division’s underlying results, was made in the year to write off assets that will no longer be required following the consolidation of global manufacturing and to reduce staff numbers by 30 in the UK. This should result in cost savings of £5 million per annum in the second half of 2013/14.

In addition, we continue discussions with the UK government to understand their future intentions on importation of controlled substances, although we believe that a whole scale opening up of this market is unlikely. Our business is, however, now better positioned to return to growth and respond to any market changes that result.

The business saw continued growth in volumes for attention deficit hyperactivity disorder (ADHD) treatments and for opiate based pain relief products. Since the year end our customers have received approval for the launch of a new generic drug that utilises APIs manufactured by us in the UK and that is used to treat drug addiction; this should help to boost sales further in 2013/14 and beyond. The business continued to benefit from oxymorphone patent revenue from Endo, the US based healthcare company.

Research Chemicals

Research Chemicals performed in line with last year with sales at £79 million. Sales grew in Europe and Asia, but fell slightly in North America. Operating profit grew ahead of sales as the mix of higher margin catalogue sales grew at the expense of bulk sales.

During the year, work began on the construction of new warehouses in Shanghai, China and Nevada, USA. The Shanghai warehouse will enable the business to relocate its existing facility from Tianjin in the north of China to the more lucrative markets surrounding Shanghai. The Nevada warehouse will provide the business with a physical presence on the west coast of North America, significantly improving service levels to customers in this region. Both facilities will be completed in the first half of 2013/14.

The business continued to expand its range and during the year over 8,000 new products were added, many of which are unique and exclusive to Alfa Aesar.

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