India Strengthens Its Fine Chemicals

30 October 2000 00:00  [Source: ICB Americas]

By Peter Pollak

India is rapidly strengthening its role in fine chemicals and custom manufacturing. Better intellectual property protection and an increasing number of Food and Drug Administration inspections of Indian facilities are helping India expand its presence in the global fine chemicals market.

Drugs and pharmaceutical-related products account for more than half of India's chemical export volume. Indian companies sold $600 million worth of active pharmaceutical ingredients in 1999, still a small figure in comparison with global sales of about $30 billion. The main drivers for the country's impressive growth are higher internal demand and exports, as well as a shift to higher value-added products.

Three factors give the Indian fine chemicals industry a substantial cost advantage: low labor costs, low investment costs and a reasonably low cost of capital.

A typical paycheck for a blue-collar worker in the Indian chemical industry is $200 per month, about 5 percent of the total cost that an employer incurs in most industrialized countries. Most equipment used in modern multipurpose plants, such as glass-lined and stainless steel reactors, centrifuges, dryers and distillation columns are available from domestic sources at very competitive prices. In developing countries, low investment costs are generally offset by a high cost of capital. That is not the case in India. Funding for export-oriented units is available at interest rates of 9 to 9.5 percent.

But there is a downside to India's cost structure. Staffing in Indian plants is much higher than in their Western counterparts, and capacity utilization of multi-purpose plants is considerably lower. Also, traditional multi-layer organizational structures prevail, and profit margin expectations are higher, reflecting a higher risk associated with investments in new capacity.

Despite an advantageous cost structure, price is not the only criterion for supplier selection. In the case of custom manufacturing deals for new drugs, the Q/V/S performance triangle (quality, value and speed), proposed by Eli Lilly and now generally acknowledged, illustrates the situation.

Quality embraces not only consistent product quality, but also cGMP compliance and service quality, especially the reliability that a supplier has to provide. The value more specifically refers to the price/performance value of a total project, which typically includes process development work, sample preparation, trial and industrial-scale manufacture. Speed specifically relates to the time-to-market pressure to which the drug industry is subject, and in which the fine chemicals supplier must not represent a critical path.

Companies that meet this criteria become candidates for outsourcing arrangements. Some examples of outsourcing agreements between Indian and Western companies include Abbott and Divi Laboratories, Aventis and Sun Pharmaceutical for pentoxifyline, Glaxo Wellcome and Medicor for acyclovir, Glaxo Wellcome and Neuland for salbutamol, and Merck and Hikal for thiabendazol. With the exception of the Abbott/Divi alliance, all deal with mature products.

Similar arrangements also exist for pesticides. Last year, Archimica, now part of Clariant, took a stake in Chemstar Organics (Baroda) in exchange for marketing rights to the company's production of pyrethroid intermediates.

Opportunities for cooperation among Indian and Western fine chemical companies may exist through contract manufacturing agreements, as in the case of Ranbaxy and Eli Lilly for cefaclor, or Hikal and Merck for thiabendazol. They may also take the form of joint ventures, either horizontal or vertical, or financial participation.

As in general business practice, the most successful alliances will be based on vertical integration. An example would be that the Indian company produces all the steps from the basic raw material to the advanced intermediate, and the Western partner takes over from there and makes the final drug or agrochemical. This is the case in the arrangements between Eli Lilly and Ranbaxy, where the latter produces a key intermediate for the antibiotic cefaclor, and American Cyanamid and Lupin, where the latter produces a key intermediate for the tuberculostatic ethambutol.

Horizontal alliances, under which Western fine chemical companies cooperate with their Indian counterparts, might be less recommendable since the Indian partner will have to carry part of the general overhead, impacting the price advantage.

The FDA conducted 185 international inspections in 1999. A bit more than half of them concerned pure API manufactures, and the balance dosage manufacturers. India, which had 11 FDA inspections, already ranks in the mid-tier category of countries, in good company with France, Germany and Switzerland, which had 10 to 20 FDA inspections in 1999.

A question that arises for US and European companies looking to do business in the Far East is which country to choose: India or China? India offers greater compatibility in terms of language, business practices, personal links with the UK or US, enforcement of safety, health and environmental regulations and, more critically, adherence to international patent laws as of 2005.

Under the pressure of the World Trade Organization, India has agreed to recognize pharmaceutical patents by 2005. This is bad news for the 25,000 or so Indian drug companies, but it provides an incentive to undertake original research and protect discoveries and better respect intellectual property rights.

In India, both the government and industry are bullish about the growth of the fine chemicals industry. The Indian government has a grand vision for expanding its pharmaceutical and chemical industry. It recently announced plans to create $8 billion worth of "comprehensive chemical estates," subdivided into four new industrial parks.

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