European companies face intense competition from Asian fine chemical suppliers, due to lack of capability differentiation and relatively higher fixed cost and labour costs, says a recent report by Frsot7 Sullivan.

Moreover, slower approval rates for new chemical entities have lead to overcapacity and reduced profitability in the industry, forcing participants to either restructure or exit the market.

Focus on niche marketing, production streamlining, and research and development will lead to success in the European market for fine chemicals, according to the report.Frost & Sullivan finds that European Fine Chemicals Market earned revenue of $10.44 billion in 2005 and estimates to reach $12.96 billion in 2009.

"Production restructuring will revive the ailing European pharmaceutical fine chemicals market," notes 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."

The 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. Preferred fine chemical suppliers will benefit.

Further, as critical mass is a requisite for fine chemical manufacturers to attract pharmaceutical companies, the fragmented market may see consolidation. Due to demand-supply imbalance, some of the pharmaceutical fine chemical companies are undervalued. The time is also suitable for private equity participation in the pure play companies. Asia driven acquisitions may prove to be a helpful exit option for the private equity participants.

However, the trend of Asia driven acquisition enables Asian companies to offer services across the value chain. The lack of capability differentiation may force the pharmaceutical companies to bypass the European fine chemical suppliers and outsource to Asian companies.

"Notable among the acquisitions includes 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," states Shrikanth. "Evidence pointing to the likely bypass is that in May 2006, an undisclosed multinational pharmaceutical company had selected Dishman as the primary API manufacturer for a new drug."

The fine chemical manufacturers that supply in Europe need to focus on niche technologies such as High Potency Active Pharmaceutical Ingredients (HPAPI), hazardous chemistry, must enhance the 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 very important factors.