perspectives2012 01 business-perspective jung bcg
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>>PERSPECTIVES_2012THE FUTURE OF CHEMICAL AND PHARMACEUTICALPRODUCTION IN GERMANY
CMF JUNE 19, 2012 FACILITATED BY DR. MICHAEL REUBOLD, CHEMANAGER
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>>A BUSINESSPERSPECTIVE.
THE FUTURE OF VALUE CREATION IN THE GERMAN CHEMICAL & PHARMACEUTICAL INDUSTRY
Dr. Udo Jung
The Boston Consulting Group
ACHEMA PERSPECTIVES 2012
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The future of value creation in the Germanchemical and pharmaceutical industry
Frankfurt , June 19, 2012
Dr. Udo Jung
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40
30
20
10
0
1 year
32
30%
Change in annualTSR (%)1
Profitable growth: Key lever for sustained valuecreation in the past and in the future
Sources of value creation of top-quartile performers in S&P 500
Profitable revenue growthMarginMultipleFree cash flow
1. TSR= Total return of a stock to an investor (capital gain plus dividends); TSR for top-quartile performers (S&P 500, 19922011)Note: The rolling analysis covers one-, three-, five-, and 10-year time frames from 1992 through 2011. Shows the average of performers in the 75th to 100thpercentile to illustrate approximate for thetop quartile companies (which would be equivalent to the 88 thpercentile); analysis excludes financial institutionsSource: Compustat; BCG Value Science Center
10 years
16
5 years
19
3 years
22
77%62%49%
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However: Growth alone does not automatically create value
Low correlation of growth and TSR1
(S&P 500, 19922011)
Why?
Growth through value-eroding acquisitions
Growth that degrades margins and ROI
Growth that requires too much capital
Growth that increases risk
Growth that reduces the P/E
Average annual TSR (%)
40
20
0
-20
Average annual revenue growth (%)
40200-20
Growth withoutvalue creation
Growth withvalue creationR2=0,23
1. TSR: Total return of a stock to an investor (capital gain plus dividends)Source: Compustat; BCG Value Science Center
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Note: GDP as $ in Purchasing Power Parity (PPP)Source: EIU; BCG analysis
Capturing profitable growth in Asia drives business model changesof German chemical and pharmaceutical companies
3.1
Rest
ofLatam
3.4
World
3.5
Russia
3.7
MiddleEast
3.9
C.E.Europe
4.0
China
20102025, GDP growth (%)
6
4
2
0
Japan
2.0
EU-15
2.4
USA
2.8
Brazil
4.6
Restof
Asia
5.2
India
5.5
MiddleEast
2.7
Restof
Latam
2.0
EU-15
5.4
USA
9.3
0
World
4.6
RoW
2.9
Brazil
1.2
C.E.Europe
1.3
Japan
Russia
1.61.4
7.7
China
7.8
India
20102025, GDP growth (Trillion US$)
50 47.9
40
20
10
30
Restof
Asia
World GDP(K US$)
201070.6
2025118.5
3.5%
x% CAGR
Asia
We are in a two speed world: Asia expected to contribute45% of global GDP growth until 2025
Asian economies growth compensate for
OECD countries underperformance
Asia (ex-Japan) accounts for 45%
of overall GDP growth until 2025
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16%
55%
6%
2010
Asia Pacific
Western Europe
North America
South America
Rest of World
17%
6%
7%
2030
5%
19%
21%
49%
More than 60% of the total global demand growth inchemicals until 2030 contributed by Asia Pacific
Source: CEFIC Fact and Figures 2011; various analyst reports; company presentations; BCG analysis
+1,310
+224
+305
+132
+180
9% Rest of World
6% South America
14% North America
10% Western Europe
61%Asia Pacific
+2,151
Global chemicaldemand (B) 2,353
4,504
Annualgrowth rate
4.1%
1.9%
2.6%
3.6%
4.4%
3.3%
Growth contribution
Backup
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Rest of World
North America
EU5
Japan
Pharmerging
2015
1,080
15%
33%
13%
11%
28%
2010
856
16%
38%
17%
11%
18%
"Pharmerging": Huge growth differential vs.established markets starting from a low base
