Why India is Important for the European Fine Chemicals Industry

Gautam Mahajan Inter-Link Services Private Limited

Mahajan@interlinkindia.net +91 9810060368

Fine Chemicals
Pharma Intermediates  Active Pharma Intermediates (API)  Contract biopharma  Agrochemical intermediates  Others


The changing business dynamics in India

Europe and India: dynamics
Opportunities to invest in, sell to and buy from in India India and China competition Using India to balance supply constraints

The changing business dynamics in India

India Trade The growth of the chemicals business and trends in India Using India as a supply base for other countries

First, we ll discuss:
Europe and India: Dynamics
Opportunities to invest in, sell to and buy from in India India and China competition Using India to balance supply constraints

Fine Chemicals: Market Size



US:

17.18 billion in 2005 23.10 billion in 2011 est. 8.43 billion in 2005 10.46 billion in 2009 est.

Europe:

India: > 1 billion

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EU Chemicals


In 2004, 29% of EU chemicals exported compared to: 19% for the USA and 19% for Japan Only 18% of the EU chemicals demand was imported from the non-EU regions*

*In 2003, India-China imports were 8%, estimated to increase to 30% in 200809

European Fine Chemicals profitability under pressure

Profitability eroding:
 

Intense Asian competition New chemical entity (NCE) approvals rate reduced

Threats and Opportunities

Globalisation  Higher Exports from Asia  India China Symbiosis  Asia driven acquisitions could be exit option



offer services across the value chain

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Indian Fine Chemicals



Growing number of Indian suppliers:



lower prices than American/European companies, often 50% compliant with current good manufacturing practices (cGMP)


70 in India alone: second largest after USA in world

intellectual property rights (IPR)

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Active Pharma Intermediates



Indian API 3rd largest in world ( 1.6 bn in 2005) and will grow to 3.63 bn by 2010, CAGR 19.3 % India will become second largest API manufacturer (overtake Italy) by 2010*

* Italy's Chemical Pharmaceutical Generic Association (CPA) report

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Indian Advantage
  

  

Low labour and environmental costs, Size and dynamism of its economy, Incentives provided by the Indian government, In long term, threatens dominance of China as top API producer R&D, Knowledge base & IPR Quality Cash rich: entering Europe 11

Lower Costs


Lower Costs due to:

   

Lower fixed (lower capital) Labor and Maintenance costs prevalent in Asia Lower overheads translates to 10.0 percent of the expenditure incurred by North American/European manufacturing plants

And Entering Europe

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Examples of Indian Acquisitions



Nicholas Piramal
 

Avecia Pharmaceutical Pfizer, Inc. (Morpeth, UK)  $350 mn supply agreement with Pfizer  7 year agreement for process development and scale-up services to Pfizer  Rhodia's (Paris) inhalation anesthetics business
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Examples of Indian Acquisitions



 

Shasun Drugs and Pharmaceuticals Rhodia Pharma Solutions Kemwell Pfizer Uppsala, Sweden contract API in Sept. 06 Dr Reddy Betapharm, Germany for 450mn United Phos crop protection chemicals co. Cequisa, Spain; Reposo, Argentine; Advanta seeds, Holland; Cropserve, S. Africa; AG Value, US and now a new 111 m acquisition of Cerexagri in Europe announced 13 Nov 06 14

Examples of Indian Acquisitions



Dishman Pharmaceuticals and Chemicals



CarbonGen and AMCIS, Switzerland for highpotency actives

 

I03S, Ltd. ( ozone chemistry), Synprotec, a contract research company

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Backward Integration in China



Indian producers backward integrating in China



Example: Dishman has two projects:



a $10-million investment for producing quaternary compounds and intermediates and an API plant

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Example: Matrix Labs

Matrix Laboratories Concord Biotech specializing in fermentation and biocatalytic  backward-integrate into China, acquired a 58% stake in Mchem Group  43% stake in Swiss API technology firm Explora Laboratories  Ventures with South Africa's Aspen Pharmacare  Belgium generics company Docpharma NV BUT  US generic drugmaker Mylan: 573.4mn to acquire a 17 controlling stake in Matrix


Indian Companies setting up in Europe/America



Denisco
Nancy, France, API  Dallas, Texas customer support office Customers in North America face tight margins and fierce competitive pressure for time-to-market. Our ability to quickly, safely and efficiently produce pharmaceutical lab samples, and then rapidly ramp up for commercial-level volumes, will help lighten these pressures, said Venkat Ram, president of Denisco Chemicals. 18


Indian Companies setting up in Europe/America



G Amphray in Holland and now in Mexico Bilcare, India's largest research-based pharmaceuticals packaging company, has bought UK-based clinical trials services provider DHP in Sept. 2006

