IMAP Focus Group Report

Chemicals/Life Science
Spring 2002
Spring 2002
Industry Profile

The chemical industry is a mainstay of the modern world, converting raw materials ( oil, natu-
ral gas, water, metals, minerals ) into more than 70,000 different products. Major industrial
customers include rubber and plastic products, textiles, apparel, petroleum refining, pulp and
paper, and primary metals.

Chemicals is nearly a $1.5 trillion global enterprise. Whereas in 2001 US sales dropped off by
2.7 % to $ 467 billion, EU sales increased by 3,0 % mio to $ 510 billion. Sales of Japanese
companies remained on some $ 225 mio.

In the US more than 1 mio people are employed in the chemical industry and are manufac-
turing products in about 12,000 chemical plants.
Throughout the EU about 1.7 mio people are employed in some 34,000 chemical plants.

The following classification is based on generally accepted industry groupings and results in
relatively homogenous segments for which generalised findings can be made.
Especially insights into what are drivers for more competition and/or for the need of restruc-
turing may enable us ‘to touch the nerve’ in a discussion with a potential client.

Chemical Industry Segments - Breakdown of Sales (EU-figures)

Fertilizer Man-made fibres

Inorganic 2% 2%
4%

Industrial gases
1%
Life science
26%

Petrochemicals
31%

Specialities
34%

Characterisation and Drivers of Key Sectors

‘Specialities’ and ‘Life Science’ are the market sectors, where with respect to IMAP’s activi-
ties opportunities can be found most likely. The specific comments below are therefore re-
stricted to these segments.

Specialities

This segment consists of those businesses that take raw material from ‘basic’ chemicals seg-
ments (e.g. petrochemicals or inorganics).
_ Fine Chemicals form a sub-segment which includes companies that manufacture specifi-
cally defined active chemicals for use in areas such as the pharmaceutical segment. The
fine chemical companies are given exact chemical descriptions of the product required, and
use their internal technical knowledge to produce the product.
- Little information is passed between supplier and customer; both parties are interested in
protecting their know-how.
- Competition mainly on quality of product and cost of production.
- As manufacturers have little influence on the end use, there is a tendency for the products
to behave like commodity chemicals. In effect the producers act as an outsourced manu-
facturing capability for the customer.
_ Performance Chemicals are specialities by which well-defined performance requirements
are to satisfy. To achieve this performance the chemicals are often developed for a specific
customer (e.g. ink for specific inkjet-printers).
- This type of customer relationship provides a good barrier against substitution , however
it does make the supplier more vulnerable to the success of the customer business.
- Effort is needed to ensure that the customers keep their competitive advantage.
- Little information is passed between supplier and customer; both parties are interested in
protecting their know-how.

As the speciality segment consists of a wide range of different products, it is characterized by

having a large number of small companies than other segments in the chemical industry.

Drivers:
_ Efforts to reduce cost:
Increasingly this fragmented market of small companies is rationalising as speciality con-
glomerates are created. These conglomerates allow the companies to reduce the cost of
common items in the business process such as branding and management systems.
_ Reduction in the number of major customer organisations:
Another important driver has been the reduction in the number of major customer organi-
sations due to global consolidation. As this occurs the customer instigate world-wide sup-
ply initiatives to cut down the number of suppliers that they use. As a result the speciality
companies have to reorganise on the same international basis.
Life Science

The life science segment encompasses both pharmaceutical and crop protection products such
as herbicides and pesticides. The total market is dominated by pharmaceuticals, which repre-
sent about seven times the sales that are achieved in agrochemicals.
- With little modification the facilities can be used for making different products.
- Research and development costs are extremely high.
- The range of possible products means that there are a large number of players in the market.