Pharmerging countries: China, India, Brazil, Russia, Mexico, Turkey, Poland, Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan and VietnamEU5 countries: Germany, France, Italy, Spain, UKNorth America: USA, CanadaSource: IMS; analyst reports; BCG analysis
+148
+25
-5
+30
+26
12% Rest of World
10% Japan
13% North America 65% Pharmerging
+224
Global pharmaceuticalsdemand (B)
Annualgrowth rate
14.4%
4.8%
- 0.7%
1.8%
3.6%
4.8%
Growth contribution
Backup
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Divergence in demographics: In mature markets 55+segment drives consumer spending growth until 2030
1. Data of Japan excludes expenditure for households with a single person, due to data availability 2. Data of Germany refers to 2007 (instead of 2008) due to data availability issuesNote: spending power evolution forecasted based on historic correlation with GDP, not corrected with potential higher relative savingsSource: Consumer Expenditure Survey Commissioned by AARP, 2008; Consumer Expenditure Survey, 2008; Japan Statistics Bureau & Statistics Center; Statistische Bundesamt
US Japan1 Germany2
2030
10.1
6.1
4.0
Growth200830
4.0
2.0
2.0
2008
6.1
4.1
2.0
Consumer spending ($K)
15
10
5
0
< 55
55+
Consumer spending ($K)
3
2
1
0
< 55
55+
2030
1.8
0.8
1.0
Growth200830
0.6
0.2
0.4
2008
1.3
0.6
0.70.1
0.3
2008
1.2
0.7
0.6
Growth200830
0.4
2
1
0
< 55
55+
2030
1.6
0.7
0.9
3
Consumer spending ($K)
What is the implication for German chemical andpharmaceutical companies?
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5 Year value creation by industry sector
69
51 54 56
35
4551
54
36
54
83
29
48
31
93
35
57
33 35
1610 10 8 7 6 6 5 5 5 5 4 4 3 3 2 2 1 1
-10 -5 -5
-15 -13 -14
-27
-15-21
-7
-15-19 -21
-14 -16 -12
-8
-18
-49
-60
-40
-20
0
20
40
60
80
100
120
Average annual TSR, 2006-2010 (%) High
Low
Industry weighted average
Chemicals
Machinery
Non-Durables
Mining
Media &Publishing
Travel &Tourism
Pharma-ceuticals
Telecom-munication
UtilitiesRetail Pulp andPaper
Multibusiness
Automotive
Sources: Thomson Reuters Datastream; BCG analysis
Technology Components
Durables &Apparels
MedicalTechnology
Transport.&
Logistics
Constr. &Build Mat.
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annual TSR1
Rank (n=164) Quartile TSR (p.a. in %)
20 years (19922011)
Rank (n=318)
annual TSR1
5 years (20062010)
Quartile TSR (p.a. in %)
5 years (20072011)
annual TSR1
Rank (n=269)
10 years (20022011)
Quartile TSR (p.a. in %)
Fuchs Petrolub
K + S
Honam Petrochemical
LG Chem
6040200%-20-40
H & RClariant
Wacker Chemie
Givaudan
Lanxess Symrise
Syngenta
EMS-Chemie
Linde BASF
-40
Clariant
BayerGivaudan
EMS-Chemie
6040200%-20
Linde
BASF
Syngenta
H & R
K + S
Fuchs PetrolubLG Chem
Honam Petrochemical
1. TSR derived from calendar year data in local currencyNote: Worldwide industry sample based on Thomson Reuters DataStream supersector segment excluding firms not continually listed within the respective timeframeSource: Thomson Reuters DataStream; BCG analysis
Value creation of German chemical companiesin the global context
17.9%
6.6%
-4.6%
18.9%
8.7%
2.5%
14.1%
6.8%
1.9%
6040200%-20-40
Mitsui Chemicals
Asahi Kasei
Kuraray
IFF
H & R
Linde Bayer
Fuchs PetrolubBASF
Honam PetrochemicalK + S
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Observations in value creation patterns in theglobal chemical industry in the past 5 years
Observation
Overall Asian chemical companies lead in value creationespecially in base chemicals
Agro related chemical businesses with superior value creation
Japan with specific challenges in value creation
German & European chemical companies with a good track record in diversified and specialtychemicals business modelsdriven by the ability to manage differentiated business models
1
2
3
4
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Global energy and geopolitical trends create challenges forthe European and German based chemical industry
