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Starting a Chemical Business

I wanted to highlight this latest post by Gaussling on starting a chemical business. (Here‘s an earlier one). In today’s environment, I’m sure that this has crossed many people’s minds, and this series has a lot of wisdom to offer on how to do it (and how not to). Not everything that looks like it should make money will do so:

The other big negative to selling proprietary reagents or processes is negotiating the terms and pricing. From the customers perspective, adopting your composition or process means that smack in the middle of their process train they have to manage a licensed technology with extra paper work and auditing. This is a big problem with catalysts. Many of the newer catalysts you see in the Aldrich or Strem catalogs are proprietary and must be used under a license agreement. Nothing stirs the creative juices like the desire to avoid paying royalities by finding white space in a patent or inventing a new process.
Having been involved in such license negotiations, I can say that you need to have a lawyer looking over your shoulder while you consider the terms and conditions. These agreements often entail upfront fees and a sliding scale of pricing based on usage. Some IP owners want a piece of your gross product sales resulting from the use of their technology. An annual audits may be expected as well. It’s like having raccoons in your picnic basket.

Indeed. I can tell you from my own experience, on the other side of the table, that few things will make your potential clients want to see your back more than asking for a percentage of the eventual profits. Fee-for-service is a lot easier to handle, but is of course less profitable.
And even then, pricing is tricky. Sometimes there’s not much space in between “Who do these people think they are?” and “They’re so cheap that there much be something wrong”. My advice to anyone starting such a business is to be open to all sorts of different arrangements, to at least get your foot into as many doors as possible. Your potential clients will probably be a pretty variable bunch, and you’ll need to be able to vary right along with them.

9 comments on “Starting a Chemical Business”

  1. Sean Seaver says:

    We work with a lot of small chemical companies and list their products on our site.
    The terms that researchers end up getting from big distributors are appalling. Well, good if you are an investor, bad if you are a start up.
    I’ve talked with companies that have their products rebottled and marked up 10x. Quality is obviously a big deal and requesting a certification of analysis should allow for an easy comparison.

  2. My 0.02 says:

    From a personal experience, you need to get your company out there first and foremost. If you have a good product and/or service, you will get compensated eventually. Don’t get hang up on the arrangement. You need lots of patience to get big companies to adopt your process or use your outsourcing service. Don’t forget bureaucracy in big companies that we are all familiar with when we were on that side of the equation. Small companies make decision lots of faster. But they will try to squeeze every bit of value out. Be prepared in both cases.
    Good product/service with good value wins, particularly nowadays. So concentrate on doing that and everything else (i.e., rewards) will follow.

  3. simpl says:

    Do read Primo Levi’s experiences as a contract chemist, e.g. in his book “The Periodic Table”. Even if it doesn’t address all problems, it will be an inspirational read.

  4. processchemist says:

    From my experience: there’s no way to figure a realistic business plan not only to start up a chemical business, but over all to make it survive with profit in the current economic climate.
    First of all: quality doesn’t matter, most of the times. Cheap is good, period. Quality is a must to survive in some niche markets, and usually to find a niche product some market research is useful, but luck is all.
    Synthetic medicinal chemistry? Currently the most successful model is the asian sweat shop.
    Process chemistry? Why the originator/owner of an NCE should be bothered by chemical development when clinical batches (and the eventual market production) will be outsourced? It’s not exactly a good idea to start a pilot scale GMP facility FDA inspected, I know about small companies that invested some serious money in this kind of operations before the crisis… guess what? The reactors in the GMP suite remained empty (By the way, the press started talking of GMP overcapacity in the western world years ago).
    But, in these interesting times, strange things can happen. Good technology can give products of high quality at globally competitive prices.
    Last but not least: you can start your business on the basis of your good connections in the pharma industry but these days the research center that was your best customer until last year can be shut down in few weeks (I’ve seen this thing time and again), so goobye to a fat slice of your turnover…

  5. CMO Guy says:

    I nominate
    “I would rather roll naked in broken glass wetted down with Tabasco than try starting a pharmaceutical business”
    for quote of the year.

  6. Fred says:

    I don’t want to do a chemical business, but I’d love to start a biotech. There’s plenty of talent out there; plenty of targets; plenty of unmet medical needs.
    Ooops, but there’s the money thing. No VC’s interested. Big Pharma gave up on drug research– I don’t know– 5-6 years ago. You could come up with the next Lipitor and you’d be lucky to find a buyer.
    Maybe I should invent an app that uploads cat-on-skateboard videos to YouTube or tracks the size of Kim Kardashian’s — ash. I’d probably be a billionaire in a week.

  7. newnickname says:

    I’ll repeat my Q from the “Roche Closes Nutley, Once Its US R&D Home” topic a few days ago.
    Would anyone here want to form a “Pipeline Real Estate and Drug Discovery Consortium” to purchase the Nutley site? I see plenty of opportunity in the venture:
    1. Borrow millions of dollars.
    2. Pay ourselves lavish salaries while waiting for contingencies and forward looking statements to be realized. AmEx Corporate Platinum Cards for All!
    3. Sublet space to biotechs and small chemical companies and bleed them dry.
    4. Declare bankruptcy and sell out to another consortium that we would also form and participate in.
    5. Wash-rinse-repeat.
    If Derek will set up a “drop box” or other mechanism, I will act as Treasurer and collect the money as you send it in.

  8. Jordan says:

    few things will make your potential clients want to see your back more than asking for a percentage of the eventual profits
    Couldn’t agree more. At our shop, when faced with a situation like this (“we can send you a sample after you sign this 30-page agreement”), we just walk away.

  9. shubham mANE says:

    HOE WANT TO START THE CHEMICAL INDUSRTY.SO HOE TO START THE MY CHEMICAL INDUSTRY
    PLEASE GIVE SUGGESTION…………..

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