From West to East - rising to the challenge in fine chems

26 November 2004 18:05  [Source: ICIS news]

A key component of the strategy followed by western fine chemical companies over the past decade has been to concentrate on supplying the major players in sectors such as pharmaceuticals and agrochemicals.

 

This has been driven largely by the market consolidation in the agrochemical and pharma sectors: in agrochemicals the top ten players now control over 95% of the market – up from 70% ten years ago while in the pharma sector their market share has increased from 30% to around 45%.

 

Another key strategy is to hook into the supply chain for blockbuster drugs - products which have sales of more than $1.0bn. Blockbuster drugs now account for over 25% of total pharmaceuticals turnover, up from around 8% in 1994.

 

In following their strategy, western fine chemicals firms boosted their reactor capacity by more than 30% between 1994 and 2000, building new facilities and buying existing assets from pharmaceutical companies which wanted to rid themselves of the messy business of actually manufacturing the ingredients to their drugs so they could concentrate on research and development (R&D) and marketing. This had the effect of loading the balance sheets of fine chemical companies with debt at a time when cash flow was uncertain.

 

But are such strategies still relevant today? What must western fine chemicals companies do to stay competitive with so many low-cost Asian producers beating a path to their and their customers' doors? These were among the themes discussed this week at the European Fine Chemicals Conference in Newcastle, UK.

 

Enrico Polastro, who heads the European pharmaceuticals and fine chemicals practice of consultancy Arthur D Little in Brussels, said the old strategy has left both pharma companies and their fine chemicals vendors highly dependent on the fate of a handful of products. This is potentially a major vulnerability factor – witness the setbacks recently suffered by Merck & Co following withdrawal of Vioxx or the pain felt by Bayer when its anti-cholesterol drug Baycol/Lipobay – had to be phased out back in 2001.

 

Another problem with the strategy is that it takes no account of changing factors on the supply side of the equation. Over the past decade Indian manufacturers have been slowly but steadily building significant business supplying advanced pharmaceutical ingredients (APIs) and more basic intermediates to European and US-based drug firms.

 

Just as Indian companies have carved out a strong niche supplying call centre and other business services to western companies – particularly those from English-speaking countries – sparking a debate about ‘offshoring,’ so they have established themselves as significant players in the branded drugs sector.

 

Polastro said the major western pharmaceutical firms now source as much as 10% of their APIs from India and this is likely to grow to as much as 40% by 2010. India’s position supplying raw materials for branded drugs is built on its already strong reputation in the generics market, where it had recently overtaken Italy to become the world’s biggest producer of APIs for off-patent products.

 

India has more FDA (US Food and Drug Administration) inspected facilities (over 60) than major players such as Italy, Spain and China, and has made far more DMF (drug master file) listings over the past five years than all its major competitors. Producers are required to make a DMF filing with the FDA before they can sell a generic in the all-important US market.

 

Another problem for western fine chemical firms is that the number of new product introductions has failed to keep pace with original expectations. The number of new molecular entities – the precursors to new drugs – approved by the FDA, has fallen from a peak of 53 in 1996 to 17 in 2002 before rising to 21 last year.

 

Clearly a ‘business as usual’ approach for western fine chemical companies is not sustainable. The restructuring that has occurred in the past three years – with many firms aggressively cutting their cost base, slashing jobs and closing plants, is not a sustainable solution to the industry’s problems. "It may be a short term solution to cut costs," Polastro said, "but it affects one side of the business equation only – you also have to grow your business."

 

Polastro proposed an evolution scenario which involves an in-depth transformation of the business and a review of every aspect of how business is conducted. He believes that a level of backward integration is required so western fine chemical suppliers link into the lower cost production systems in Asia and focus their existing fixed costs and capital expenditures in key niche areas.

 

There’s no reason why western firms can’t themselves take simple molecules from China and more advanced ones from India and then conduct the complex molecular synthesis in the west, he said. "There needs to be a symbiosis of western and eastern companies, and if they don’t do it willingly, they will be forced to by the customer," he said.

 

Polastro believes that over the next few years the big pharma companies will become less dominant as small and medium-sized drug firms, start-ups, speciality pharma houses and generics firms become more important. Some of these new companies will be based in Asia themselves. Already there are western fine chemical companies doing good business supplying APIs to India, he said. "The key is to be flexible."

 

Clearly Polastro’s approach calls for nothing less than an in-depth transformation of the western fine chemicals industry where innovation – and the ability to adapt to the new competitive environment - will be the key for success.

 

By Alan Tyler

+44 208 652 8126

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