Feedstock advantaged countries will continue investing in a scenario of lower gas prices vs. higher
naphtha prices No great expectations for cheap unconventional gas in Europe
Shale gas revolution in the US reduces European competitiveness in Chemicals
Countries will growing Chemicals demand and advantaged feedstock will increasingly drive theirown economic development agenda, which includes localization of chemicals supply sources
Increase value added to local economies
Reduce imports and increase self sustainability
For specialty chemicals customer proximity (in emerging markets) provides competitive advantage,thus favoring new capacity in demand centerssuccessful European chemical companies will haveto "localize" their global business models
Regulatory pressure on the chemical and adjacent sectors (e.g., power) will lead to increased costs inEurope and a potential reduction of European industry competitiveness
Larger and integrated new "megasites" in the Middle East and in Asia copy successful Europeanexamples
Are there unique advantages for European based value addin production, innovation and business management?
1
2
3
4
5
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Asian and Middle East chemical companies gain importanceGlobal top 10 chemical companies 19802011
Note: Asian and Middle East companies in orange boxesSource: Chemical and Engineering News, ICIS Top 100, Chemical Week; Company websites; BCG analysis
Several new leader are part of national economic agendas"decision making beyond IIR and quarterly reporting"
Rank 1980Chemicalsales (B$) 1995
Chemicalsales (B$) 2011
Chemicalsales (B$)
79.6
60.0
58.1
57.9
50.6
50.6
38.0
37.3
33.0
29.6
14.1
14.1
13.8
13.7
13.7
10.6
10.0
8.4
7,6
7.0
24.2
22.1
21.2
18.0
17.9
15.9
15.3
15.1
14.5
13.3
6.3
PetroChina
1
2
3
4
5
6
7
8
9
10
26
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Many factors influencing the future of theEuropean chemical production base
Overview of most relevant system dynamics
Changes in theEuropean chemical
production base
Assetinvests
Innovationinvests
Relocationof decision
centers
Investmentdecisions of the
chemical industry/companies
Public andpolitical sentiment
Industrystructure
End-industryproduction and
innovationnetworks
Relocation ofnetworkstowardsgrowth regions
Share of newinvest intogrowth regions
Europeanchemical demand
GDP-driven
Growth ofsegment
"55+"
Self-sufficiencypolicies in growth
regions
Perception shaping
Share ofSMEs
Global market positionof European-basedChemCos in spec.segments
Share offoreign assetownership
Clustercompetitiveness
New advantagedcapacities in
growth regions
Rawmaterial
differentials
Europeancompetitiveness
in specificsegments
Invest focuson competitiveclusters
Exit hurdles
non-compe-titive clusters
Changes intrade balances
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European Advantage (I): The competiveness of chemical sitesand clusters in Europe will become even more decisive
Large
Small to medium size
Region
Rheinland-Pfalz (Mainz), DE
Dsseldorf, DE
Vlaams Gewest (Antwerpen), BE
Rhne-Alpes (Lyon), FR
Istanbul, TR
Darmstadt (Frankfurt am Main), DE
Kln, DE
Ege (izmir), TR
Mnster, DE
Cheshire (Chester), UK
Nordwestschweiz (Basel), CH
Size(employees)
40,075
25,284
21,937
20,361
18,133
16,250
15,928
10,587
9,590
9,108
8,549
Source: The role of clusters in the chemical industry; BCG analysis
Value added provided by industrial
parks and industry cluster
Better access to raw materials(for chemical industries)
Easier movement of final outputsasinputs to other downstream sectors
Reduction in energy footprintandincreased efficiency
Common investment in required
infrastructures(rail, ports, pipe-lines, ) reduce investmentrequirements and minimizesenvironmental footprint
Opportunities to coordinate andcooperatein key fields (distribution,R&D, purchasing, )
Option to leverage larger scaleprojectsthough associations
.......
