Europe's fine chemical suppliers cannot beat their Asian competitors in their own game and must seek an advantage through restructuring, innovation and specialisation in niche markets, a new report by Frost & Sullivan advises.
Because of their relatively high labour costs and their lack of capability differentiation, European companies are struggling to compete with Asian manufacturers of fine chemicals, so it is only through niche marketing, production streamlining and research and development that they can bounce back, the report suggests.
Overall the European fine chemicals market earned revenue of $10.44bn in 2005 and is expected to reach $12.96bn (€10.18b) in 2009, as European companies come up with ways of boosting their competitiveness.
"Production restructuring will revive the ailing European pharmaceutical fine chemicals market," said Frost & Sullivan research analyst S. Shrikanth.
"In fact, these companies should look beyond technology and become service providers for the pharmaceuticals industry, which includes consulting."
This will not be easy since Asian companies now offer services across the value chain, indeed the lack of capability differentiation may force pharmaceutical companies to bypass the European fine chemical suppliers and outsource to Asian firms.
Nevertheless, the report finds that the recent pharmaceutical production-restructuring announcement by Pfizer and Merck could mark the beginning of the restructuring efforts of pharmaceutical companies, bringing about substantial opportunities for the European pharmaceutical fine chemicals market as existing partners benefit.
What is more, to attract big pharma, more fine chemical firms will seek greater status, so the fragmented European market may see consolidation.
With some pharmaceutical fine chemical companies undervalued due to demand-supply imbalance, the time is also suitable according to the report for private equity participation in the pure play companies.
Moreover, Asia-driven acquisitions may prove to be a helpful exit option for the private equity participants.
"Notable among the acquisitions are the Nicholas Piramal - Avecia Pharmaceutical deal, the acquisition of Rhodia Pharma Solutions by Shasun Drugs and Pharmaceuticals and the sale of Solutia Pharma solutions to Dishman Chemicals in May 2006," said Shrikanth.
"Evidence pointing to the likely bypass is that in May 2006, an undisclosed multinational pharmaceutical company had selected Dishman as the primary active pharmaceutical ingredient (API) manufacturer new drug."
The fine chemical manufacturers that supply in Europe need to focus on niche technologies such as High Potency Active Pharmaceutical Ingredients (HPAPIs) and hazardous chemistry, the report suggests.
They must also enhance customer service and quality and collaborate with Asian firms to maintain a stable position in the long term.
Confidentiality, first-class reputation, documentation and product quality will remain important factors for European firms though, which must not neglect these key assets as they pursuit competitiveness.