Rethinking strategy is the key to building on existing capabilities

26 November 2001 00:00  [Source: ICB]

The fine chemicals industry is poised for a gradual recovery. This was the view of Enrico Polastro, vice president of Arthur D Little in Brussels, at the Fine Chemicals Conference, organised by ECN's sister magazine Performance Chemicals Europe.

He said that the recovery would see 'steady, albeit relatively modest' growth and 'normal' profitability levels, possibly outpacing GDP in the pharmaceutical market. However, 'the original growth and profitability expectations vested in fine chemicals in general, and pharmaceutical custom synthesis in particular, have been often overly optimistic', he added.

The growth for the contract pharmaceutical manufacturing sector will be driven by volume demand in the pharma industry, said Polastro. The pharma industry is expected to grow at 7%/year he said, driven by population growth, expanded access to pharmaceuticals and therapies which address unmet medical needs. Another contributing factor will be outsourcing of chemical development and manufacturing by 'virtual' pharmaceutical startup companies which do not have their own capacities. This sector is responsible for over 20% of the NCEs introduced in the past three years. Polastro believes these companies will 'go it alone' more in the future, rather than licensing their products to the pharma majors.

Polastro concluded by saying that it will not just be cGMP capability that will help a fine chemicals company succeed, but that skilled labour and common sense were key to attaining success.

Peter Jackson, head of the pharmaceutical products division of Avecia Life Science Molecules, looked at the gap between capacity in the fine chemicals industry and sales. He acknowledged that some excess capacity was necessary, but asked what could be done to reduce the gap.

Jackson outlined some of the factors that affect overcapacity. He said fine chemicals companies must understand the risks of clinical trials: from every 5000 compounds evaluated, five reach phase I, three of these reach phase II, one and a half will reach phase III, and one will be approved. Even then, products can fail after launch, as witnessed by Bayer and its Baycol product. Mergers in the pharma industry have resulted in companies rethinking their strategy for outsourcing manufacturing, freeing up contract manufacturing capacity.

Over the past 20 years there has been a 100-fold increase in the potency of drug compounds, thus lower volumes of product are being produced. Jackson considered a typical five-stage process, with 90% stage yields. If the complexity of the process is doubled, three times more capacity is required, but, if this is coupled with a ten-fold increase in potency, then overall three times less capacity is required. One factor affecting the quantity of product manufactured is the advancements made in drug delivery technology, which result in lower dosages being needed.

Another factor affecting capacity usage is the track record of a company. Jackson said that under no circumstances should a company do anything that would have a detrimental effect on its licence to operate. He said that attaining GMP was hard work and that retaining cGMP was ongoing and expensive hard work. It is also important for companies to keep their enquiry pipeline full. Jackson suggested that on average one in 20 enquiries resulted in a commercial product. He said the pharma companies would usually place serious proposals with three to six players, but they may place an order with more than one supplier, in order to reduce the risk of being left without product if a supplier has a problem.

Jackson then analysed the way the fine chemicals industry has responded to the overcapacity situation. He said there was a relationship between capacity, technology and developing relationships with others, and that building on these factors could make a fine chemicals company better. He suggested building these through:

• Investment in technology and specialised capability that is sufficiently differentiated from the competition. Cryogenics used to be such a differentiator, but now a company can enter this market in less than a year. Jackson said that microbial or mammalian biotechnology was a big differentiator currently, as it would take a company five to ten years to become proficient in it.
  
  
• Making smarter use of existing capabilities within the industry through licensing and technology transfer.
  
  
• Using mergers and acquisitions to strengthen a company by adding what is required from capacity, technology or relationships.

Rolf Bachmann, a partner at McKinsey in Switzerland, made the case for biotech in the fine chemicals industry. He said: 'Biotech is technologically ready for take-off and will be one of the key innovation drivers over the next ten years in chemicals.' Bachmann believes: 'Pharma will be the dominant driver for biotech in fine chemicals creating opportunities, especially in contract manufacturing.' He estimates that by 2010, 60% of fine chemicals will be produced by biotech due to substitution of current methods and higher growth.

In 1999, 15% of the $48m fine chemicals for pharmaceuticals market was produced by biotech methods. By 2010, Bachmann suggests this will have increased to 60% of a market which will increase by 6%/year. This suggests a compound annual growth rate for biotech fine chemical manufacturing of 20%, while fine chemicals produced classically will show a decrease of 1%.

The drivers for this growth in fine chemicals for pharmaceuticals will come from an overall growth of the pharma market from 70% to 80% for fine chemicals; reduction of captive share by the pharma companies; and 80% of the new products for pharma being derived from biotech by 2010. Jackson suggested that biotech products would account for 50% of drugs by 2010, and Polastro said: 'The much hyped development of biotechnology in life-science is expected to barely dent the demand for synthetic fine chemicals.'

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