A unique "German advantage": cross-industry production, innovationand supply chain clustersdriven by the "Mittelstand champions"
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CO2as newbuilding block
Noble earthsubstitution inindustrialapplication
Key issue thermodynamics CO2utilization only with
limited potential to solveclimate challenge
Rapidly taken up, since keythreat across all industries
No alternative solutionsdeveloped yet
New feed-
stocks basedon biomass
New feed-stocks basedon gas/coal
Biomass may becomemore important, but stillunlikely to match 'traditional'capacities by 2020
Boosted by direct publicfunding on global level
Several technologies withlimited yield established
Water scarcityand means ofalternativeenergy input
Global key challenge, drivenby climate change/regulation
Proven technology avail. Next gener. to be developed
Processintensification
Methanecoupling
Energy and raw materialefficiency major driver
Continuous focus resultingin new process technologies
Key driver abundant globalgas resources
Still unmatured topic, due tothermodynamic challenge
3
Bio-processing unlikelyto substantially matchtraditional chemical pro-cesses in terms of volume
Resource efficiency driven Selected systems in differ.
development stages Limited commercializ. yet
1
2
5
4
Boosted by demographics Broad R&D topic landscape Different maturity of multiple
applications in food and feed
Driven by demographics Multiple existing substances Crop industry leaders foster
R&D to sustain AI-pipelines
HC availabilty pattern shift New gen. of perf. chemicals
beyond classical surfactantsabout to be commercialized
3
Boosted by new energyinitiative
Multiple systems, but noproven technology available
Driven by enhanced energyefficiency in transportation
New high efficient polymersto be commercialized
1
2
5
4
Boosted by CE trends andPV thinfilm application
First conducting polymerscommerz.in selected applic.
White bio-technology
Improving bio-processingwith GMO
Biomimetriccatalysts
Organo-electronics
Leight
weightedmaterials
Active agroingredients
Chemicals forenhanced oilrecovery
Source:
Energystorages
European Advantage (II): Innovation andorchestration of chemical value chains
ProductsFeedstock
Chemical reactionsEnergy efficiency
Organic/inorganic feedstock
Energy
Energy efficiencyLow carbon intense products
Enabling precursors/products
Energy efficiencyProven technologies
New process technologies
Technologies
3
1
2
5
4
Selected key topics
Key R&D topic
Driver and maturity
Germany has a unique value propositionin cross industry innovation
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6040200%-20-40
Immunogen
Kyowa Hakko
Astellas
Biotest
Pfizer
BayerNovartis
Roche
Sanofi
Novo NordiskBiogen Idec
6040200%-20-40
Evotec
Qiagen
PfizerMorphosys Sanofi
Novartis Stada
AstraZeneca
Biogen IdecBayer
Merck KGaABiotest
Novo Nordisk
6040200%-20-40
Stada
Evotec
Novartis Qiagen
MorphosysSanofi
PfizerMerck KGaA
AstraZeneca Bayer
Biotest
Biogen Idec
Novo Nordisk
Value creation of German pharmaceuticalcompanies in the global context
annual TSR1
Rank (n=90) Quartile TSR (p.a. in %)
20 years (19922011)
Rank (n=306)
annual TSR1
5 years (20062010)
Quartile TSR (p.a. in %)
5 years (20072011)
annual TSR1
Rank (n=248)
10 years (20022011)
Quartile TSR (p.a. in %)
1. TSR derived from calendar year data in local currencyNote: Worldwide industry sample based on Thomson Reuters DataStream supersector segment excluding firms not continually listed within the respective timeframeSource: Thomson Reuters DataStream; BCG analysis
