The Hindu Business Line : Chemical companies moving to pharma sector for stability

In the past few years more than a dozen erstwhile chemical companies have moved into manufacturing bulk drugs. And, as analysts point out, some of these companies are even going in for acquisition of pharmaceutical companies overseas.

According to Mr P.K. Chowdhury, Managing Director of ICRA, "The trend of forward integration from the pure chemicals business to pharmaceutical business has been there for the past few years. It allows them to get better realisations in select segments as some of the chemicals they manufacture are raw materials for bulk drugs."

Consider this: Jubilant Organosys, earlier known as Vam Organics bought Max India's business to enter pharmaceuticals. Recently, it announced acquisition of the US-based generic pharmaceuticals company Trinity Laboratories Inc and its wholly-owned subsidiary Trigen Laboratories Inc.

Dishman Pharma also started off as an organic chemical producer, but now supplies QUATS (ammonia compound) and has a contract manufacturing agreement with various players such as Solvay Pharma, Glaxo for bulk drugs.

Most recently, Mangalam Drugs, which came out with an IPO, was the result of merger of Mangalam Organics Private Ltd, Shree Mangalam Pharma Private Ltd and Mangalam Rasayan Private Ltd. Investment bankers said that there are many more in the offing.

Mr Sanjiv D. Kaul, Management Advisor, ChrysCapital, said, "Chemical companies are trying to move up the value chain. It is a natural progression and offers stability to the business model."

Another investment banker added, "The chemicals used in the pharma industry are largely a commodity which is impacted by the cyclical changes in the business. Moving to the pharma intermediary stage gives companies huge opportunities."

The margins from the pharma business are substantially higher than the chemicals business. "This would give companies higher market capitalisation," Mr Kaul added.

The chemical industry, for one, is very competitive and fragmented and these suppliers to pharma companies have very low bargaining power. The pharma industry, on the other hand, can easily switch their suppliers without incurring high cost.

This adds to the risk profile of chemical companies hence the forward integration, said an industry analyst.

However, there are risks here as well. The competition in the pharmaceuticals industry is intense and companies would have to optimise and upgrade their efficiencies further, to stay on the top.

"Only those companies which are able to withstand competition will survive," analysts said.

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