Pharma contributes to strong 2004 at BASF

- Last updated on GMT

Related tags: Fine chemicals, Material, Supply and demand, Pharmacology, Basf

German chemicals giant BASF reported strong earnings increases
across the board yesterday, helped by pricing increases. The
companies activities in pharmaceuticals, part of its chemicals and
fine chemicals units, also did well, report Dominique Patton and
Phil Taylor.

As expected, BASF saw a hefty rise in operating profit, up 83 per cent to €4.86 billion, with the strong increase in industrial output during 2004, especially in Asia and the US, lifting demand. In this climate, chemicals firms have also been able to raise prices to pass on higher raw material costs to customers.

Continuing high energy and raw material costs - with oil prices up 30 per cent this year - will however influence a drive to prioritise value over volume, a strategy that will be difficult to put into place in the fine chemicals unit.

"If raw material prices over one month can increase 65 per cent, for example benzene, then you can no longer focus on volume,"BASF​ board chairman Jurgen Hambrecht told a press conference in Ludwigshafen.

Yet the fine chemicals business, which has customers in the human and animal nutrition sectors as well as pharmaceuticals and cosmetics, has seen margins reduced to 2.7 per cent from 6.8 per cent the prior year.

Much of the damage came from lower vitamin prices that eroded a volume growth of 6 per cent. Sales to third parties from this unit fell 2.8 per cent during 2004 to €1.79 billion while earnings before interest and tax fell 61.6 per cent to €48 million.

"It is not without risk of you prioritise value over volume,"​ noted Hambrecht, pointing to the 'real challenges' in the fine chemicals unit.

"With lysine and vitamin C we have overcapacity on a global basis. But prices are not just governed by supply and demand. There is also an alternative lysine source, soy, and if these prices go down it affects us independently of supply and demand,"​ he explained.

Within fine chemicals, the BASF Pharma Solutions business did well, helped by the introduction of new products in its polymer-based Kollicoat range of tablet coatings, although the company does not break down its financial results to this level. In 2005, the company the group will also expand its activities in contract manufacturing and will start operations at a new production and packaging plant for active pharmaceutical ingredients and excipients in Minden, Germany.

In the chemicals sector, which includes BASF's activities in pharmaceutical intermediates, sales rose 22 per cent to €7.02bn, while EBIT soared 215 per cent to €1.24bn. Highlights for 2004 included a collaboration with Solvias, adding chemical capabilities for the manufacture of chiral compounds in addition to BASF's biological technologies, and the expansion of its portfolio of specialties based on boron and potassium, which are mainly used in the production of pharmaceuticals and herbicides.

The company also highlighted a new process to make butyl acetate - used in the manufacture of pharmaceuticals - which uses an ion-exchange resin as a catalyst instead of sulphuric acid and reduces the level of organic substances in wastewater.

Looking ahead, BASF has forecast a slight decline in sales and a moderate increase in income from fine chemicals operations during 2005, but declined to comment on where this improvement in income would come from. For chemicals, the company expects sales and income to remain at 2004 levels.

BASF has been working on reducing fixed costs to offset falling prices. In November the firm said it will shed about 3,600 jobs at Ludwigshafen over the next three years as part of efforts to improve efficiency.

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