Fine Chemical - Outlook

Outlook

Two main trends impinge on the industry. On the supply side, biotechnology is rapidly gaining importance. In the synthesis of small molecule fine chemicals, the use of biocatalysts and microbial fermentation enable both a more sustainable and economic production than conventional organic chemistry. In the synthesis of big molecules, such as biopharmaceuticals, it is the method of choice. Biopharmaceuticals are expected grow 15% per year, three times as fast as small molecule drugs. Five of the top ten drugs were biopharmaceuticals in 2010 (see table 6), and their share is expected to grow to eight by 2016 (see table 2).

On the demand side, the main customer base for fine chemicals, the pharmaceutical industry, is faced with slower growth of demand, patent expirations of many lucrative blockbuster drugs and stalling new product launches. In order to restrain these challenges, the leading companies are implementing restructuring programs. They comprise a reduction of in-house chemical manufacturing and plant eliminations. Outsourcing is moving up from a purely opportunistic to a strategic approach. It is difficult to make a judgment, whether the positive or negative effects of these initiatives will prevail. In a worst case scenario, a condition could develop, whereby even top tier mid-sized, family owned fine-chemical companies with state-of-the-art plants and processes could be relegated to producing small quantities of fine-chemicals for new life-science products in late stage of development. In agro fine chemicals, the active ingredients become more sophisticated and performing. Therefore they require multipurpose instead of dedicated plants prevailing in the industry so far. At the same token outsourcing is gaining ground.

Globalization results in a shift of fine chemical production from the industrialized to developing countries. The latter benefit not only from a “low cost / high skill” advantage, but also from a rapidly rising domestic demand for Western medicine. Despite the mantras of Western industry leaders, the cost advantage of the Asian producers is going to persist . As the pharmemerging countries mainly use generics, their market share continues to grow to the detriment of originator pharmaceuticals and agrochemicals. This is also the case for biosimilars, the generic versions of biopharmaceuticals. As a consequence of the harsh business climate, many Western fine chemical companies or divisions created during the “irrational exuberance” at the end of the 20th century already have exited from the sector. Others will follow suite or will be acquired by private equity firms. Survival strategies include implementation of lean production principles originally developed by the automotive industry and extending the business model to include also contract research at the beginning and active drug formulation towards the end of the added value chain. This latter strategy, however, is not finding unanimous approval by industry experts.

Although the demand for fine chemicals on the merchant market has not grown to the extent originally anticipated, fine chemicals still provide attractive opportunities for well-run companies, which are fostering the critical success factors, namely running fine chemicals as a core business, pursuing niche technologies -- primarily biotechnology -- and taking advantage of the opportunities offered by the Asian market.