Globalization of Fine Chemicals
Despite dire warnings, most fine chemical producers have developed an Asian strategy in order to compete in the fast-changing global pharmaceutical market.
By Tom Branna
Editorial Director
What a difference a decade makes! Not too many years ago, most U.S. and Western European fine chemical companies and their pharmaceutical customers cast a wary eye toward Asian fine chemical producers. Now, many have moved into the region, intent to capitalize on the benefits of doing business in India and China. While they acknowledge threats to intellectual property still exist and the potential for miscommunication can be great, several fine chemical executives agreed that conducting at least some manufacturing operations in Asia (and Eastern Europe too) makes economic sense—both in the long- and short-term.
“Asia is a threat and an opportunity,” noted Joseph Principe, global head of marketing and sales, Degussa Exclusive Synthesis and Catalysts. “Yet it will form a major pillar of our growth strategy.”
The Drug, Chemical & Associated Technologies Association (DCAT) recently tackled the issues of global sourcing in a two-day seminar in East Brunswick, NJ.
Why use a multi-source strategy? Obviously to take advantage of the savings realized by operating in a low-cost country such as China and India. In fact, according to Lonza estimates, capital investment costs in India may be just 65% of capital investments in Switzerland, and in China, the percentage is just 60%. In terms of operational costs, new plants in India (74%) and China (72%) are much less expensive to operate.
But besides cost savings, outsourcing can also ensure stability of supply, explained Robert Bloodworth, head of procurement, Saltigo. But choosing the right partner can be daunting, as there are more than 7,000 fine chemical suppliers in India and China, noted Stefan Borgas, chief executive officer, Lonza. In addition, China has more than 30 FDA-inspected sites and India has more than 50 FDA-inspected sites.
“Outsourcing remains focused on intermediates, but outsourcing mature APIs is established and growing,” said Mr. Borgas. “Most (suppliers) continue to see East and West somewhat complementary in their outsourcing strategy.
“We’re adding manufacturing capacity in China that complements the West and is driven by lifecycle management,” he added.
Enrico Polastro, vice president and senior industry specialist at Arthur D. Little, agreed that outsourcing is no longer the flash point it once was for pharmaceutical suppliers.
“The mood is better, more upbeat, The slight recovery that started this year will continue into 2007,” observed Mr. Polastro. “Good companies will perform well and mediocre ones will struggle. Successful companies must focus on the right niche and that means bigger is not necessarily better. That’s why the focused fine chemical companies will win.”
What Gets Outsourced?
According to A.D. Little data, western pharmaceutical companies outsource 100% of their basic chemicals for API production compared to 60% of early intermediates, 20% of late intermediates and just 5% of proprietary APIs. However, as patents expire, outsourcing becomes more important to pharmaceutical companies. In fact, 20% of mature “sunset APIs” get outsourced. But Mr. Bogras noted that for now, at least, China and India are primarily used for early phased intermediates.
“Western pharmaceutical companies plan to increase their share of outsourcing from emerging countries,” observed Mr. Borgas. “The West’s share is expected to decrease as emerging countries gain an increasing importance as fine chemical sources.”
Conducting Business in Asia
But before fine chemical producers rush off in search of a low-cost supplier for the near-term, they must look further down the road and be confident that the relationships forged have staying power.
“Nobody can change suppliers every year and hope to compete in this very service-oriented segment,” warned Dr. Bloodworth.
His company has formed sourcing organizations in both Shanghai and Mumbai and has integrated these teams into its global sourcing organizations. At the same time, Saltigo has formed a dedicated team to aid suppliers with technological and logistical support.
“It takes a lot of baby-sitting,” he cautioned. “No doubt about that.”
Still results have been extremely positive for Saltigo. In fact, Saltigo’s Asian sourcing has jumped from less than 5% of total chemical sourcing in 2004 to more than 20% this year.
At the same time, Dr. Bloodworth praised outsourcing initiatives in Eastern European countries such as Russia, Poland and the Czech Republic. All of these countries are adopting EU safety guidelines and, unlike China, have easy access to most raw materials.
Mr. Principe of Degussa noted that his company formed a joint venture in May with Lynchem, based in Dalian, Liaoning Province, China. Under terms of the agreement, Degussa holds 51% of the venture. According to Degussa, the JV combines Lynchem’s track record in the efficient production of custom-made fine chemicals with Degussa’s strength as a market leader in technology development as well as for good manufacturing practice (GMP) intermediates and APIs for the pharmaceutical industry. According to Degussa, it is the first European supplier to implement the concept of horizontal integration in the custom-manufacturing market.
Some Caveats
All the executives who participated in the DCAT roundtable urged caution when it comes to intellectual property. Dr. Bloodworth, for example, reminded the audience that contracts alone are not enough to protect IP, and he suggested that initial agreements should be limited to existing products and technologies.
At the same time, nearly every speaker said there is a lack of transparency when it comes to pricing.
“Chinese companies keep three books,” observed one speaker. “One for you, one for the government and one for themselves!”
Costs too can be a problem. As already mentioned, although capital investment and operational costs are much lower in Asia, if a company is forced to used an existing facility, costs can skyrocket and easily approach or even surpass what it would cost to produce material in Western Europe.
To avoid these inflated costs, Mr. Borgas suggested an alternative strategy whereby a global company can exercise its breadth and depth of knowledge and assets to best serve its customers. For example, Lonza uses its facilities in Visp, Switzerland and Braine, Belgium as an R&D hub as well as the production of complex intermediates and large volume APIs. The new site in Nansha, China is responsible for some discovery and development as well as API and intermediate production. Meanwhile, the Lonza site in Riverside, PA is involved in launch and technology transfer operations, production and controlled substance synthesis. The site in Kourim, Czech Republic is dedicated to fermentation, production and launch of bio-based products.
Like many other successful fine chemical producers, Lonza has realized that a one-region-fits-all approach to sourcing no longer fits in the global fine chemical industry.
