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Why India is Important for the European Fine Chemicals Industry

Explore why India plays a crucial role in the European fine chemicals industry, highlighting market size, global competitiveness, and strategic acquisitions.

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Why India is Important for the European Fine Chemicals Industry

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  1. Why India is Important for the European Fine Chemicals Industry Gautam Mahajan Inter-Link Services Private Limited Mahajan@interlinkindia.net +91 9810060368 1

  2. Fine Chemicals Pharma Intermediates Active Pharma Intermediates (API) Contract biopharma Agrochemical intermediates Others 2

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

  4. 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 4

  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: >€ 1 billion 5

  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 6

  7. European Fine Chemicals profitability under pressure Profitability eroding:  Intense Asian competition  New chemical entity (NCE) approvals rate reduced 7

  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 8

  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) 9

  10. Active Pharma Intermediates  Indian API 3rdlargest 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 10

  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  R&D, Knowledge base & IPR  Quality  Cash rich: entering Europe 11

  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 12

  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 13

  14. Examples of Indian Acquisitions  Shasun Drugs and Pharmaceuticals 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 Rhodia 14

  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 15

  16. 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 16

  17. Example: Matrix Labs  Matrix Laboratories 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 Concord Biotech 17

  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. 18

  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 19

  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 20

  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. 21

  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. 22

  23. 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

  24. Unit Labor Costs¹* 70 65 60 K Euro/ p/y 50 42 40 30 20 15 10 4.5 3 2.5 0 Swiss. Italy Poland India China Coastal China Inner ¹Includes fringe/other benefits 24 *Source: Arthur D. Little

  25. Productivity Ratio* 7-9 8 6-8 7 6 5 4 2.5 - 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 in Asia *Source: Arthur D. Little 25

  26. Transformation Costs* ~20 20 ~18 18 ~15 16 Euro/Kg 14 12 10 ~7 ~8 ~6.5 8 6 4 2 0 Swiss Italy Poland India China Coastal China Inner *Source: Arthur D. Little 26

  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 27

  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. 28

  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 29

  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 30

  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 31

  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. 32

  33. 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 33

  34. Galaxy Surfactants Ltd. 34

  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 business and trends in India • Using India as a supply base for other countries 35

  36. India  Purchasing power parity 3rdlargest in world of €3 trillion  10thlargest GDP at > €600 bn (2006)  2ndfastest 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 36

  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 37

  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 R&D) 38

  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  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. 39

  40. India Merchandise Trade with World 40

  41. India Merchandise Trade with EU25 41

  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 42

  43. Indian Chemical, Pharma & Petrochemicals Industry Indian Chemical Industry : Segments Others, 3% Soaps & Toiletries, 11% Fertilisers, 18% Organic Chemicals, 10% Dyes, 5% Paints, 3% Synthetic Fibres, 16% Agrochemicals, 3% Polymers, 6% Pharmaceuticals, 15% Inorganic Chemicals, 10% 43

  44. Exports & Imports – Chemicals (India-World) In Million Euros 9000 8000 7000 6000 5000 Exports Imports 4000 3000 2000 1000 0 1999-00 2000-01 2001-02 2002-03 2003-04 2005-06 44

  45. 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  Inorganic Chemicals:  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 11thas importer from EU 45

  46. Indian Pharma Industry • Currently € 6.5 Bn;Growing at 10-15%, 4thlargest in world and to be €9.7bn in 2008 • About 60% of production exported to about 65 countries • 1/20ththe 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. 46

  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 > €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

  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 48

  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 R&D to India is 30-50%  Indian domestic Pharma companies are going global with a direct presence in multinational locations in the world. 49

  50. Pharma Industry  Bulk Drugs, € 1.6 bn, growing at 20%  Formulations, € 5.5 bn, growing at 15%  Imports > € 1.4 bn  Exports € 2.5 bn in 2003, 40% of India’s pharma manufacturing  Now € 3.8 bn 50

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