Global ambitions for Indian fine chems

In fine form

23 July 2007 00:00  [Source: ICB]

Indian fine chemical manufacturers have global ambitions in the contract research and manufacturing services sector

VIVEKA ROYCHOWDHURY/MUMBAI

Indian fine chemical players are no longer content to stick to the lower end of the value chain. They have evolved into niche players, emphasizing their strengths and adapting to the needs of their clients, particularly the pharmaceutical industry.

The fortunes of India's fine chemical industry have long been closely tied to the country's booming pharmaceutical business, which accounts for 60% of sales. Pharmaceutical companies in India have almost exclusively pursued the generics market, but the implementation in 2005 of the TRIPS agreement, which requires international-standard patent protection, has nudged many of them toward greater innovation.

These companies hope to capitalize on the present advantages of low-cost, highly skilled scientists and low-cost manufacturing to move up the value chain. Initially taking on contracts for western innovators' pharmaceutical companies, Indian companies have emerged as major players in the global contract manufacturing space.

Many are investing the revenues earned from contract manufacturing into research and development (R&D), with the ambition of launching their own innovator molecule in the next few years.

High-quality fine chemicals and intermediates play their own crucial role in meeting these long-term goals.

Fine chemicals is the fastest growing segment of the Indian chemical industry, growing at a rate of 12%/year, thanks to the 10%/year growth rate of the Indian pharmaceuticals market.

A SLICE OF CRAMS PIE

Pharmaceutical Contract Research and Manufacturing Services, or CRAMS, is the most vibrant sector of this high-growth industry. Indian CRAMS revenues totalled $1.8bn (€1.31bn) in 2006, according to Frost & Sullivan, which projects that they will reach $4.5bn by 2011.

Some of the key players in the field are Cadila, Dishman Pharmaceuticals and Chemicals Ltd., Hikal Ltd., Divi's Laboratories, Jubilant Organosys, Matrix Laboratories, Nicholas Piramal Indian Ltd. (NPIL), Shasun Chemicals and Drugs Ltd. and Suven Life Sciences.

The cost of business for companies such as these remains considerably lower than in the West. Installing a plant, for example, costs 70% of what it would cost in the US, according to Mumbai-based ENAM Research.

The relative cost of running the same plant is even lower, at 55%. These companies have established a growing international clientele that includes the top 10 pharmaceutical companies (see table below).

No country outside the US has as many Food and Drugs Administration (FDA)-compliant plants as India - about 75 at the end of 2005 - and the cost of manufacturing in them is 35-40% of US costs, says ENAM. More than half of Indian plants manufacture active pharmaceutical ingredients (APIs), and almost all of them comply with World Health Organization Good Manufacturing Practices (GMP), according to the firm.

LOW LABOUR COSTS

But though India offers high-quality manufacturing skills at low cost, large globally approved manufacturing facilities, and companies willing to invest in intellectual property (IP) creation and protection, the sector does suffer certain weaknesses, says ENAM.

Its commitment to IP is still unclear. Timely delivery is a problem. Being service-oriented, the CRAMS business requires a change of mindset.

Indian CRAMS players also face the threat of insufficient entry barriers, according to ENAM greater Chinese competition could lead to price wars.

ENAM points to a number of balancing opportunities, including plant divestitures by former European API leaders high-margin contracts in cytotoxics and injectables and an edge for small and medium-sized enterprizes (SMEs) with no history of patent litigation.

Fine chemicals encompasses markets beyond pharmaceuticals, of course. For example, Sudarshan Chemicals manufactures industrial abrasives and chemicals Thirumalai Chemicals produces organic acids, anhydrides and derivatives for the plastics, paints, resin industries, and additives for the food and feed industry and Atul Ltd. output ranges from drugs and agrochemicals to intermediates, polymer resins, adhesives and specialities.

CHANGING LANDSCAPE

For several Indian fine chemical players, a supporting role on the global market will not suffice. These ambitious companies are making bold moves toward center stage by acquiring western companies to gain global positioning and access to new clients and markets.

Mumbai-based NPIL has been one of the most active dealmakers in the CRAMS space these past few years. In December 2004, it acquired France-based Rhodia's inhalation business.

One year later, NPIL acquired Avecia's custom manufacturing business, gaining manufacturing capacity in the UK and Canada, and technologies such as fermentation, biotransformation, and capabilities for high-potency active pharmaceutical ingredients (HPAPIs). NPIL's third European acquisition was Pfizer's Morpeth, UK, manufacturing facility, which also secured a $350m supply agreement with Pfizer.