18.5%
5.9%
-4.0%
13.2%
4.2%
-2.4%
14.1%
6.8%
1.9%
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Leading pharma companies emerged from M&A
Note: Only a selection is shown on this slideSource: Company webpage; BCG analysis
Legend:
Target
Buyer
Year when it happened
GSK
Merck &Co
NovartisSandoz
Ciba
Glaxo
Wellcome
MarionMerrel
Hoechst
RousselUclaf
Fisons
RhonePoulenc
Upjohn
Pharmacia
Pfizer
J&J
Sanofi-Aventis
Bayer
RocheRoche
Genentech
Pfizer
J&J
Aventis
Pfizer
WarnerLambert
GlaxoWellcomeSmithKlineBeecham
Zeneca
Astra AB
J&J
Centocor
Rhone
Poulenc
H MRoussel
Merck&Co
Rosetta
Pharmacia
Pharmacia& Upjohn
Monsanto
Alza
Sanofi
Synthlabo
Sanofi-Synthlabo
Astra-ZenecaMed-
Immune
Bayer
ScheringAG
Chugai
Chiron
AstraZeneca
Wyeth
Schering-
Plough
1995 1996 1997 2005 2006 2007 2008 20091998 1999 2000 2001 2002 2003 2004 2010 2011
KingPharma
Inspire
Guangdong
BeiKang
Anadys
Crucell
Alcon
Zentiva
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Pharmaceutical market still dominated by US and EU playersGlobal top 10 pharmaceutical companies 19802011
Source: IMS Health; BCG analysis
Rank 1980
Pharma
sales (B$) 1995
Pharma
sales (B$) 2011
Pharma
sales (B$)
56.3
51.5
40.1
39.3
37.0
34.5
34.3
27.6
25.8
23.9
1.6
1.4
1.4
1.2
1.2
1.1
1.0
1.0
1.0
0.9
9.7
9.6
7.8
7.7
6.8
6.5
6.2
6.1
5.7
5.5
1
2
3
4
5
6
7
8
9
10
Smith Kline
Bristol-Myers
Th f t f l ti i th G h i l d
http://de.wikipedia.org/w/index.php?title=Datei:Pfizer_Logo.svg&filetimestamp=20080319105413http://../Downloads///upload.wikimedia.org/wikipedia/de/4/43/Sanofi_2011_logo.svghttp://../Downloads///upload.wikimedia.org/wikipedia/de/4/43/Sanofi_2011_logo.svghttp://en.wikipedia.org/wiki/File:Merck_Logo.svghttp://de.wikipedia.org/w/index.php?title=Datei:Novartis-Logo.svg&filetimestamp=20061224154146http://de.wikipedia.org/w/index.php?title=Datei:Pfizer_Logo.svg&filetimestamp=20080319105413http://../Downloads///upload.wikimedia.org/wikipedia/de/8/8d/GlaxoSmithKline-Logo.svghttp://en.wikipedia.org/wiki/File:Merck_Logo.svghttp://de.wikipedia.org/w/index.php?title=Datei:Novartis-Logo.svg&filetimestamp=20061224154146http://en.wikipedia.org/wiki/File:Bilogo_new.jpghttp://../Downloads///upload.wikimedia.org/wikipedia/de/9/92/Abbott_A_Promise_For_Life_Logo.svghttp://../Downloads///upload.wikimedia.org/wikipedia/en/4/4f/AstraZeneca.svghttp://de.wikipedia.org/w/index.php?title=Datei:Pfizer_Logo.svg&filetimestamp=20080319105413 -
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The future of value creation in the German chemical andpharmaceutical industry
Obviously the global context matters
2-speed global economy, the rise of state owned enterprises in chemicals, self-sustainabilityagenda in pharma and in chemicals in many growth regions
Company perspective
To grow profitably and to create value European and German based chemical andpharmaceutical companies will continue to globalize their business modelsand invest in
"localization" in the growth regions (production, R&D, decision center relocation)
Location perspective
European chemical and pharmaceutical company have proven their ability to create value withdifferentiated and diverse business model (management of complexity)
The attractiveness of Europe and Germany as a location for innovation and production is
driven by the "integrated attractiveness" (infrastructure, logistics, resource efficiency) of sitesand clusters
Cross-industry innovation and production cluster are largely a unique German advantagedriven by the unmatched density of "Mittelstand-champions"