PHARMA FINE CHEMICALS
The price pressures facing the pharmaceutical industry—
branded Rx or generics—are unlikely to abate anytime soon as
health payers throughout the world try to keep expenditures
under control. Quite logically pharmaceutical companies facing
such pressures try to offset these by squeezing their fine chemical
vendors, requesting from them some form of discount in the form
of lower prices or some other“value” concessions. This strongly
suggests that the much touted shift amongst pharmaceutical
companies towards strategic as opposed to tactical fine chemical
sourcing will be all but to provide to vendors a blank check. The
quest for value amongst pharmaceutical companies is likely to
continue unabated and could even accelerate.
MEETING CLIENT NEEDS
Several western vendors remain ill prepared to compete and meet
evolving customer expectations. They must have the ability to effectively act as sparring partners for pharmaceutical companies,
providing to these support in terms of synthesis route research
or process development. Many vendors are having a limited role,
simply“renting” capacity and applying the process provided by
the customer without providing any truly value added services.
Also, there must be a match between vendor capabilities
and evolving customer requirements in terms of molecular
structures and/or volumes. The trend is moving towards increasing complexity of the NCEs reaching the market. Parallel
to this, volume requirements of individual products tend to
become lower, driven by the increasing shift of pharmaceutical companies towards specialty drugs as opposed to general
practitioner (GP) type of products targeting large patient cohorts. For fine chemical vendors the implications of this shift
are far reaching as the hardware, equipment and skill base required for efficiently handling these new types of products are
very different. Some players risk finding themselves unable to
eventually effectively compete.
The major dependence of several pharmaceutical fine chemical companies on a handful of products and customers leaves
them highly vulnerable to swings of fortunes. This situation
is largely associated with the type of dynamics intrinsic to the
pharmaceutical fine chemical business where the vendor supplying the drug substance for a NCE or a paragraph 4 ANDA
can find himself unexpectedly facing short capacity or conversely
with empty assets depending on the end product fate and/or the
customers ultimate sourcing decision. It is interesting to note
that larger vendors are not immune to high customer or product
dependence levels as this set of players tends to focus on larger
accounts and products, reflecting their drive to avoid business
fragmentation and dilution of efforts.
Vendors must also avoid inadequately differentiated positioning. Most vendors on their sites and brochures tend to describe
themselves as“leading” suppliers while most often invariably offering the same capabilities. This begs the question, how is it possible to have so many“leaders” when, by definition, in any given
area there can be just one number one—all others are followers.
8 TRAITS FOR SUCCESS
At this stage it is critical for western pharmaceutical fine chemical
companies to take advantage of the current window of opportu-
nity and actively prepare to effectively meet eight traits that will
increasingly differentiate the winners from the rest of the crowd.
1. Achieve an adequate size—not too small but not too big.
Within this frame the slogan applied in the early 90s by the
now defunct Shell Fine Chemicals, “Big enough to matter
but small enough to care,” remains fully appropriate and is
worth meditating on. While size obviously matters in order
to achieve acceptable economics and have a critical mass, it
is important not to go overboard. Passed a certain size dis-economies of scale mainly relating to loss of flexibility and
responsiveness rapidly start to take their toll.
2. Assemble and maintain a diverse yet coherent business,
product and customer portfolio where the key is to carefully
manage and avoid dependencies on any given product or
customer. Establish a subtle balance between own products
such as off-patent API or intermediates where the vendor
has an effective control on the business. Custom made/
bespoke items supplied for the exclusive use of a single
customer is a business where the customer rather than the
vendor is in control.
3. Eliminate inefficiencies and fragmentation in terms of industrial footprint. One of the root causes behind the inadequate financial performance of several fine chemical companies is having grown through acquisitions. Within this
frame having a turnover of € 30 million per site appears to
be the minimum level required for ensuring critical mass
and adequate fixed cost coverage.
4. Ensure limited staff turnover at all levels within the organization to prevent loss of knowhow, experience as well as discontinuities in terms of customer relations. The latter factor is
of critical importance when involving the decision made by
a pharmaceutical company to outsource from a third party a
critical input such as an API. It represents an act of faith hinging on the level of confidence that has developed between
client and vendor. It is also equally important to have for key
positions adequate succession plans in place—a particularly
critical factor for family owned companies.
5. Develop a “can-do-customer centric service approach.”
Flexibility and reactivity are of paramount importance in
pharmaceutical fine chemicals.
6. Articulate a value proposition astutely combining soft skills
such as project management, product and customer selection, the ability to establish effective rapport with customers, and hard capabilities like knowhow in certain chemis-tries and suitable hardware.
7. Ensure total commitment to quality and customer satisfaction. The cost of failure is daunting for both the customer
and the supplier.
8. Set pricing in line with the value effectively provided to the
customer favoring the long-term. Carefully avoid taking advantage of situations where the balance of power is for once
in favor of the vendor. CP
DR. ENRICO T. Polastro is vice president and senior industry specialist of the
Global Pharmaceutical and Fine Chemicals practice of Arthur D. Little. He can
be reached at firstname.lastname@example.org.