Drivers:
_ Tremendous R&D expenses
Rationalisation in the pharmaceuticals market is mainly caused by the cost of new drug de-
velopment. A typical new treatment takes up to nine years to develop. Companies are
therefore often forced to merge or to look around for another form of strategic cooperation.
Note: Regarding this issue one of the current buzzwords is Chiral-Technology, incl. devel-
opment of highly effective catalysts and introduction of biotec based processes.
Acquisitions and cooperations between manufacturers of pharmaceuticals and spe-
cialized chemical companies are characterizing this technological trend.
_ High share of failing drug development projects
For one reason or the other many compounds simply fail to make it through to a successful
product. New methods for an early detecting of potential drug candidates are therefore of
high interest. Many bio-informatic companies are specialized in this field. An increasing
number of engagements and cooperations are characterizing a rapid development.
_ Shrinking margins due to the poor financial situation of the health insurance system
(at least in Europe/Germany)
Cost saving projects are considered by all companies. Especially some of the small or mid-
seized players feel definitely uncomfortably with the current development.

Deals and opportunities

Based on the reasons indicated above market experts see in the

chemical industry
an increasing pressure for structural changes:
- Mature industry (overcapacities, price-cost-squeeze, GDP related growth rates)
- Globalization (global competition)
- Shareholder value (higher profitability)
increasing activities to react
- Focused portfolios with global leading businesses based on core competencies
- Operational excellence based on optimised production structures and supply chains as
well as lean overhead structures
pharmaceutical industry
challenges due to
- Accelerating technology developments
- Increasing scrutiny of the general public and of investors
- Emergence of new sets of competitors
Spin-offs and buy-outs get an increasing importance

Chemical deals by segment 1997 - 2000

Speciality
Other Sectors Chemicals

28
Fine Chemicals 38
7
6
27
13
Diversified
Companies Plastics &
Resins
Coatings

Average EV/ EBIT by segment

Other Sectors 13,1

Diversified Companies 12,5

Plastics & Resins 13,3

Coatings 10,8

Speciality Chemicals 13,4

Fine Chemicals 19,1

0 5 10 15 20 25

Average EV/sales by segment

Other Sectors 1,55

Diversified Companies 1,2

Plastics & Resins 1,31

Coatings 1,41

Speciality Chemicals 1,7

Fine Chemicals 2,46

0 0,5 1 1,5 2 2,5 3

Based on 118 acquisitions (excl mergers) for which data are publicly available
As mid-seized companies are certainly potential partners in those projects, M&A companies
which can proof a wide net of connections to decision-makers and entrepreneurs in a specific
sector have a good chance to get accepted even by the big international players.

Focus Group Members:

Enrico Ercules Cavour S&P Italy

Mark Esbeck Business Capital Corporation USA
Peer Josten Fuhri Snethlage & Joosten Flohil Netherlands
Michael R. Simon ACS American Corporate Service USA
Allen Stott Executive Sounding Board USA
Peter de Waele Winx Capital House Belgium
Richard Wottrich DSI Investment Banking Services USA

This report was prepared by

Franz Müller
M&A Consultants AG
Theodor-Heuss-Anlage 12
D-68165 Mannheim
Fon: +49 621 3286 47
Email: franz.mueller@ma-consultants.com
Appendex

Worldwide sales of chemicals

(mio EUR)
2000 2001 %-change
TOTAL 1.768.563 1.795.090 + 1,5

Europ.Community 502.682 517.874 + 3,0

BenLux 68.207 70.345 + 3,1
France 82.160 82.990 + 1,0
Germany 135.041 133.887 - 0,9
Italy 64.734 66.415 + 2,6
Spain 36.224 36.586 + 1,0
UK 53.633 56.940 + 6,7

Eastern Europe 40.496 43.452 + 7,3

NAFTA 519.990 507.687 - 2,7

Canada 25.756 26.650 + 3,5
Mexico 14.348 13.999 - 2,4
USA 479.886 467.038 - 2,7

Japan 240.050 237.903 - 0,1

Others 465.345 488.174 + 4,9

Source: CEFIC, VCI

Result of Sales
(%)
2000
Europ.Community + 6,6
BenLux + 6,3
France + 4,7
Germany + 4,1
Switzerland + 17,0
U.K. + 12,9
Japan + 4,5
USA + 10,2
Source: IW, Osiris