Ahmedabad-based Dishman has also been very busy, first buying Swiss ozone specialist IO3S and Synprotec, a small contract research firm in the UK, before acquiring the AMCIS and Carbogen, Solutia's drug services business, for $74.5m. The two firms, soon merged as Carbogen Amcis, are located in Switzerland.

Early this month, Dishman added to its rapidly expanding portfolio with the acquisition of Solvay Pharmaceuticals' cholesterol, vitamin D and vitamin D analogs businesses, including a facility in the Netherlands.

Chennai-based Shasun made its first global foray in April 2006, with the acquisition of two UK-based plants from Rhodia. Noida-based Jubilant Organosys Ltd. recently completed the acquisition of Hollister-Stier Laboratories, adding to its capabilities in the contract injectibles segment.

Of course, the advantages enjoyed by Indian firms have not gone unnoticed by western firms. A number are shifting some of their manufacturing facilities to India, to take advantage of the lower costs, the availability of trained personnel and access to emerging Asian markets. India is thus the bridge to Asia.

US and Europe-based fine chemical producers are using many strategies. They are either shifting manufacturing plants after shutting them down elsewhere, buying existing facilities to augment supply, or tapping into low-cost supplies via long-term agreements.

In March 2006, for example, Degussa AG signed a long-term, non-exclusive agreement with the Mumbai-based Hikal, whereby the Indian fine chemicals major will supply pharmaceutical intermediates and APIs to Degussa.

As Indian companies move up the value chain, they are in turn sourcing simple intermediates from still cheaper producers in China. Some firms are establishing formal relationships with Chinese producers, as Hikal did with Sinochem. Others are building their own facilities in China, as Dishman is doing in Shanghai.

DIFFERENTIATE OR DIE

As Indian companies today source simple and semi-advanced intermediates from third parties based in destinations like China, they are increasingly concentrating on the final stages in the synthesis process, which are most often the steps involving intellectual IP. This strategy would reduce fixed costs, as well as capacity expansion requirements.

The next step would be for companies to position themselves as "solution providers" rather than as "suppliers". The key will be to compete not just on low cost, but on the differentiating factor. Another concern will be the successful integration of acquired businesses and investment in strong management teams to take this growth forward, across geographies.

Relationships between Innovators and Indian CRAMS firms

Indian CRAMS firm	Pharma innovator	Object of relationship
Cadila (through joint venture)	Altana	Two intermediates for pantoprazole
	Mayne	Intermediates for eight oncology products
Divi's Lab	Mylan	Active pharmaceutical ingredient (API) for leviteracetam
	Merck, Abbott and GSK	NA
Dishman	Solvay	API for eprosartan mesylate
	AstraZeneca	Intermediates for esomeprazole
	GSK	Intermediates for three products
	Merck, Abbott and GSK	Intermediates for three products
Jubilant Organosys	Eli Lilly	CCS for three molecules
	Novartis	Oxcarbazepine in India
	GSK	Lamotrigine
NPIL	AMO	Neutralizing tablets
	Allergan	APIs
	AstraZeneca	APIs and intermediates for many products
	Global Hospital Products	APIs for many products
	Pfizer	APIs/formulations for veterinary products
	Eli Lilly	Drug discovery agreement
Shasun	GSK	Ranitidine
	Eli Lilly	Nizatidine
	Boots	Ibuprofen
Suven	GSK	Intermediates for abacavir
	Eli Lilly	Intermediates for losartan

SOURCE: ENAM RESEARCH

Recent Landmark Deals

Company	Asset Acquired	Date
Nicholas Piramal India Ltd. (NPIL), Mumbai	Rhodia's inhalation business	Dec 04
NPIL, Mumbai	Avecia's custom manufacturing business	Dec 05
NPIL, Mumbai	Pfizer's Morpeth, UK-based manufacturing business and long-term supply agreement through November 2011	Jun 06
Shasun Chemicals and Drugs Ltd., Chennai, Tamil Nadu	Two UK-based plants of French pharmaceutical companyRhodia	Apr 06
Dishman Pharmaceuticals and Chemicals, Ahmedabad, Gujarat	Carbogen and Amcis	Aug 06
Mylan Laboratories, US	Controlling stake in Matrix Laboratories, Hyderabad	Aug 06
Jubilant Organosys, Noida, Uttar Pradesh	Hollister-Stier Laboratories	Jun 07
Dishman Pharmaceuticals and Chemicals, Ahmedabad, Gujarat	Solvay Pharmaceuticals' cholesterol, vitamin D and analogs businesses, and facilities in Netherlands	Jul 07

SOURCE: ICIS

 

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