Catalyst

CW website’s ‘Quote of the Day’ today illustrates an alarming state of affairs regarding the counterfeiting of pharmaceuticals. The quote, “These guys have got some balls,” was made by a spokesman for China’s State Food and Drug Administration (SFDA) on criminals who set up a fake version of the drug watchdog’s website to promote their own ‘miracle’ drugs, so says a report by Reuters.

So now we know what industry groups such as SOCMA and the European Fine Chemicals Group, among others, are up against. As fine chemical manufacturers what are your experiences of pharmaceuticals counterfeiting and how do you think the industry should respond?

Leading industry executives are lining up to support the 2008 U.S. presidential campaign of Republican Mitt Romney, according to a review of contributions filed with the Federal Election Commission (FEC; Washington). Romney, the former governor of Massachusetts and co-founder of private equity firm Bain Capital, has an impressive roster of industry support.
All four of ACC’s 2007 officers have contributed to Romney’s campaign: Andrew Liveris, Dow Chemical chairman and CEO and ACC board chairman; Robert Wood, Chemtura chairman and CEO as well as chair of ACC’s executive committee; David Weidman, Celanese chairman and CEO and ACC board vice chair; and Jack Gerard, ACC president and CEO. Gerard is also serving as a national finance co-chair for Romney. Several other executives have also contributed to Romney.
Romney’s positions on education, energy, and research sync well with views of many in industry. An energy position paper issued by Romney calls for “efforts related to conservation and efficiency measures, developing alternative sources of energy like biodiesel, ethanol, nuclear, and coal gasification, and finding more domestic sources of oil such as in the Arctic National Wildlife Reserve or the Outer Continental Shelf.”
Romney also supports greater investment in materials research. “Corporations today spend more on tort liability than they do on R&D,” another Romney position paper states. “While the government already invests heavily in defense, space, and health technologies, it is time to invest substantially in technologies related to power generation, nanotechnology, and materials science.”
Support is not unanimous, however. Nova Chemicals chairman and CEO Jeff Lipton has contributed to both Romney and Republican presidential candidate Rudolph Guiliani, the former mayor of New York City, according to FEC filings. Rohm and Haas chairman and CEO Raj Gupta, meanwhile, has contributed to the campaign of leading Democratic contender Hillary Clinton.

The ongoing credit crunch has put the brakes on large chemical M&A deals. Activity has slowed after a frenzied spring and early summer that saw $1-billion-plus deals frequently surface. Investment banks still need to place $200 billion-$300 billion in leveraged buyout (LBO) financing that was committed before credit markets froze in July. Banks are reluctant to fund further big deals until those loans clear, analysts say. Among big industry deals in the pipeline are Basell’s pending acquisition of Lyondell Chemical, which has $21 billion in debt financing attached, and Apollo Management’s planned acquisition of Huntsman, through its Hexion unit, valued at $10 billion including debt.

“In practical terms this means that for the next few quarters we may not see another Hexion-Hunstman transaction sponsored by a large private equity fund,” says Chris Cerimele, senior v.p. at Lincoln International. “At least, probably not in the U.S.”

Attention and activity is shifting toward deals in the middle market, or those with lower price tags. “Funding is still available for smaller deals, it’s just that the loan cost is 150 basis points (1.5 percentage points) more expensive than it was earlier in the year,” says one executive at a private equity firm that targets transactions as large as $500 million.

Deal structures are changing and terms have become more “lender friendly,” Cerimele says. “Previously a single lender would fully underwrite a deal and then syndicate post-closing,” he says. However, “we are now seeing the return of club deals, with pre-close syndication required,” he adds. Buyers are putting up more equity, and loan pricing is higher, Cerimele says. “Covenants, which had begun to disappear during the height of the market in the first half of 2007, are now reappearing,” he says.

Chemical makers, particularly those with strong balance sheets, appear better positioned now that private equity faces financing constraints. Producers say they are evaluating acquisitions, particularly bolt-on deals, but are, so far, still cautious. M&A activity is likely to be tempered by the credit crunch and concerns over the economic outlook, says Wesley Chinn, chemicals analyst with Standard and Poor’s (New York). “However, the shakeup in M&A appears to create some opportunities for chemical companies looking for strategic assets,” because firms previously faced stiff competition from private equity firms.

Chemical makers continue to struggle with high and volatile feedstock costs as third-quarter earnings reports demonstrate. Forecasts that energy and feedstock costs would moderate in the second half have not materialized as crude oil, propane, and ethane continue to notch up to new record highs.
Conditions overall are solid but producers are still trying to recover soaring feedstock costs. “Margins [in the third quarter] did not expand to levels that we believe reflect the supply/demand balance,” says Lyondell Chemical chairman and CEO Dan Smith.
Ethylene increases of 5 cts-6 cts/lb in October have been announced, and a further increase of 9 cts/lb has been announced for November. Polyethylene increases totaling 15 cts/lb have been announced for October and November. Specialty chemical makers are also feeling the pain. Rohm and Haas announced price increases of 5%-15% across its product line last week, citing raw material pressures (p. 7).
Fourth-quarter price increases are more difficult to implement because of seasonal demand weakness and end-of-year inventory drawdowns. Margins dropped sharply for chemical producers, particularly those in the ethylene chain, in late 2006 and early 2007, due to a consumer-led inventory correction that caused prices, margins, and demand to fall sharply.
The failure of feedstock costs to moderate in the third quarter has led producers to become more urgent about the need for price increases this quarter. Conditions appear stronger this year as ethylene operating rates remain in the mid-90% range and exports are soaring. “I do not believe we will see much opportunity for any meaningful inventory builds in the fourth quarter, so I am also very bullish on 2008 for our industry on the assumption that the global economy stays reasonably healthy, oil prices and therefore naphtha prices stay relatively high, and the U.S. dollar will not strengthen significantly,” says Nova Chemicals president and CEO Jeff Lipton.

Join Chemical Week as it returns to New Orleans for the 13^th Annual Chemical Transportation, Distribution and Security Conference – the only event dedicated to supply chain, distribution, security and logistics within the chemical industry.

This year’s conference tackles a slew of urgent new issues in transportation, distribution, and security that the chemical industry is contending with. What do new security policies mean for the transportation and distribution of chemicals, especially hazardous materials? How is the chemical industry dealing with continuing labor shortages among carriers? Are freight rates going to climb further in 2008? Are there still lessons to be learned for shippers and carriers from the devastating hurricanes that hit the U.S. Gulf Coast in 2005?

Central themes to be addressed at the 13^th Annual Chemical Transportation, Distribution and Security Conference include:

· The ins and outs of the Department of Homeland Security’s new security law, and its implications for production, storage and transportation of chemicals

· How the industry is addressing rising freight rates and labor shortages among carriers

· A look at the rebuilding of New Orleans two years after the devastation caused by hurricanes, and the lingering effect on the transportation network

· Lessons learned in emergency preparedness and disaster recovery

This year’s conference will take a closer look at these issues, and provide you with the opportunity to analyze and discuss them with your peers and experts in the field.

To register for the 13^th Annual Chemical Transportation, Distribution and Security Conference, visit www.chemweek.com/conferences/transportation08.