The mood amongst western pharmaceutical fine chemical companies has sharply improved. For the past couple of years a wind of optimism appears to be sweeping through
the industry, marking a sharp departure from the depressed atmosphere that prevailed until recently.
The reasons behind this change of mood are multiple, including a pick-up in both top and bottom line growth, more robust
demand driven by a larger flow of new chemical entities (NCEs),
lesser leverage as pharmaceutical companies seem to eventually
embrace a more strategic approach to sourcing, as well as the
sentiment that competition out of China and India, referred to as
Chindia-based vendors, is facing increasing hurdles and is rapidly losing its edge.
But is this optimism justified? Are we witnessing the new
dawn of the western pharmaceutical fine chemical industry
where all its ills including overcapacity and inadequate returns
on capital are durably solved? Or, is this situation simply a short-term reprieve? At this stage I lean in favor of the latter hypothesis.
PREPARE FOR THE FUTURE
Western players are now benefitting from a combination of favorable tailwinds that may be short lived, underpinning the imperative for these players to take advantage of the situation to prepare
for the future if they want to continue to prosper.
This view is based on a number of observations. For one, the
strength of the U.S. dollar—the reference monetary unit in phar-
maceutical fine chemicals—compared to other currencies may not
last forever. Should this be the case and the U.S. dollar to the Euro
exchange rate revert back to the levels noted in 2013 it would spell
bad news for several Western European-based producers.
Also, Chindia competition may be out only temporarily and
may well emerge more formidable than before. Within this frame
it is important to have a look at the root causes behind the fall
out of grace of this set of players. This has been largely driven
by high profile regulatory setbacks suffered by several Chindia-based vendors following inspections by western agencies casting
doubts on the reliability of the entire sector.
Parallel to this, the value proposition provided by Chindia
revolving around lower delivered prices has been challenged by
rapidly escalating labor and environmental costs. It would be,
however, a gross mistake to believe that Chindia is permanently
out of the picture as a pharmaceutical fine chemical source. Instead, the most likely scenario calls for an accelerated restructuring of the supply structure leading to the pruning of weaker
players and the emergence of a small number of vendors offering capabilities in line if not even exceeding those of western
competitors. Such a pruning of the supply structure can already
be observed in China as well as in India, though to a lesser extent. The declared intent in both countries is to proactively encourage the emergence of national champions able to compete
at par with best in class western players without having to leverage the price dimension.
Who Will Win in
Pharmaceutical Fine Chemicals?
Western pharmaceutical fine chemicals suppliers must prepare for an uncertain future
Dr. Enrico T. Polastro
Vice President, Arthur D. Little