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Other Indian Companies

Hikal, Jubilant Organosys, Matrix, and Suven have the benefit of the 'highskill and low-cost advantage' plus the leadership and financial muscle according to a Swiss Consultant

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Example: SST USA



SST USA: ..European-based producers still account for the majority of supplier base, producers from India and Japan now represent an important minority of the company's suppliers," says Gary Vassallo, president of SST, who took over in March India makes up one-quarter of the 23 manufacturers represented by SST.
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Therefore,


Supplies from India and China forcing US and European companies to redefine their business models:
"Apart from the issues of quality, speed, and value, the two key requisites for success are a position in India or China (a manufacturing subcontracting arrangement is good and an affiliate company is better) and an attractive toolbox of technologies,"

Degussa custom manufacturing j. v. with Lynchem in China

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*says Pollak.

Fine Chemicals Economics



Fine chemicals production economics favor China and India based operations.


 

Annual unit labor costs are a fraction of the West s: 3,000 in India 4,000- 6,100 China versus 40,400 in West Europe or 15,300 in Poland, a good proxy for the Central and Eastern European region 23

Unit Labor Costs*

70 60
K Euro/ p/y 65

50 40 30 20 10 0 Swiss.

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15 2.5 4.5 3

Italy

Poland

India

Includes fringe/other benefits *Source: Arthur D. Little

China China Coastal Inner

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Productivity Ratio*
7-9 8 7 6 5 4 3 2 1 0 West India China
This ratio is calculated dividing value added (net sales less raw material costs )-- by total direct labor wage costs. Note that even with lower labor costs, productivity is higher in25 Asia *Source: Arthur D. Little

6-8

2.5 - 4

Transformation Costs*
20 18 16 14 12 10 8 6 4 2 0 ~20 ~18 ~15

Euro/Kg

~7

~8

~6.5

Swiss *Source: Arthur D. Little

Italy

Poland

India

China China Coastal Inner

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Economics in Asia
  

Lower Labor cost/Higher Productivity Lower administrative costs Investment cost lower (maybe 40%), or
 

India: 40,000/m3 W. Europe: 160,000 to 400,000+/m3

 

Lower environmental costs In China, cost of capital considered a sunk cost

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Economics in Asia
   

Raw materials maybe higher in India and China Higher solvent loss due to climate Higher energy costs Higher costs due to logistics, infrastructure and other inefficiencies Overall: Cost advantage of Asian suppliers increases with the complexity of the molecule,
 

the longer and more complex the synthesis, and the higher the manpower and reactor volume requirements.

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Economics
But changing:  Higher inflation in India/China  Environmental costs catching up  Risks
 

Quality Supply chain disruption

  

Communications Time Potential impact of REACH regulations

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That is why penetration has not been higher

Conventional Solution
Industry restructuring and consolidation in EU,
     

Production restructuring Reduction of overcapacity More Imports Enhance quality Collaborate with Asian firms to maintain a stable position Confidentiality, reputation, documentation, product quality important

Hitech segments such as contract biopharma, high potency active pharmaceutical ingredients (HPAPI) & Hazardous Chemistry Undervalued pharmaceutical intermediaries and API 30 are investment/consolidation opportunities

Opportunities for European Companies

   

Take advantage of Globalisation Acquire/update Asian companies Import from/Export to Asia Distribute in Europe, Asia and North America Use REACH regulations to advantage
 

To import To buy time to restructure

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Acquire/Update Indian Companies

 

Degussa long-term agreement Hikal Solvay Pharma got FDA approval for Bavla facility


Expanded its facilities in Naroda, India, for cGMP manufacture of quaternary ammonium and phosphonium compounds and certain bulk drugs.

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Acquire/Update Indian Companies



Albany Molecular Research USA expanding Indian R&D center, + scale-up lab for APIs and intermediates. Aceto Corporation USA (a distributor) to buy or build its pharma quality assurance, and analytical labs, and to be Indian logistics center. Sigma-Aldrich Corporation USA building a manufacturing plant in Bangalore

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Galaxy Surfactants Ltd.

