Bullish Pharma Biz Drives Suppliers of Fine Chemicals

20 March 2000 00:00  [Source: ICB Americas]

By Feliza Mirasol

As segments of the fine chemicals market become increasingly commoditized, fine chemicals suppliers are turning to the bullish pharmaceuticals market for new opportunities. Not only have specialty chemical manufacturers entered the arena, but so have larger chemical producers that are generally viewed as commodity suppliers.

Because of this changing landscape and increasing competition, it is expected that larger fine chemical producers that have more complete portfolios of chemistries and process technologies will lead the sector, says Ray Fahmy, project manager at Little Falls, N.J.-based Kline & Co. Inc. Mr. Fahmy spoke at a recent meeting of the Chemical Marketing & Economics Group.

The US fine chemicals market is valued at roughly $30 billion (both merchant and captive), according to estimates by Kline in a new fine chemicals report, scheduled to come out in April, that examines the fine chemicals markets in the US and Western Europe.

"Fine chemicals is both an exciting and challenging place to be involved, and pharmaceuticals--the most dynamic segment--represents more than one-half of the business," Mr. Fahmy says.

Globally, the pharmaceutical industry is expected to grow at a yearly rate of 8 to 10 percent over the next five years. In comparison, the fine chemicals segment of the market is expected to grow at a 10 to 13 percent annual pace, according to Mr. Fahmy.

The major trends driving the growth of pharmaceutical fine chemicals include greater outsourcing, a continuing need for new molecules that require innovative production techniques, the emergence of small and technically oriented suppliers, and alliance and acquisition opportunities. Demographic trends, managed care, political considerations and biotechnology are all factors behind the growth of the finished drug industry.

Although those trends are fueling growth, they are also posing new challenges for drug manufacturers. A major obstacle to growth is the cost of research and development for new drugs, a problem that has led to the need for outsourcing.

"By the time it reaches the market, a new drug will cost an estimated $500 million to $600 million. Pharmaceutical R&D has tripled over the last 10 years, and it is estimated that only one out of 10,000 molecules that are going to be discovered is actually going to be a commercial product," Mr. Fahmy notes.

Other challenges include the increasing complexity of molecules, reducing the time to bring products to market, shorter market exclusivity, the impact of generics, and pressure to maintain profitability.

Because of those challenges, pharma companies are consolidating, virtual companies are emerging, outsourcing is continuing and purchasing practices are changing.

"This will impact the fine chemicals market, exerting more pressure downward on the supplier," Mr. Fahmy adds. "Pharmaceutical companies today are getting smarter in their purchasing and are approaching their supply options much more differently.

"Outsourcing is one way for pharma companies to free up funding for R&D. Traditionally, they've outsourced from the basic intermediates to the active pharmaceutical ingredients (APIs). However, today they need to find more dollars to pump into R&D. For that reason, they're expanding their outsourcing to include more chemical process development and, in certain cases, the discovery itself."

These outsourcing changes have led to the new supply structure in which pharma companies are narrowing down their suppliers and focusing on a select number for their specific needs.

Pharma companies now deal with either preferred suppliers or tiered ones. The former is leading to a consolidation of the supplier base. The latter involves contracting top-tier suppliers and allowing them to choose secondary and niche suppliers further down the chain.

As a result, two important groups of fine chemical companies are emerging: small niche players that have expertise in chemical process development, and discovery experts with small-scale cGMP facilities.

"What we're also seeing are world-scale companies with large manufacturing capabilities and a wide range of manufacturing technology that lack capabilities on the small scale. They are either acquiring or putting up small cGMP pilot plants to strengthen their presence in the early stages of discovery," Mr. Fahmy says.

He expects the top 10 or 15 fine chemicals suppliers to expand their capabilities and position in the market. Second-tier suppliers will position themselves with either a range of pharma companies or a number of top-tier fine chemicals producers.

A range of specialty and commodity chemical players are also entering the market, and many existing and new niche entrants are trying to establish themselves in emerging technologies such as biotechnology and chiral chemistry.

The higher-value chemicals that offer more growth are the advanced intermediates and APIs. Standard intermediates and bulk generics constitute the commodity end of the fine chemicals market.

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