Why India is Important for the European Fine Chemicals Industry

1
Why India is Important for the European Fine
Chemicals Industry

• Gautam Mahajan
• Inter-Link Services Private Limited
• Mahajan_at_interlinkindia.net
• 91 9810060368

2
Fine Chemicals

• Pharma Intermediates
• Active Pharma Intermediates (API)
• Contract biopharma
• Agrochemical intermediates
• Others

3
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 businessand trends
  in India
• Using India as a supply base for other countries

4
First, well 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

5
Fine Chemicals Market Size

• US 17.18 billion in 2005
• 23.10 billion in 2011 est.
• Europe 8.43 billion in 2005
  10.46 billion in 2009 est.
• India gt 1 billion

6
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 2008-09

7
European Fine Chemicals profitability under
pressure

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

8
Threats and Opportunities

• Globalisation
• Higher Exports from Asia
• India China Symbiosis
• Asia driven acquisitions could be exit option
• offer services across the value chain

9
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)

10
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

11
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
• RD, Knowledge base IPR
• Quality
• Cash rich entering Europe

12
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

13
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

14
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

15
Examples of Indian Acquisitions

• Dishman Pharmaceuticals and Chemicals
• CarbonGen and AMCIS, Switzerland for high-potency
  actives
• I03S, Ltd. ( ozone chemistry),
• Synprotec, a contract research company

16
Backward Integration in China

• Indian producers backwardintegrating in China
• Example Dishman has two projects
• a 10-million investment for producing quaternary
  compounds and intermediates and
• an API plant

17
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
  controlling stake in Matrix

18
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.

19
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

20
Other Indian Companies
Hikal, Jubilant Organosys, Matrix, and Suven have
the benefit of the 'high-skill and low-cost
advantage' plus the leadership and financial
muscle according to a Swiss Consultant
21
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.

22
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

says Pollak.
23
Fine Chemicals Economics

• Fine chemicals production economics favor China
  and India based operations.
• Annual unit labor costs are a fraction of the
  Wests
• 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

24
Unit Labor Costs¹
65
K Euro/ p/y
42
15
4.5
3
2.5
¹Includes fringe/other benefits Source Arthur
D. Little
25
Productivity Ratio
7-9
6-8
2.5 - 4
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 in Asia

Source Arthur D. Little
26
Transformation Costs
20
18
15
Euro/Kg
7
8
6.5
Source Arthur D. Little
27
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

28
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.

29
Economics

• But changing
• Higher inflation in India/China
• Environmental costs catching up
• Risks
• Quality
• Supply chain disruption
• Communications
• Time
• Potential impact of REACH regulations
• That is why penetration has not been higher

30
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
  are investment/consolidation opportunities

31
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

32
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.

33
Acquire/Update Indian Companies

• Albany Molecular Research USA expanding Indian
  RD 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

34
Galaxy Surfactants Ltd.
35
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 businessand trends
  in India
• Using India as a supply base for other countries

36
India

• Purchasing power parity 3rd largest in world of
  3 trillion
• 10th largest GDP at gt 600 bn (2006)
• 2nd fastest growing major economy, with a GDP
  growth rate of 8.9 (1st quarter 20062007)
• Growth in industrial output of 11.4 for
  September 2006 and 12.7 for the year

37
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

38
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 RD)

39
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
• RD 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.

40
India Merchandise Trade with World
41
India Merchandise Trade with EU25
42
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
  world-wide investments

43
Indian Chemical, Pharma Petrochemicals Industry
44
Exports Imports Chemicals (India-World)
In Million Euros
45
India Chemicals

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

46
Indian Pharma Industry

• Currently 6.5 BnGrowing 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 RD 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.
47
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 gt 725M.
• 170 biotechnology companies in RD 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.

48
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

49
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
  RD to India is 30-50
• Indian domestic Pharma companies are going global
  with a direct presence in multinational locations
  in the world.

50
Pharma Industry

• Bulk Drugs, 1.6 bn, growing at 20
• Formulations, 5.5 bn, growing at 15
• Imports gt 1.4 bn
• Exports 2.5 bn in 2003, 40 of Indias pharma
  manufacturing
• Now 3.8 bn

51
Indias Pharma Intermediates

• Distinctive focus on
• Late stage Intermediates
• Complex Synthetic APIs
• Move Towards
• Custom Synthesis
• Low delivered prices
• Increasing technical managerial sophistication

52
Chemicals Industry
Source Report 2005-06 Ministry of Chemicals
Fertilizers Govt. of India
53
Indian Petrochemicals
Source Annual Report 2005-06 Ministry of
Chemicals Fertilizers (Govt. of India)
54
Organic Pigments
000 Tons
55
Indian Specialty Fine Chemicals Market

• Indian Specialty Fine Chemicals Industry gt 4
  Billion/Year
• Will be one of top-two exporters in low cost
  countries
• 2002 Exports valued at 1.6 Billion
• Growing _at_15-20 annually
• Manufacturing hub for technology intensive
  production
• Better than China in product quality RD
  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.

56
Why India is Important for the European Fine
Chemicals Industry

• The changing business dynamics in India
• The growth of the fine chemicals businessand
  trends in India Knowledge and RD 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

57
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

58
European Growth Drivers

• Generics
• New Molecules (RD)
• Speed of Generisation
• India is great at these

59
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)

60
Lessons

• European Fine Chemicals Cos. have Customer Base
• Change Production Base to India
• Source
• Contract
• Buy someone
• Use India for RD REACH labs in India

61
Lessons

• Build Global Strategy USA, Asia, and the world
• Understand and react to change
• Try to Europeanise India
• Upgrade
• As economy grows
• Insurance companies

62
Lessons

• Indian Companies
• Use Production RD 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
• Globalise Backward/Forward Integration
• Indianise Europe

63
Drivers in India

• India low Cost
• Driven by Government to deliver low cost health
  care solutions to the poor
• Low cost/affordable drugs
• Avoid Insurance company syndrome
• Lobby of people vs.
• Lobby of insurance companies/drug companies
• Example AIDS drugs

64
India and Specialties

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

65
We conclude, India is important

• Very cheap source of fine chemicals
• Growing important RD centre
• Growing market for European companies to tap
• India is Entering Europe
• Growing competitor
• Opportunity for European manufacturers to
  re-locate and source from India and to sell in
  India
• Sub contract
• Or source and sell through specialists like
  Azelis

66
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!

67
THANK YOU

• Gautam Mahajan
• Inter-Link Services Pvt. Ltd.
• K 185 Sarai Jullena New Delhi 110025
• mahajan_at_interlinkindia.com
• 91 98100 60368, Fax [phone]