In his book "Fine Chemicals - The Industry and the Business," Dr. Peter Pollak provides a comprehensive view on one of the most challenging segments of the modern chemical industry, and a practical guide for succeeding in the multibillion dollar fine chemicals business.

The second edition, which was published by Wiley in May, takes developments in the field since the first edition was written into consideration, including substantial updating of facts and figures; new chapters on M&A and biosimilars; and a discussion of the offer/demand development of the modern pharmaceutical fine chemicals industry. Before becoming a consultant in fine chemicals business and a board member of several fine chemical companies, Pollak spent more than 30 years at Lonza.

CHEManager Europe asked him about the development and the current and future challenges of the global fine chemicals industry.

CHEManager Europe: Dr. Pollak, you write in your book that all fine chemicals, in general, are used to make specialty chemicals. Is there a more detailed definition that helps to understand the importance and value of fine chemicals?

Peter Pollak: Fine chemicals are complex, single, pure chemical substances. They are produced in limited quantities - up to about 1,000 tons/year - in multipurpose plants by multistep batch chemical or biotechnological processes. They are described by exacting specifications, used for further processing within the chemical industry and sold for more than $10 per kilo.

The class of fine chemicals is subdivided on the basis of the added value - building blocks, advanced intermediates or active ingredients - and the type of business transaction, namely standard or exclusive products.

The pharmaceutical industry, which is the largest user of fine chemicals, distinguishes between drug substance, which is the active ingredient, a fine chemical, and drug product, which is the formulated, finished drug, a specialty.

The fine chemicals industry is very fragmented...

Peter Pollak: Yes; globally, there are 2,000-3,000 fine chemical companies, extending from small, "garage-type" outfits in China making just one product, all the way to the big, diversified companies. Among the top 20, 17 are divisions of large chemical or pharmaceutical companies like Albemarle; BASF; and Boehringer-Ingelheim, and there are only three pure players. In terms of geography, nine of the top 20 are located in Europe, which is recognized as the cradle of the fine chemical industry. An example in case is the world's No. 1 company, Lonza, headquartered in Switzerland. The second largest geographic area is Asia, housing seven of the top 20. With four large companies, the U.S. ranks last. The combined revenues of the top 20 reached about $10 billion in 2009.

Traditionally a European and North American business, the fine chemicals industry is globalizing at a fast pace. What are the driving forces behind this globalization?

Peter Pollak: In the fine chemical industry, globalization mainly refers to the impressive foray of Asian, especially Chinese and Indian companies. In simple terms, their success is based on their "high skill/low cost / bright future" competitive advantage. "High skill" not only refers to the education of managers and scientists (not to mention the sheer number of university graduates), but also to the quality of the fine chemical plants, corporate governance, safety, health and environment standards, regulatory compliance, etc.

Auditors from the leading Western pharmaceutical companies agree that the top tier Chindian (Chinese and Indian) companies' standards are in line with those of their Western competitors. "Low cost" not only means low wages for the plant operators, but also low construction costs of Chindian fine chemical plants.

A dramatic example is the cost of the pivotal piece of equipment of every multipurpose fine chemical plant, the reaction vessel. The unit cost for a fully installed reactor ranges from $10 milllion/m3 for a reactor installed in a Western Big Pharma company, to $1 milllion/m3 for a Western plant, and $0.1 milllion/m3 in a Chindian plant.

"Bright future" means that the demand for the two main outlets for fine chemicals, namely pharmaceuticals and agrochemicals, enjoy "double digit percent annual growth rates" in the Eastern hemisphere, whereas it has decreased to "low single digit percent annual growth rates" in the Western part of the world. The main beneficiaries of this surging demand obviously will be the domestic suppliers in Asia.

Most fine chemicals are produced captively or under an exclusive contract for a single customer, especially when it comes to fine chemicals used for pharmaceuticals. What kind of pressure does the consolidation of the customer base (e.g. pharma) put on fine chemical companies?