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The changing business dynamics in India

Europe and India: dynamics
Opportunities to invest in, sell to and buy from in India India and China competition Using India to balance supply constraints

The changing business dynamics in India

India Trade The growth of the chemicals business and trends in India Using India as a supply base for other countries
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India


 

Purchasing power parity 3rd largest in world of 3 trillion 10th largest GDP at > 600 bn (2006) 2nd fastest growing major economy, with a GDP growth rate of 8.9% (1st quarter 2006 2007) Growth in industrial output of 11.4% for September 2006 and 12.7% for the year
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Growth in other Industries

 

Car sales up 22% in September Indian Engineering & Construction industry 8.5% CAGR in 5 years, increasing rapidly Manufacturing to grow from 39 bn in 2003 to 242 bn in 2015 Telephones grew from 14.5 million in 1997 to 120 million in 2006 IT industry has had 29% CAGR in 5 years
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India


India: FTA with Thailand Trading partner status Asean Working on EU special relation NAFTA? India as a base for value added marketing into Asia and Middle East/Africa India as a source of manufactured goods, not just services and knowledge (and R&D) 38

India


Sustained High Growth

India adds:
 

36 billion in incremental output (around a tenth of the levels of the US) to world Annual contribution will rise to 282 billion by 2025 and 1.8 trillion by 2050

By 2050, 1/3 of global economic growth from India



India and China together will account for 2/3

India's economic growth will bring several benefits to Western economies

 

R&D facilities in India will help reduce costs and improve productivity Low cost geography and its scientific talent pool, India will provide value added services, globally Special Economic Zones to give distinct thrust to exports Tax benefits, export incentives etc.

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India Merchandise Trade with World

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India Merchandise Trade with EU25

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Indo EU Trade
Total 2 way trade expected to be 80BN in 2011  EU-India trade has grown from 4.4 billion in 1980 to 40 billion in 2005  Trade with the EU represents more than 20% of Indian's exports and import and  EU is India's largest trading partner  The EU is also India's largest source of foreign direct investment. However, India accounts for just 1.8% of total EU trade. India attracts only 0.3% of the EU's worldwide investments

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Indian Chemical, Pharma & Petrochemicals Industry

Indian Chemical Industry : Segments
Others, 3% Fertilisers, 18% Soaps & Toiletries, 11% Organic Chemicals, 10%

Dyes, 5% Paints, 3%

Agrochemicals, 3% Pharmaceuticals, 15%

Synthetic Fibres, 16%

Inorganic Chemicals, 10%

Polymers, 6%

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Exports & Imports Chemicals (India-World)

In Million Euros
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 1999-00 2000-01 2001-02 2002-03 2003-04 2005-06 Exports Imports

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India: Chemicals


Organic Chemicals:


 

1.53% of EU organic chemicals exported to India which are 18.63% of India s needs China, EU are top suppliers to India. India is 11th ranked importer from EU 1.54% of EU inorganic chemicals exported to India which are 6.26% of India s needs Inorganic Chemicals suppliers Morocco, South Africa India ranks 11th as importer from EU
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Inorganic Chemicals:


 

Indian Pharma Industry

Currently 6.5 Bn;Growing at 10-15%, 4th largest in world and to be 9.7bn in 2008 About 60% of production exported to about 65 countries 1/20th the cost of developed countries Estimated market size of 20 Bn by 2010 Average spend on R&D is 5-6% of sales 3000 API units; 5000 Formulation units and 2000 other units (intermediates etc.)
* These figures include production from unorganized sector, which is estimated at 26% of the production.
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Indian Pharma Industry

 Exports are over 3.8 billion.  India among top five bulk drug makers.  Indian owned companies are 65% increased from    

25% Exports growing by 20% Medicinal plants trade > 725M. 170 biotechnology companies in R&D and manufacture of genomic drugs, business growing exponentially. Sequencing genes and delivering genomic information for big Pharmaceutical companies is the next boom industry in India. 47

Indian Pharma Industry



India's bulk drug and pharmaceutical industry grown into a highly sophisticated one, meeting the International standards of Production, Technology and Quality Control The progress of the Drug industry has rendered the country self-sufficient in National Health Care, has reversed the trend of Indian foreign trade profile from a predominantly importing country to a highly visible exporter to global marketing 48

Indian Pharma Industry



Indian pharmaceutical companies: filed 104 out of 251 new Drug Master Filings made in the US in April- June 2006, largest number of DMFs by any country India has largest contract research business in pharma industry (2005: $100-120 Mn) and growing at 20-25 per cent per year. About 35 per cent is new drug discovery and 65 per cent is in clinical trials. Cost saving for a multinational company moving R&D to India is 30-50% Indian domestic Pharma companies are going global with a direct presence in multinational locations in the 49 world.

Pharma Industry


Bulk Drugs, Formulations, Imports >

1.6 bn, growing at 20% 5.5 bn, growing at 15%

1.4 bn

Exports 2.5 bn in 2003, 40% of India s pharma manufacturing



Now

3.8 bn
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India s Pharma Intermediates

Distinctive focus on:
 

Late stage Intermediates Complex Synthetic APIs

Move Towards:
  

Custom Synthesis Low delivered prices Increasing technical & managerial sophistication
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Chemicals Industry
Performance of Chemicals during 2001-02 to 2004-05 (000 MT)
Group 2001- 2002- 2003- 2004- Growth(%) 02 03 04 05 CAGR Total major Chemicals Capacity Production Capacity Utilisation (%) Imports Exports Consumption 8012 5963 74.4 743 277 6429 8334 6612 79.3 724.6 435 6902 8750 7066 80.8 930 478 7518 8933 7375 82.6 914 721 7568 7.15 37.56 5,5952 3.69 7.34

Source: Report 2005-06 Ministry of Chemicals & Fertilizers Govt. of India

Indian Petrochemicals
2001-02 to 2004-05(000 MT)
Group 2001-02 2002-03 2003-04 2004-05 Growth(%) CAGR

Total major Petrochemicals Capacity Production Capacity Utilisation (%) Imports Exports Consumption 7017 6235 88.9 669 698 6206 7162 6553 9 1.5 691 969 6275 7423 7006 94.4 830 1039 6797 7915 7348 92.8 841 1257 6932 7.93 21.66 3.76
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4.1 5.63

Source: Annual Report 2005-06 Ministry of Chemicals & Fertilizers (Govt. of India)

Organic Pigments
000 Tons

Year 2001-02 2002-03 2003-04 2004-05 2005-06

Production 9,808 10,932 11,269 13,546 13,574

Imports 1,157 997 875 728 -

Exports 1,150 871 918 844 -

Demand 9,815 11,058 11,226 13,430 54

Indian Specialty & Fine Chemicals Market

       

Indian Specialty & Fine Chemicals Industry > 4 Billion/Year Will be one of top-two exporters in low cost countries 2002: Exports valued at 1.6 Billion Growing @15%-20% annually Manufacturing hub for technology intensive production Better than China in product quality & R&D facilities Specialty chemicals as antioxidants, food additives, and pigments Pharmaceutical and Agrochemical Industries consume more than 70% of the fine chemicals produced Performance chemicals being developed in India. Growing demand from manufacturers of products such as sunscreens and Biocides Manufacturing for Fine & Specialty chemicals shifting from developed countries to developing countries such as India. 55

Why India is Important for the European Fine Chemicals Industry

The changing business dynamics in India The growth of the fine chemicals business and trends in India: Knowledge and R&D base Opportunities to invest in, sell to and buy from in India India and China competition Using India to balance supply constraints Using India as a supply base for other countries
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Confused European Dynamics*

  

Some European Companies: Growing Others: On the Fence And Some: Exiting
Understand and React to Change Cos. Trading at Low Multiples Few Customers for Used Plants

* Marc Hannebert

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European Growth Drivers

  

Generics New Molecules (R&D) Speed of Generisation

India is great at these

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Who is your Customer?

Taking Pharma Intermediate Cos. as an example:  Consumer  Final Drug Producer  Some one else  Insurance Companies? Provide Value Added solution to end Customer Move down and up Value Chain, convert commodities to specialties through soft factors (Roger LaForce)
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Lessons


European Fine Chemicals Cos. have Customer Base Change Production Base to India
   

Source Contract Buy someone Use India for R&D: REACH labs in India
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Lessons


 

Build Global Strategy: USA, Asia, and the world Understand and react to change Try to Europeanise India


Upgrade


As economy grows

Insurance companies
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Lessons
Indian Companies  Use Production & R&D base to your advantage  Get closer to Customer


 

Buy someone close to the customer, or with a customer base Buy a distribution co. Manage expensive European logistics Indianise Europe

Globalise: Backward/Forward Integration



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Drivers in India
 

India low Cost Driven by Government to deliver low cost health care solutions to the poor


Low cost/affordable drugs Lobby of people vs. Lobby of insurance companies/drug companies


Avoid Insurance company syndrome

 

Example: AIDS drugs

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India and Specialties



Opportunity for European companies to sell For Indian companies to develop low cost alternatives

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We conclude, India is important:

     

Very cheap source of fine chemicals Growing & important R&D centre Growing market for European companies to tap India is Entering Europe Growing competitor Opportunity for European manufacturers to relocate and source from India and to sell in India
 

Sub contract Or source and sell through specialists like Azelis

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Therefore, understanding India, build a Global Strategy



Used to be in many industries:

What is your China Strategy?

It is not only that but your Indian and Asian strategy, and your Global strategy Ignore India at your own risk!

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THANK YOU

Gautam Mahajan Inter-Link Services Pvt. Ltd.

K 185 Sarai Jullena New Delhi 110025 mahajan@interlinkindia.com +91 98100 60368, Fax +91 11 26929055
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